Voices
As French President Emmanuel Macron and three of his ministers landed in Dublin on Thursday, a French military aircraft was taking off in Afghanistan, carrying most of the Irish team of Army Rangers and diplomats sent there earlier in the week along with some of the evacuees they had safely gathered at Kabul airport.
In public remarks on Brexit a few hours later, Macron summarised France’s position on ensuring the UK respects the Northern Ireland Protocol with an emphatic “we will never let you down”. Over at Iveagh House, Minister for Foreign Affairs Simon Coveney and his French counterpart Jean-Yves Le Drian had just signed a series of bilateral commitments to build on ever-closer ties since the UK’s departure.
From the exponential growth in Irish-EU trade through French ports and student exchanges to the Celtic Interconnector subsea electricity cable under development to address energy supply and climate change challenges here, Ireland’s new “closest EU neighbour” has never been closer. Although I have to declare an interest as a French national, the examples above illustrate that the benefits have, so far, mostly flowed in the Irish direction.
Now France wants a quid pro quo, and that is Ireland’s support for the global tax agreement brokered by the OECD and signed in outline form by 133 other countries so far, pending a final deal at a series of international meetings in October. A minimum corporation tax rate of “at least 15 per cent” on the profits of large multinationals in each country where they operate is the most contentious proposal in the deal.
From an Irish perspective, you could be forgiven for thinking there is little in it for the French, apart from jealousy over the gleaming headquarters and thousands of jobs located in Dublin by Silicon Valley giants to sell digital services to customers in France and elsewhere. Indeed, a rise in Ireland’s corporate tax rate from 12.5 per cent to 15 per cent, or even 21 per cent as suggested by US President Joe Biden, would hardly convince them to decamp to France, where they would pay 26.5 per cent (down from 31 per cent until recently).
To understand the long-running insistence by French Finance Minister Bruno Le Maire on a global minimum rate, you need to look at the issue from his perspective.
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At their joint press conference on Thursday, Taoiseach Micheál Martin and Macron did not bring up corporation tax until they were asked. At that point, Macron said: “I’m not one to put pressure on my friend” – then proceeded to do just that.
“What you managed to do during the past decades is unique and it was based, indeed, on such mechanisms as very low corporate tax. I think now the situation is different,” the French president said. “The post-Covid-19 world is new and will request [sic], first, more involvement of the EU and governments in order to help people, to intervene to protect them, to accompany the big change regarding climate change but, as well, health, education and so on. And, second, a stronger and united Europe. So the situation will probably request some in-depth change in our classical business model.”
Having thus made clear that the low-tax attractiveness model was a thing of the past, Macron added that it was up to Ireland to “decide for yourself” what to do, bearing in mind that “the OECD framework does make sense in such a context and I want to believe that we will find the right path together in order to deliver a common framework and to deliver this minimal taxation”. Apart from this, no pressure at all.
In response, Martin re-iterated Ireland’s non-committal stance, which has remained unchanged since the outline OECD agreement was published nearly two months ago: “There’s a public consultation ongoing in respect to the proposals that have emerged from the OECD process in respect of corporation tax and we have entered reservations in respect of some aspects of that but that process is continuing and we will continue to engage.”
In the audience were Le Maire and his Irish counterpart Paschal Donohoe, fresh out of their own two-hour face-to-face meeting. According to sources close to the talks, the largest chunk of this time was occupied by the proposed global corporation tax agreement, especially the minimum rate of “at least 15 per cent”.
Donohoe sought assurances that 15 per cent would become a fixed threshold in any final agreement, and not drift up later to 18 or 21 per cent as mooted among various participants in the global talks. Le Maire would not commit to that, despite a common acknowledgement of the uncertainty risk surrounding a period of tax rate instability.
There was some quibbling over which of the two countries would return to pre-pandemic levels of economic activity and employment first, and which needed corporation tax money most urgently as a result. But deep down, the French view was that Irish opposition could not derail the miraculous achievement of bringing the entire world so tantalising close to a deal on a less aggressive form of capitalism.
Yet no agreement could be found at this point because the two ministers were looking in opposite geographical directions.
