The G7 group of large, high-income countries took control of the agenda for BEPS 2.0 when their finance ministers reached an agreed position in early June. To date, a coalition of small countries to push back against the proposals has not emerged. Indeed, over 130 countries signed on to the principles, though not the details, after a meeting of the OECD ‘Inclusive Framework’ in July.

The objectives of the larger countries are two-fold. The first is to reduce the attractiveness for investment in lower-tax, typically smaller, jurisdictions; the second is to capture a larger share of the pie of taxing rights.

The competitiveness play is via a minimum tax “of at least 15 per cent” with the intent to narrow the difference between the rates charged in the larger countries and the outcomes possible in lower-tax countries such as Ireland which explicitly use tax competition to attract investment.

If the objective of Pillar Two, the minimum tax, was corporate tax revenues it would apply on a company-by-company basis. Each country would guarantee that the overall effective tax rate on its MNCs was above the prescribed minimum, say 25 per cent.

This would mean a guarantee for tax revenues to governments but would leave a role for tax competition as companies would be able to blend outcomes achieved in lower-tax jurisdictions with those in higher tax jurisdictions for their assessment against the minimum rate.

Instead, it is proposed that the minimum tax will apply on a country-by-country basis. Thus, the home country of an MNC must ensure that the profit it earns in each country in which it operates is taxed at no less than the minimum rate. If a company shows it has profits in any country that have been taxed less than this it will be required to make a top-up payment in its home country.

That this is not an issue for most countries can be seen in the number of countries who put their name to the statement from the Inclusive Framework. Included among those were Bermuda, the Cayman Islands and other island jurisdictions which do not have corporate income taxes. Nor have they any intention of having one.

Bermuda and the Cayman Islands may seek exceptions for parts of the financial sector such as reinsurance and it could be that some of the larger countries do most of the heavy lifting for them in getting such exceptions included in the final deal. This is because they do have some employment in these sectors. However, from the perspective of these no-corporate-tax jurisdictions how the home countries of MNCs choose to tax their own companies is primarily a matter for them. Bermuda gains little from US companies reporting tens of billions of profits in Bermudan-resident subsidiaries.

Obviously, these companies do not pay corporate taxes to Bermuda – there is none to pay – nor are there significant gains in terms of employment or other spending by the companies as they are typically holding companies with no physical presence.

The attitude of Bermuda will be that if home countries want to tax those profits, then work away. Indeed, the Bermudan government will argue that countries should be able to prevent the profits flowing to Bermuda in the first place.

Aggregate statistics published by the OECD from the country-by-country reports that MNCs are filing show that it is really only US companies that have significant profits in the likes of Bermuda and the Cayman Islands. Domestic legislation prevents German, French and MNCs from most countries from shifting substantial amounts of their profits to zero-tax jurisdictions where they have no substance.

Substance is key to all of this. If companies have substance in a country, it means they have been successful in attracting investment. This could be because of their large size which means proximity to customers or depth of talent pool. Some small countries such as Ireland have used lower tax to attract investment.

Unlike Bermuda, Ireland does have something to lose if the minimum tax is successful in achieving its goal of reducing the investment attractiveness of lower-tax jurisdictions. Initially, Ireland took the position of being opposed to a minimum tax of this form. That position has evolved and Ireland’s position now is not one of outright opposition to a minimum tax but that any such tax should be compatible with the existing 12.5 per cent rate here.

Ireland has been incredibly successful in attracting investment and creating employment, particularly from US MNCs. Tax is not the only reason for the significant presence these companies have in Ireland but it is certainly a part of it. The extent of that success is worth setting out.

Figures from Eurostat show that, in Ireland, in 2018, just over 1.5 million people were employees of enterprises in the business economy. The business economy excludes the financial sector and state-dominated sectors such as education and health.

Of those 1.5 million, 135,000, or nine percent, were direct employees of US MNCs. This share was the highest in the EU27 and close to double that of the next highest, which was Luxembourg. The median, or mid-point across the EU27 was two per cent.

If employment with US MNCs in Ireland was at the median for the EU27 they would have 30,000 employees here, a reduction of more than 100,000. Across the world, of countries with a population of more than one million, Ireland has a larger share of its population working as employees of US MNCs bar the US itself.

When looking at pay, with 135,000 direct employees in Ireland in 2018, US MNCs incurred €9.5 billion of personnel costs. This was equivalent to 4.8 per cent of modified gross national income (GNI*). This was the highest contribution of pay from US MNCs to national income in the EU27, where the median was 1.1 per cent.

A second difference with the zero-tax jurisdictions is that Ireland does have a corporate income tax. The 12.5 per cent rate may be lower than other countries but in recent years revenues have soared. In part, this is a consequence of BEPS version 1.0 which was driven by an underlying principle of aligning profit with substance. US MNCs have significant substance in Ireland and are making significant tax payments here.

