Last week, during his visit to the United States, An Taoiseach Micheál Martin cast doubt on the 12.5% rate which has been the cornerstone of Ireland’s current corporation tax regime for more than 25 years.
While it marks a change in tone from previous Irish Government statements, it should not be viewed as a signal that Ireland has changed its position in terms of the Organisation for Economic Co-operation and Development (OECD) reforms. The Irish Government’s key sticking point with the so-called ‘Base Erosion and Profit Shifting 2.0’ (BEPS 2.0) or, more formally the ‘Inclusive Framework on BEPS’ (BEPS IF) is the uncertain language of the reports themselves, which reference a minimum corporation tax rate of “at least” 15%. According to Minister for Finance Pascal Donohue, the proposal’s current wording suggests a real risk exists that, should Ireland raise the corporation tax rate to 15%, this may still be viewed as insufficient and unacceptably low by certain BEPS IF jurisdictions.
The Taoiseach’s statement is perhaps better viewed as confirmation that Ireland only intends to sign up to a deal when it has certainty on the details and clarity on the future implications for existing stakeholders – predictability is key. Given that the bulk of Ireland’s €12 billion in corporation tax comes from US multinationals, almost all of whom would be impacted by the OECD rules, it is critical to consider, in parallel, the impact the Biden administration’s changes will have on the tax rules that govern how much U.S. companies owe on their foreign profits, in order to understand the potential true revenue impact of these changes when taken together.
OECD/G20 Proposals
Since the final reports of the OECD’s original ’BEPS’ project were published in 2015 [1], 140 countries and jurisdictions within the OECD and G20 have been working collaboratively on BEPS IF.
The stated aim of the BEPS IF is to build consensus-based, workable and long-term solutions to address the tax challenges arising from the digitalisation of the global economy. If adopted, the BEPS IF could result in fundamental and far-reaching changes to bedrock principles of international taxation.
During its January 2020 meeting, the BEPS IF jurisdictions resolved to move ahead with a two-pillar approach. This approach, broadly, includes:
- Under the “first pillar”, solutions for determining the allocation of taxing rights ("nexus and profit allocation").
- Under the “second pillar”, the design of a system to ensure that multinational enterprises ( MNEs) pay a minimum level of tax on profits.
Despite their differences, and the challenges posed by COVID-19, the BEPS IF jurisdictions have made notable progress towards building consensus. In October 2020, a package of significant documents was released, including reports on the core components of pillars one and two. The reports themselves reveal that, while diverging views continue to exist in relation to key features and parameters of the two pillars, a majority of the BEPS IF jurisdictions are in favour of taking the political and technical steps necessary to bridge these gaps in order to bring about significant change.
Importantly, it is expected that MNEs with a global turnover below 20 billion euro and profitability on a before tax basis below 10% should be out of scope of many of the rules proposed under the BEPS IF first pillar (modified nexus, tax base determination, etc). For the proposed rules under the second (in particular, the Global anti-Base Erosion Rules or “GloBE rules” and the “Subject to Tax Rule” or “STTR”) however, the proposed turnover threshold for determining whether a particular MNE is in scope is currently set much lower at 750 million euro. Furthermore, the BEPS IF reports make clear that the first pillar’s principles could potentially be applied to MNEs with a global turnover of above 10 billion euro following future consultations.
Proposed US Tax Reform
From a corporate tax perspective, President Biden’s core commitment is to raise the corporate tax rate (which was lowered to 21% under President Donald Trump’s 2017 Tax Cuts and Jobs Act) to 28% for taxable years beginning in 2022. It is thought that a blended rate would apply to tax years beginning in 2021 and that a 15% minimum tax on book earnings of large corporations will also be introduced.
The broader tax-related proposals from President Joe Biden’s administration [2] , which are currently under consideration by US lawmakers, contain further significant international tax proposals. At a high-level, these proposals include:
- Increasing the “global intangible low-taxed income” (“GILTI”) tax rate to 21%.
- Overhauling the anti-inversion regime by treating a foreign-acquiring corporation as a US corporation based on a reduced 50% (rather than 80%) continuing ownership threshold.
- Repealing the “foreign derived intangible income” (“FDII”) regime.
- Substituting a new “stopping harmful inversions and ending low-tax developments” (“SHIELD”) regime in place of the existing “base erosion and anti-abuse tax” (“BEAT”) regime, which would disallow deductions to US domestic corporations for US tax purposes by reference to the effective tax rate on amounts paid to foreign entities that are members of the same financial reporting group.
Considering the Impact
From an Irish perspective, the original BEPS project may have had the unintended consequence of helping to drive more capital and foreign direct investment projects to Ireland. A key reason for this is thought to be centred on the fact that many of the original BEPS project’s rules (which Ireland has, for the most part, adopted in its tax-code) require MNEs with a “hub” in Ireland to increase the level of “economic substance” in the State. This can be viewed as having led to increased MNE employment and production/R&D capacity, which are in turn borne out in Irish corporation tax receipts between 2013 and 2019 [3] .
