Crucial decision imminent for Ireland on corporation tax

The week ahead could be huge for businesses in Ireland, especially large national and multinational companies.

Indeed, negotiations around a new global corporate tax framework could be about to reach a crescendo.

Depending on how things develop over the next few days, the result could be a sea change in Irish corporate tax policy.

For so long, the 12.5% ​​rate has been Ireland’s calling card, the foundation on which a vibrant and lucrative export-driven economy has been built, which in turn has become a powerful driver of economic growth.

Remind me why change is sought?

Pressure has been growing in recent years for a substantial overhaul of how corporation tax is calculated, how much is levied and where it is paid.

Many countries were increasingly frustrated with big business, especially in technology.

These were companies that made large sums of money in their territories but could avoid paying a lot (if any) of taxes locally because they had no real operations there.

Governments were also beginning to get annoyed that aggressive tax planning was being used to shift profits around the world to lower or zero tax locations.

So where does the OECD come in?

The annoyance of the states that were losing because of this situation began to cause some of them to threaten to break with global tax norms and instead pursue their own policies, such as imposing special taxes on large digital companies, like Facebook, Google and Amazon.

Left unchecked, this had the potential to lead to a bit of freedom for all which could have resulted in an extremely disruptive, bureaucratic and disparate system across the world.

So, under the auspices of the Paris-based Organization for Economic Co-operation and Development, a process has been launched to try to reach a global agreement on corporate tax reform.

It has existed for several years, with the participation of 139 countries.

But now it looks like he’s about to reach the endgame.

And what has been proposed by the OECD?

Last November, the OECD announced that 130 of those 139 countries and jurisdictions had signed on to a plan that would bring sweeping new reforms.

Under the proposals, countries could tax big business profits in the markets where they are made, whether or not they have a physical presence there.

The framework also proposed that an overall minimum tax rate of “at least 15%” be set.

The rate would apply to companies whose turnover exceeds the threshold of €750 million, with only the maritime industry being exempt.

The government feels the negotiations are moving in a positive direction, but no one is yet certain that Ireland will get enough of what it wants.

The OECD said the plan would ensure multinational companies pay a fair share of taxes wherever they operate and provide much-needed revenue to governments, as well as stability.

Those that signed on to the plan accounted for 90% of global GDP and included the US, China, UK, France and Germany.

Since then, a number of other holdouts have also signed up.

But Ireland didn’t, did they? Why is that?

No, the government was not among the original 130 signatories, which leaves it in the dark.

Ireland has no major problem with the first part of the plan, which would give countries the right to tax companies based on the activities they do in a country, even if the company is not there. no major operation.

Ireland’s problem lies in the second part of the draft agreement, which sought to set an overall minimum tax rate of “at least 15%”.

Ireland does not want to give up its 12.5% ​​rate at all, if that helps. And if necessary, he wants the new rate to be as low as possible.

There is a private acceptance in government circles that 15% would be a reasonable compromise under the circumstances.

But only if the agreement were to provide certainty and stability of a fixed percentage of 15% – not 15% or more.

It was therefore not too surprising that Ireland did not enter initially.

Not when the absolute finish line of the negotiations had yet to be reached and there were many variables at play, including whether the plan would even make it through the US Congress.

And so, since then, Irish officials, as well as the finance minister, have been negotiating hard with whoever will listen to have the “at least” part of the description removed.

Key to the negotiations is also which “exclusions” or exemptions from the new global minimum rate will also be included.

So what’s going on this week?

It is expected that the final, possibly final, draft agreement will be circulated to all participating countries in the coming days.

When that happens, it will quickly become clear whether or not Ireland has been successful in its lobbying efforts.

If so, then the government will have to make a tough decision on whether or not to abandon the 12.5% ​​rate – a key weapon in Ireland’s arsenal of foreign direct investment that has been closely watched for decades. – in the hope that doing so now will limit the longer-term damage.

And if he’s not successful, the Cabinet will face an even tougher decision to stay out of the deal, leaving him as an outlier in the global economy.

Or he could decide to sign everything the text proposes, including perhaps the “at least 15%” clause, because staying out of the deal is no longer tenable.

Complicating the decision-making process, it remains unclear how the U.S. tax reforms proposed by the Biden administration will play out and whether they will complement the global plan.

The government feels the negotiations are moving in a positive direction, but no one is yet certain that Ireland will get enough of what it wants.

Ireland is a very small global player. But he has many friends in the United States and Europe and a thriving collection of foreign multinationals that have a lot of clout in their home markets.

On Friday, representatives of the 139 countries involved in the process will hold a plenary meeting at the OECD during which it is expected that a final agreement can be signed.

It is not completely certain that the process has come to an end and that the deadline may drift.

But everything indicates that the hour of decision is approaching for the government.