The French focus was back home. Macron borrowed words used many times by Le Maire in domestic settings over recent years when he said: “Our citizens can no longer understand that when you’re an SME, you pay tax, but when you’re a big digital group you don’t pay tax. They want us to change the system.”
His remarks were a carbon copy of comments made by Le Maire in parliament as early as December 2018, as France was about to assume the rotating presidency of the G7 superpowers’ club: “If we want to pay for our childcare, hospitals, public services and schools tomorrow, then large multinationals making the largest profits must pay the same amount of tax as our SMEs.”
It was under Le Maire’s stewardship that a meeting of G7 finance ministers and central bankers in France duly agreed to add a second pillar to progressing OECD-led talks in July 2019, introducing a minimum global corporation tax rate. Although the Trump administration in the US was walking away from other aspects of the talks at the time, it had no objection to this proposal, having just enacted its own version of it – the much more lenient global intangible low-tax income (GILTI) regime. Many US firms have since used it to locate intellectual property in Ireland under the so-called green jersey corporate structure.
“The president and I have been very clear: 15 per cent is a minimum but if we can obtain more, we will get more.”
Bruno Le Maire
A career diplomat and right-of-centre politician, 52-year-old Le Maire first became a minister in 2008, taking the European Affairs portfolio. This was under President Nicolas Sarkozy, who famously went on to try and link the European bailout of Ireland to corporation tax reform here. By then, Le Maire had moved on to agriculture. In opposition between 2012 and 2017, he failed to secure the conservative Republican party’s nomination for the last presidential election and instead joined Macron as finance minister immediately after the vote.
Le Maire has arguably been the most active and consistent advocate of a global agreement on corporation tax ever since. While the US wavered during the Trump presidency and seriously re-joined the talks only this year, following Biden’s election, the French minister was constantly pushing for a deal. Reacting to last month’s outline agreement, he told parliament: “This is a victory of justice against the unfairness where digital giants avoid tax while French and European SMEs must pay their fair share… The president and I have been very clear: 15 per cent is a minimum but if we can obtain more, we will get more.”
This statement, much like Macron’s comments singling out “big digital groups” in Dublin on Thursday, muddies the waters by conflating the two pillars of the OECD-brokered agreement.
Pillar one reallocates a portion of taxable profits to the countries where a firm’s customers are located. This is where digital sales come into the equation. When Microsoft, Google or Facebook sell software-as-a-service or advertising to French customers from their Irish base, as they do now, a formula agreed internationally would see some of the resulting profits taxed in France. Donohoe has said publicly that Ireland is on board with this.
Pillar two, meanwhile, would allow the home country of a multinational’s headquarters to collect any difference between the local tax paid by its subsidiaries in each country around the world and an agreed minimum – 15 per cent or more. As digital giants are nearly all US-headquartered, a reallocation of taxable profits in this industry would benefit the US, not France.
Why, then, are Le Maire and Macron so insistent on signing up Ireland to this second pillar?
The answer is to be found in a paper by five economists published in June through the Conseil d’Analyse Économique, a State-funded independent research body similar to the ESRI here.
They estimated that profit re-allocation under Pillar one would result in around €900 million in additional revenue for the French Exchequer. Not only is this barely significant in the context of France’s multi-hundred-billion-euro budget, it is also an “optimistic view”, according to the authors themselves, because of “opportunities for manipulation” in Pillar one calculations.
In any case, the figure is broadly in line with the revenue expected from a temporary French digital sales tax already introduced unilaterally by Le Maire until a global agreement takes effect.
“French corporations worldwide shift around €34 billion of profits to tax havens.”
Conseil d’Analyse Économique
By contrast, the paper found that a global effective minimum rate of 15 per cent would yield €5.9 billion in additional French tax in the short term, while the 21 per cent minimum rate sought by the Biden administration would increase this figure to €8 billion. And here is the big reveal: This is nearly all derived from profits made by French-headquartered multinationals.
“We adopt this perspective since the minimum taxation negotiated by the OECD allocates the taxing rights exclusively to the country where the multinational’s headquarters is located. French corporations worldwide shift around €34 billion of profits to tax havens,” the authors wrote. This compares with €46 billion for German-based groups and €95 billion for US ones.
