LIKE IT OR lump it, Ireland’s corporation tax regime is facing global headwinds that are likely to alter it irrevocably.

That much we know after a week in which the United States firmly set out its stall on the issue of a new 21% global minimum rate of corporation tax. In just its first couple of months, the US President Joe Biden has given new impetus to a set of ongoing multilateral talks at the Organisation for Economic Cooperation and Development (OECD) around issues of global tax reform.

Having largely come off the tracks during his predecessor’s term of office, the Biden administration has renewed America’s commitment to getting a deal over the line, removing a major stumbling block in the process.

What we don’t know is how exactly those negotiations will play out.

Irish policymakers have been bracing themselves for a development of this kind for a long time. For years, international controversy has howled around Ireland’s low-tax set-up — characterised mainly by the contentious 12.5% rate of corporation tax — and from all directions, mainly from Europe.

So what exactly makes this different?

Profit shifting

Essentially, there are two pillars to the OECD talks around global tax reform, focused on something called BEPS, which stands for ‘base erosion and profit shifting.’

The first pillar relates to finding a way to tax large multinational tech companies in a more effective manner. The second relates to the global minimum rate of corporation tax.

In a bid to “catalyse” the OECD talks, the Financial Times reported this week, the US has largely removed Trump-era objections to the first pillar, which had been a major stumbling block to the overall process. It is now proposing a deal that would allow national governments across the globe to tax  “only the very largest and most profitable companies in the world” regardless of what sector they’re in, tech or otherwise.

That should help to considerably grease the wheels of negotiations on the second pillar but you might be wondering why, exactly, the US is doing this and now.

In a nutshell, because it would allow the Biden administration to raise its own corporate taxes without having to worry about whether America will be undercut by other jurisdictions looking to lure multinationals with lower rates. 

In the strongest possible language, US Treasury Secretary Janet Yellen said a global minimum corporation tax rate would be a bulwark against a “30-year race to the bottom” on corporation tax rates.

But it’s difficult to deny the role Ireland has played in this global shift since the 1990s.

Tax competition

Tax competition is an emotive issue for politicians, however, who will often contort themselves in order to defend Ireland’s record.

But probably the vast majority of economists would agree with the World Bank’s Michael Keen and Jim Brumby who wrote in 2017 that “headline corporation tax rates have plummeted since 1980, by an average of almost 20%”.

For Keen and Brumby, a wide range of factors are responsible for this downward trend, but tax competition — countries undercutting one another on rates in order to lure multinationals — has certainly been one of them.

Within that 30-year window that Yellen spoke of, Ireland has become a poster boy for a model of development that hinges on its low corporate tax environment. Successive Irish governments slashed corporation tax rates throughout the 1990s, before introducing the world-famous 12.5% rate between 1999 and 2003, which remains in place, a cornerstone of the country’s model for attracting foreign direct investment.

Because of it, Ireland has punched well above its weight.

Figures from 2017, reproduced recently by the International Monetary Fund, suggest that Ireland’s share of total global foreign direct investment was about 2.5% in that year. That’s hugely disproportionate, given that the Irish economy accounted for just about 0.4% of world gross domestic product in that year.

It must be said that we’re not the worst offenders by any stretch, not even within Europe. 

In Europe, Hungary offers a 9% rate. Luxembourg’s 17% standard rate combined with various sweetheart tax deals for individual companies mean that the tiny, land-locked country, with its 0.1% share of global GDP, enjoyed a whopping 12.8% share of world foreign direct investment in 2017.

Expressed as a percentage of its world GDP share, it means there’s an over 7000% gap between Luxembourg’s country’s share of global investment and the size of its output. In Ireland, it’s about 264%.

But as Bloomberg economist David Fickling wrote this week, “The trouble is, with Ireland running a 12.5% rate and the likes of the Cayman Islands and British Virgin Islands not taxing corporate profits at all, it’s a race to the bottom that rich-country governments can only win by either drastically cutting spending or by shifting more and more of the fiscal burden onto the shoulders of middle-and working-class voters.”

Cutting expenses

Of course, it’s not just rich countries that suffer as a result of tax competition.

As Fickling explained, the modern global economy is structured around policies that have allowed massive corporations to cut labour expenses by offshoring jobs to emerging markets like China and other countries while cutting tax costs by offshoring profits to countries with low rates like Ireland, Bermuda and so on.

Why do we need a minimum corporate tax, you ask? pic.twitter.com/opDmdbeUEe

— Gabriel Zucman (@gabriel_zucman) April 5, 2021

So while the majority of the profit-generating labour is conducted in the developing world, the argument goes, governments in those countries are deprived of vital tax revenues by multinationals booking their profits overseas.

This problem has only be exacerbated by digitalisation, the IMF said this week. High tech firms have been allowed “to earn significant profits in ‘market countries’ without incurring any income tax liability there”, the fund said in its biannual fiscal monitor report.

So it’s clear that change is afoot but what exactly will it mean?

Corporation tax receipts have been an extremely lucrative revenue stream for the Irish government, particularly over the past half-decade or so. Last year alone, the Exchequer took in €11.8 billion from corporation tax, roughly 20% of Ireland’s total tax take.

The bottom line is that proposed under BEPS could cost the Irish exchequer an estimated €2 billion per year. 

Nevertheless, Minister for Finance Paschal Donohoe said this week that the OECD remains the best forum for discussing international tax reform. 

“What Ireland and other countries will do is put forward their case within with the OECD, and we’ll work inside that process to try and influence an outcome that recognises the role of small economies in the global economy,” the Fine Gael TD said.

So there’s plenty of road left to travel.