Figures the IRS have published for 2018 from the country-by-country reports US MNCs have filed with them show that, incredibly, Ireland was the third-highest recipient of corporate income taxes from US MNCs in the world. In 2018, US MNCs paid just under $8 billion of corporate tax to Ireland. This was second only to the US itself and the UK who received $140 billion and $11 billion respectively.

Indeed, given the continued rise in Ireland’s Corporation Tax revenues since 2018 there is a reasonable chance that Ireland is now the world’s second-largest recipient of corporate taxes from US MNCs. Ireland was the largest recipient within the EU27 and one-quarter of all the corporate tax that US MNCs paid in the EU27 was paid to Ireland.

These receipts are also highly concentrated. In 2020, just ten companies (most of whom are likely to be subsidiaries of US MNCs) paid 50 per cent of all Corporation Tax. That was €6 billion or an average of €600 million per company. It cannot be ruled out that one of those companies paid something approaching €2 billion of Corporation Tax.

The corporate tax payments of US MNCs in Ireland were equivalent to 3.4 per cent of modified gross national income (GNI*) in 2018. Only Luxembourg with receipts of just over $1 billion had a comparable share of national income coming from corporate taxes of US MNCs. The share was less than 0.5 per cent of national income for the remaining 25 of the EU27 countries.

The median for the tax payments of US MNCs in the EU27 was 0.1 per cent of national income. If US MNCs paid corporate tax in Ireland in line with that their payments in 2018 would be $200 million. That’s not a reduction of $200 million; that’s what the payments would be in total.

Combining personnel costs for employees and corporate tax paid to governments shows that US MNCs contributed 8.8 per cent to Ireland’s national income in 2018. This was the highest across the EU27, with the equivalent figure for France and Germany being less than 1.5 per cent. That they are in favour of proposals that might see them attract more investment or collect more tax is not a surprise.

And the contribution set out above excludes payments for other taxes such as commercial rates, wages to agency staff, and purchases of goods and services from domestic suppliers.

Bermuda might have little to lose from a minimum corporate tax as currently proposed but Ireland certainly does. The large countries using a minimum tax to blunt the investment attractiveness of lower-tax jurisdictions is a legitimate objective but it should not be presented as something that it is not.

The larger countries are making a play to garner more tax revenues and that is being done via Pillar One, the reallocation of taxing rights. Initially, this was focused on the digital economy and there is a merit in companies that sell online advertising paying more tax in the market countries as that is where one of their key assets are located: us. Sellers of online advertising use our search histories, our contact lists, our locations and other information to better target ads at us. The data they collect is a key asset and that is collected based on where the user is. There is logic to these companies paying more tax where their users are.

This was the initial motivation behind Pillar One but the US viewed this as a targeting of their MNCs in the digital sector. The Trump administration simply withdrew the US from the negotiations. The Biden administration re-joined and offered a renewed impetus for international agreement to be reached, in part, because of domestic proposals they hope will be passed by the US Congress.

One of the conditions the Biden administration set on their return was that Pillar One would not be limited to digital companies. It is not clear how much wrangling there was when the G7 finance ministers met but the subsequent statement showed that the US had got its way.

Pillar One was no longer to be confined to digital companies and other countries agreed to shelve their plans for digital taxes. Shortly afterwards the European Commission came out and confirmed that plans for an EU-wide digital tax were being put on ice.

The Pillar One proposals are that the new profit allocation rules using location of customers will apply to a set of 100 companies to be determined by size and profit margins rather than the sector they operate in. This, in itself, is a huge shift from the system that has been in place for close to 100 years.

Up to now, companies pay corporate taxes on the basis of where their value-adding functions, assets and risks are located. Location of customers did not enter the determination. And once the mould has been broken maybe, in time, the new rules will apply to a larger and larger set of companies of smaller sizes and profit margins.

There is little doubt that Ireland will lose if such an approach becomes widely adopted. US MNCs have lots of value-adding substance in Ireland but Ireland has very few of their customers. In spite of this, Ireland has already agreed to the principles of Pillar One.

This is perhaps recognising that Ireland’s corporate tax revenues are at an elevated level and also maybe with an eye to seeing if agreeing to Pillar One can help Ireland eke out some concessions on the minimum tax. For now, none seem to be forthcoming but there is still a way to go until the negotiations are concluded. If the current agreement holds together, it will be the large, high-income countries who will be most pleased.

Seamus Coffey is a lecturer in the Department of Economics in University College Cork. He is the former Chair of the Irish Fiscal Advisory Council and was appointed the independent expert by the Minister for Finance to undertake a review of Ireland’s Corporation Tax code.