Tax rate change designed to benefit bigger countries, economist warns
Minister for Finance Paschal Donohoe said the deal "provides that the minimum effective rate for multinationals with an annual revenue in excess of €750 million is 15%. Picture: Julien Behal
The Government is to give up our lucrative 12.5% corporation tax rate as part of a landmark international agreement.
After months of wrangling, Ministers have agreed to sign the Organisation for Economic Co-operation and Development (OECD) deal that will see our corporation tax rate rise to 15%.
The tax rate will apply for all multinationals with revenues in excess of €750m. The 12.5% rate will remain for businesses with revenues below the €750m mark.
Minister for Finance Paschal Donohoe said the deal "provides that the minimum effective rate for multinationals with an annual revenue in excess of €750 million is 15%".
"We have secured the removal of ‘at least’ in the text. This will provide the critical certainty for Government and industry and will provide the long-term stability and certainty to business in the context of investment decisions," he added.
One economist has said the change will benefit the larger and richer countries and not countries like Ireland.
Mr Donohoe said that the rate of 15% will apply to 56 Irish multinationals employing around 100,000 people, as well as 1,500 foreign-owned MNEs based in Ireland, employing approximately 400,000 people.
Mr Donohoe said: “Furthermore, the vast majority of businesses in Ireland will be outside the scope of this agreement and there will be no change to their corporation tax rate. This is important for the domestic economy and the thousands of SMEs that operate here.
Mr Donohoe added: ‘We have seen over the last two years the benefits of innovation – critically in respect to the vaccines which are allowing society now to reopen, but also the role that technology played in keeping businesses open.
“Innovation matters and it is right that the tax system can support this. I am pleased that it has been recognised and delivered in the agreement.”
Ireland has come under increasing pressure to sign up to the OECD deal on global tax reform.
Ministers were able to approve the deal after a clause which stipulated that tax would be set at "at least" 15% was removed. Mr Donohoe said he had been advocating for the removal of the controversial term since July.
When asked whether he believes America will also sign up, Mr Donohoe said he has been in close contact with the US Treasury on the issue and he is confident that the tax rate will be adopted across the world.
The Finance Minister said that he is "confident" that Ireland will continue to remain an attractive location for foreign direct investment long after the OECD agreement is implemented.
"I am confident that Ireland will remain competitive into the future, and we will remain an attractive location and ‘best in class’ when multinationals look to investment locations.
These multinational enterprises support our economy with high-value jobs and at the same time, Ireland provides a stable platform and a long proven track record of success for MNEs choosing to invest here."
The 140 member jurisdictions of the OECD’s Inclusive Framework will meet tomorrow to reach an agreement.
The Department of Finance said that there is "much technical work to do in the months and years ahead before the new rules come into play" which is expected to be as early as 2023.
But experts said the fallout of the Government conceding changes to the corporate tax regime that has anchored Irish prosperity for the past 25 years will not become clear for some time.
UCC economist Seamus Coffey, the former chair of the Irish Fiscal Advisory Council, said it was unclear what the effects will be on future investments in Ireland by US multinationals, in particular.
Mr Coffey said that it should not be downplayed the significance of changing the 12.5% regime.
Overhauling global tax is "clearly designed to benefit the larger and richer countries” and not smaller countries like Ireland, he said.
Feargal O'Rourke, managing partner at PwC, said the Government’s loss of around €2bn in revenues from the tax reforms will likely even out because it will collect more revenue under the 15% rate.
Brian Keegan, director of public policy at Chartered Accountants Ireland, said: "It is possibly one of the better outcomes to come out of the major international moves."
A major concern is that the EU will legislate with a common directive, and Ireland must look after its interests.
"We are in a better position than we were a few weeks ago but this is the start of difficult negotiations to ensure we can consolidate the gains we have made," Mr Keegan said.
IDA Ireland said the move is unlikely “to adversely impact Ireland’s existing base” of FDI.
CEO Martin Shanahan said that Ireland “will remain competitive from a tax perspective and the recent changes to the draft OECD agreement secured by Ireland provide clarity on the global minimum rate that will apply for large companies, making it possible for Ireland to continue to provide stability for investors”.
He added: “Tax is important but it is but one part of Ireland’s proposition and it is imperative that we continue to remain competitive on all aspects of our investment offering, given the level of global competition for the investments we are trying to attract.
“FDI is central to Ireland’s economic success. It has transformed Ireland utterly and brought a level of prosperity that could not have been imagined decades ago.”
Ibec, the group that represents Irish business, said that the decision was the right one, at the right time.
CEO Danny McCoy said the agreement marks a watershed for the Irish business model.
“Implementation of any changes must improve on the elements of the regime we control. The key advantage of Ireland’s tax regime will continue to be built on certainty, simplicity and maximising opportunity.”
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