Rewarding tax havens? Why Ireland may cash in on OECD reforms

Dublin docklands. - Copyright Canva

Published on 15/03/2024 - 10:47

The cornerstone of Irish economic policy has been low corporation tax, so what will a minimum levy mean for the country?

Stretched out along Dublin’s river Liffey is an expanse of glass office buildings.

Sometimes referred to as the ‘Silicon Docklands’, the nickname points to the neighbourhood’s status as a corporate magnet.

Major firms - famously Big Tech - have long flocked to Ireland, enticed by the country’s low level of corporation tax.

Since 1997, the official rate has been held at 12.5%, although this changed in January with the arrival of a long-awaited reform.

Along with around 140 other nations, Ireland introduced a 15% minimum tax rate on the profits of multinationals, a policy spearheaded by the Organisation for Economic Co-operation and Development (OECD).

"The goal was to try to reduce the distortions in investment decisions that were occurring as a result of competition to reduce tax rates amongst countries," explained Manal Corwin, Director of the Centre for Tax Policy and Administration at the OECD.

Not only were firms making investment choices disproportionately based on tax costs, states were also being forced to lower rates to compete for this investment, she told Euronews Business.

A nation built on foreign investment

Before recent breakthroughs, Ireland had long shunned efforts to harmonise international tax rules, as it was substantially benefiting from the existing system.

During much of the previous century, Ireland had been one of Europe’s poorest countries, although this all changed with the rise of the Celtic Tiger - an economic boom - in the 1990s.

Whilst the Tiger was shaped by a number of forces, foreign direct investment is often cited as a driver behind Ireland’s remarkable GDP growth, which jumped by 229% in the two decades to 2007.

For many, the corporate levy of 12.5%, phased in gradually after 1997, was partially to thank for this period of prosperity.

"It's paid a rich dividend on a number of fronts," explained Kieran Mcquinn, Professor of Economics at Ireland’s Economic and Social Research Institute.

"I think governments and political parties of all shades are always a little bit tentative about increasing the corporation tax rate again," he added.

"There's a perception that it might send the wrong signal to the international community."

Ireland’s former Finance Minister Paschal Donohoe, who stepped down in December 2022, was notoriously hesitant to implement the OECD reforms.

He told national broadcaster RTE in 2021: "What I’m doing is making the case for our 12.5% rate and for the right of smaller- and medium-sized economies to have a low rate, as part of their competitiveness."

Will the tax hike scare investors?

Since investment in Ireland has historically been supported by the country’s generous tax system, some fear the 15% floor could harm the nation’s economy - although many experts would contest this prediction.

To a large extent, Ireland is shielded by safety in numbers, as the decision to raise the corporate tax rate is not purely domestic.

Added to this, experts highlight that the nation offers other incentives for investors beyond its tax policies.

Since Brexit, Ireland stands out as one of just two EU countries that has English as an official language, and it has already established a community of multinationals on its soil.

The Irish Tax Institute recently reiterated the view that Ireland will remain an attractive option for investors, although its President, Tom Reynolds, expressed concerns about bureaucracy surrounding the new rules.

"Those of us who work in the tax functions of large multinationals are now getting our heads around how we comply with what is in effect a new and untested taxing system that sits alongside our domestic corporation tax code," Reynolds said.

"Suffice to say that we need Revenue to be supportive and pragmatic in the bedding in period ahead."

Rather than condemning the new tax floor, some experts are also more wary about an accompanying OECD initiative proposed, which seeks to reallocate taxes based on where customers and users of a service are located, rather than where a firm is physically based.

The policy means that other countries may be able to collect tax, currently going into Ireland’s coffers, that is generated by business activity outside of Ireland.

This proposal is known as pillar one, with pillar two referring to the global minimum tax.

Criticism of the OECD regulation

For other commentators, the main flaw of the OECD’s reforms is that they aren’t sufficiently watertight.

"The problem is that there are a number of loopholes that were introduced gradually to the agreement that are basically drilling holes in the floor," said Quentin Parrinello, Senior Policy Advisor at the EU Tax Observatory.

In particular, he pointed to something called 'substance-based carve outs', which can allow companies to dodge the minimum rate of tax.

If a company has business activities in a country where the corporate levy is less than 15%, other nations should be able to collect the excess revenue until this threshold is reached.

With 'carve outs', the picture changes.

Provided that the firm operating in the low-tax country has certain expenses in this jurisdiction, they can then subtract these costs from the revenues subject to global taxation.

According to Parrinello, this scenario undermines the fight against harmful tax competition, a move that harms everyone - including Ireland.

"Harmful tax competition is a lose-lose situation," he said.

"We’re all losing public resources that are desperately needed to tackle the inequality crisis and to tackle the climate crisis."

Will the minimum tax be a cash cow for Ireland?

Globally, the OECD estimates that the global minimum tax will generate an additional $155 billion to $192 billion annually in corporation tax revenue.

In euros, this amounts to between €142 billion and €176 billion, with significant benefits expected for investment hubs like Ireland.

If the Emerald Isle does decide - and manage - to charge an effective 15% rate of tax, the country will see a substantial influx of cash, given the high number of multinationals already on its soil.

The Irish Department of Finance projects that its corporate tax revenue will hit €24.5 billion in 2024, an annual increase of around 2.5%.

Recognising the volatility of these revenues, the government announced last year that it would be funnelling the extra cash into sovereign wealth funds, meaning state-owned investments.

Many Irish people will no doubt be hoping for immediate spending increases, perhaps to support the country's healthcare system or tackle Ireland's growing housing crisis.

For now, the government says that some of this revenue must be stored away for a rainy day, providing a cushion for future shocks.

It's important that "permanent fiscal commitments are not made on the basis of transitory revenues", said the Irish Minister for Finance, Michael McGrath, in January, adding that public services would see "sustainable" investment.

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