In terms of the future impact of these reforms, DLA Piper recently hosted a webinar to tease out the likely future impact these reforms will have on multinationals currently in Ireland which featured our Maura Dineen (Partner, Dublin and Head of Tax in Ireland), Kevin Glenn (Tax Partner, New York) and Ambassador Marc Grossman of The Cohen Group, who served as the Under Secretary of State for Political Affairs, the State Department's third ranking official, until 2005.
The consensus amongst the experts on our panel is that these Biden reforms when viewed alongside the OECD reforms should not diminish Ireland’s attractiveness for the moment as a destination jurisdiction for US outbound investment and FDI projects. For example, if we look at the scenario where Ireland does sign up to BEPS IF and ends up with a 15% minimum tax rate, this is still less than the proposed US GILTI rate, so from the perspective of the US multinationals, there is insufficient incentive to bring activities back to the US.
A factor which Ambassador Grossman emphasised is that tax is not the only consideration for these companies. Tax is only part of the analysis that MNEs consider when deciding where to locate their investments. While the consistently low Irish rate of 12.5% has made Ireland an attractive location from an effective-tax rate perspective; the tax tail does not wag the dog and there are other benefits which weigh in Ireland’s favour, including the language and open-culture; political stability and government competence; common law legal system; highly educated young workforce. In our view, if the playing field is being levelled from a tax perspective, Ireland needs to play to its other strengths and focus investment on enhancing further these advantages to shore up its competitiveness in an environment where the Irish trading corporation rate moves upwards to 15%.
This is because all other commercial drivers being equal, there is a tipping point at which some US multinationals will decide to ‘re-shore’ assets to the US, if the taxation of those assets is more generous. For example, where a MNE is developing software in Ireland, carrying out R&D, it may leave that R&D and associated workforce in Ireland but re-shore the IP back to the US when the right incentives are there.
DLA Piper’s Kevin Glenn does not believe those incentives exist at the moment, but he did emphasise that reputational considerations are also relevant and do influence MNE decision-making in this environment of evolving international rules, and more stringent requirements under Pillar 1 and Pillar 2 and some would be wary of the potential reputational risk from having IP in a ‘substance-light’ jurisdiction. This is likely to be a factor for MNEs who have yet to fully internationalise. As regards MNEs in Ireland with significant substance, the impact is more likely to materialise when considering where to locate new jobs rather than decisions to move existing Irish jobs back to the US.
Domestic Politics
Notwithstanding the Taoiseach’s statement in the US, just one day later while speaking at Cabinet An Tánaiste Leo Varadkar, TD reaffirmed the State’s commitment to the 12.5% corporation tax rate in a domestic context (specifically, for so-called small- and medium-sized enterprises having an annual turnover of 750 million euros or less). This could be an indication that the Irish Government is considering a progressive corporation tax regime where it would retain the 12.5% for domestic companies or those of up to €750 million, but for companies within the scope of OECD rules, they would do an alternative calculation using the global minimum tax rate (15%) and such companies would pay the higher of the two rates.
While this is very much the ideal scenario for Ireland, this sort of solution would represent a big political victory for the Government parties and it should also result in a higher tax take, which is vital in order to pay for the cost of the COVID-19 pandemic.
Conclusion
The OECD talks in October will be key in seeing how the BEPS IF global tax reform discussions advance and the US is obviously a clear player in those talks and will be trying to advance its own reforms in parallel.
Whatever the outcome, the prevailing sentiments surrounding the proposals of both the OECD/G20 and the United States suggest that Irish businesses should prepare for a more level playing field in relation to tax competition going forward. To continue to successfully attract and retain capital, Irish businesses and MNEs in Ireland may wish to look to other vital areas – maturity of ecosystems within key sectors such as financial services, life sciences, pharmaceuticals, technology and IT, etc; quality of life enhancements; ease of doing business; regulatory environment, etc – in order to ensure fair and sustainable growth into the future and to maintain Ireland’s competitiveness in terms of winning new FDI investments.
Footnotes:
[1] BEPS refers to tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity or to erode tax bases through deductible payments such as interest or royalties. Source: https://www.oecd.org/tax/beps/about/
[2] United States Department of the Treasury: General Explanations of the Biden Administration’s Fiscal Year 2022 Revenue Proposals, commonly referred to as the “Green Book”.
[3] Department of Finance: Corporation Tax-Tax Strategy Group – 20/03: September 2020. Source: https://assets.gov.ie/86996/fc592e6d-1b7b-4e86-a187-1ce63cef311c.pdf