“For France, the main profit shifting destinations are Switzerland, the Netherlands, and Luxembourg. The geography of profit shifting is very similar for Germany. In contrast, profit shifting by US corporations is relatively more directed towards offshore financial centres close to the US coast, such as the Bahamas or the Cayman Islands, as well as Ireland, Hong Kong, and Singapore.”
Geography of tax avoidance by origin of the group headquarters
The model used by the economists considered only those companies with over €750 million in worldwide revenue, in line with the OECD draft agreement. It attributed two thirds of the initial tax revenue boost to France collecting the difference between the global agreed minimum and the lower rates enjoyed by subsidiaries of French firms in lower-tax jurisdictions. In addition, some profits were forecast to be relocated to France, while a small negative effect came from a portion of real business moving to lower-tax jurisdictions to justify booking profits there.
Over time, the paper estimated that the impact would erode as countries like Ireland and Luxembourg increase their tax rates to the global minimum, still leaving France with an extra €2 billion in annual tax revenue if the global minimum rate is 15 per cent, and €3 billion if it is 21 per cent.
Continuing the comparison with Germany and the US, the authors found that those countries would gain more than France in euro terms – but not in proportion: “Although the levels of the amounts are lower for France (whose GDP is lower than the German and US GDPs), the growth in corporate tax revenues would be the highest there. We estimate that with a minimum rate of 21 per cent, French tax revenues would increase by almost 20 per cent compared to 10 per cent for Germany and 3.5 per cent for the US.”
In summary, France stands to gain most from Pillar two because so many of its own multinationals offshore their profits, yet very few of them do it in Ireland. The countries where most French firms offshore their profits have already signed up to the OECD-led two-pillar agreement and could implement it without Ireland. Why, then, did Le Maire spend two hours trying to extract support from Donohoe for a minimum corporation tax rate?
The Conseil d’Analyse Économique paper explains that, even if each country applied such a minimum rate, current EU anti-discrimination legislation would limit its scope within the bloc to those subsidiaries without any real activity – brass plate-type companies only.
While this would let France tax the many Swiss subsidiaries of French multinationals, those operating in Luxembourg and the Netherlands would enjoy this EU protection and the scheme would become bogged down in calculations to determine their substantial activity, if any. To apply a straight minimum rate across the board, there is only one option: an EU directive to implement any final OECD agreement. The paper warns that “it would then run the risk of encountering a veto from a single Member State”.
Cue Thursday’s high-powered French visit to Dublin, four months before the start of a French EU presidency that would table such a directive. As Macron said, no pressure at all.
Donohoe still looks towards the US
So, French officials have an eye on recovering multi-billion-euro taxing rights from their own companies in continental low-tax jurisdictions, while publicly slating US digital multinationals setting up in Ireland. This is politically clever as the so-called GAFAM (Google, Apple, Facebook, Amazon and Microsoft) are already public villains in France, and very few people working for them have a vote in the country. Meanwhile, pharmaceutical group Sanofi, one of France's largest corporations, quietly reported an effective tax rate of 4.9 per cent in 2019.
Yet France needs to bring Ireland on board, and Donohoe is clearly looking in the opposite direction – towards the US. Before committing to any level of a global minimum rate, the minister wants to know which one will apply to those American-based groups propping up the Irish tax take, under rules to be decided during an ongoing marathon budget debate in Washington.
This overcame a hurdle this week, when the US Congress passed an overall budget blueprint in a format that allows individual items to be voted on in the coming weeks without the chance of being blocked by Republican filibusters. Bringing together Biden's own Democratic party across the divide between centrists and progressives to accept the budget outline, however, was in itself a battle worthy of the most nail-biting episodes of The West Wing.
And it still leaves the details of upcoming US fiscal policy up in the air, especially Biden’s target to reform the current GILTI regime to increase the tax rate on profits booked by US firms in Ireland and elsewhere to 21 per cent.
Until that is settled, no matter the amount of cajoling or pressure directed towards Ireland by Macron and Le Maire, the Irish position on a wider global tax deal is unlikely to change.
