Introduction

The CCAB-I welcomes the opportunity to share our views on Ireland’s approach to international tax proposals being discussed at the OECD/G20 BEPS Inclusive Framework. We support Minister Donohoe’s refusal to sign Ireland up to a global minimum effective tax rate of ‘at least 15%’ under Pillar Two.

The reputation of Ireland from a tax policy perspective has been much maligned over the last ten years, despite consistent implementation of international tax reform measures promoted by the OECD under BEPS One and by the EU under the Anti-Tax Avoidance Directives. While the decision for Ireland not to join the consensus on the agreement under the Inclusive Framework may not be good for the country’s reputation, experience suggests that Ireland’s FDI tax policy will always be questioned for as long as the country is successful in attracting FDI.

Challenges to tax sovereignty

The Irish government has repeatedly confirmed support for global tax reform to address base erosion and profit shifting practices. Ireland’s commitment to global tax reform is demonstrated by our support of Pillar One which will result in a loss of a share of Irish taxing rights to large countries with large consumer markets. However, Pillar Two is a completely different proposition because Ireland will lose sovereignty over corporation tax. Ireland will be subject to a tax rate set by large countries like the US, Germany and France. The manner in which the minimum effective corporate tax rate under Pillar Two is currently being decided demonstrates how Ireland and other small countries will be at the mercy of the political objectives of large countries. The 15 percent rate is proffered by the US after originally calling for an effective rate of 21 percent1 . The US wants to increase international tax rates to justify an increase in domestic corporate tax2. The OECD’s plans for Pillar One and Two also took a U-turn from its original proposal to introduce a minimum rate of 12.5 percent3 to a rate which could now be “a bit above” 15 percent4.

The European Commission’s stance on introducing an own resource digital tax is at odds with the OECD’s core objective for consensus-based global tax reform. The Commission postponed the publication of digital tax proposals in July, but it still plans to press ahead with its proposals once the OECD’s measures are finalised5. This means MNCs may have to contend with a European digital tax plus Pillar One and Pillar Two measures and the US may also fulfil threats to implement trade tariffs in retaliation for the imposition of a European digital tax on companies with a US parent. The very reason countries are collaborating with the OECD is to avert trade tensions stemming from unilateral measures against MNCs by individual states and economic blocks like the EU.

The US political position is also very difficult to assess. Currently there is no legislative basis to the Made in American Tax Plan. Nor is there any clear indication of when or indeed if the initiatives in the plan will make it through US Congress. It is most likely that the OECD will press ahead with its plans regardless of the outcome in the US, but this very situation demonstrates the precarious nature of an internationally determined corporation tax rate.

If Pillar Two proposals are implemented, then Ireland will be mere pawns to the vagaries of international politics.

Loss of FDI competitiveness

In addition to the fundamental tax sovereignty challenge facing Ireland, Pillar Two proposals will damage Ireland’s ability to win FDI investment and risks the flight of established FDI investment.

Ireland has fostered a corporation tax policy over twenty years which has successfully attracted FDI to locate here. The extent of Ireland’s success is examined by Seamus Coffey in his recent article in tax.point, a publication by Chartered Accountants Ireland. Eurostat figures indicate that over 1.5 million people were employees of enterprises in the business economy in Ireland in 2018 of which 135,000, or nine percent, were direct employees of US MNCs. This share was the highest in the EU27. If employment with US MNCs in Ireland was at the median for the EU27, 30,000 employees would be located here, a reduction of more than 100,000 jobs. When looking at pay, Mr Coffey points out that US MNCs incurred €9.5 billion of personnel costs in 2018 which was equivalent to 4.8 percent 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 percent.

Substance and real economic activity on the ground is a fundamental condition to access the 12.5 percent rate of tax. A key principle of the 2015 BEPS project is that taxable profits of MNC should arise only where companies have substance and where value is created. Therefore, Ireland’s substance-based regime saw a further influx of FDI on foot of the original BEPS project. This resulted in substantially increased and highly concentrated corporation tax receipts in Ireland over a relatively short period of time. For example, in 2016 the top ten corporate taxpayers paid 37 percent of the corporate tax take and by 2020 the top ten corporate taxpayers paid 51 percent of the corporate tax take6. The Government has flagged the risk of reliance on a high proportion of corporate tax payments from ten MNCs.

Based on data published by the IRS for 2018 country-by-country reports filed by US MNCs, US MNCs paid just under $8 billion in corporate tax to Ireland. Ireland was the largest recipient within the EU27 and just over one-quarter of all the corporate tax that US MNCs paid in the EU27 was paid to Ireland. The corporate tax payments of US MNCs in Ireland were equivalent to 3.4 percent of modified gross national income (GNI*) in 2018. The median for the tax payments of US MNCs in the EU27 was 0.1 percent of national income. If US MNCs paid corporate tax in Ireland in line with the EU27 average, payments in 2018 would fall from $8 billion to $200 million7. Combining personnel costs for employees and corporate tax paid to governments shows that US MNCs contributed 8.8 percent 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 percent.

A portion of the Irish public are supportive of the OEDC’s reform proposals. These measures have been publicised as the answer to tax injustice and the only means of getting large MNCs to pay more tax. As set out in this submission, we contend that the OECD’s proposals will block countries like Ireland from using legitimate tax competition to attract FDI. Tax revenues will be controlled by and accrue to large countries. Consequently, countries like Ireland will be disproportionately impacted by the reform proposals and Ireland in particular will incur substantial economic losses.

We are not convinced that the extent of the economic consequences for Ireland of Pillar Two has been fully debated in Ireland. If an employer threatens to pull 100 jobs out of Ireland, the Irish public expects the Government to do all in its power to fight to retain those jobs in Ireland. On this occasion 100,000 established high value jobs are potentially at risk along with future job creation opportunities because MNEs will locate their operations in large market jurisdictions as dictated by the pathway set by Pillar One and Two. We are not suggesting that 100,000 jobs will be lost over night, but it must be recognised that the long-term future of these jobs is uncertain. Accountants will do all possible to continue to highlight the many other benefits Ireland has to offer FDI investors, but the power of Ireland’s stable and low corporation tax rate of 12.5 percent is simply irreplaceable.

The proposal for an effective minimum rate of “at least” 15 percent also presents a level of uncertainty for Ireland which is untenable given the twenty years of economic stability attributable to the 12.5 percent rate. Over 70 percent of those who took part in our survey on the OECD’s tax reform proposals felt that a global minimum effective tax rate of at least 15 percent is too uncertain at present.

Conclusion

There is no clear solution to the dilemma facing Ireland. However, we do foresee economic and social damage for Ireland if we lose control over our corporation tax rate and if Ireland is blocked from using the 12.5 percent rate to compete for FDI investment. It is regrettable that Ireland must take an opposing position to an aspect of international tax reform, but make no mistake about it, Ireland will incur substantial economic damage in the form of lost jobs and lost tax revenue if Pillar Two is agreed and internationally implemented.