A global tax deal still hangs in the balance. But if one is done, there are clear signals of pressure on countries who are holding out against an agreement. For Ireland, US plans to push countries to sign up are particularly vital, given the key role of US investment in Ireland. Large Irish companies with operations in the US are now exposed in the row over the deal, with the US threatening to target them for extra tax bills if Ireland does not sign up.
1. The state of play
The intention is to have a deal to reform the global corporate tax regime in place for G20 ministers to sign off on at a meeting in October, with a view to the new arrangements coming into place in 2023. It is an ambitious timetable, given the complexity. While 132 of the 139 countries involved in the talks under the auspices of the OECD (Organisation for Economic Co-operation and Development) have now signed up to outline proposals, there is much detail still to be agreed – and a few countries, like Ireland, have held out against parts of the deal. To make matters more complex, the Biden administration has to get the deal through the US Congress.
2. The US debate
The Biden administration is talking tough internationally and pushing other countries to sign up. But it remains to be seen what it can get through Congress. US treasury secretary Janet Yellen said recently that she hoped Congress would sign off on the part of the deal involving a global minimum tax rate – so-called "pillar two"of the OECD talks – by this autumn. However, she said talks in Congress on the other key aspects of the discussions, the so-called "pillar one" proposal to get companies to pay tax in markets where they sell, are likely to continue into spring of next year.
The minimum tax plan may be passed by what is called the reconciliation process, a mechanism allowing the administration to get certain proposals through via a simple majority of both houses. With the Senate tied and requiring a casting vote of the vice-president to get proposals through, even this is tight. And some leading Democrat members of the Senate finance committee have tabled an alternative plan. But the pillar one plan, because it looks likely to involve changing tax treaties, may – many experts believe – require a two-thirds majority in the Senate.
3. So will the rate be 15 per cent?
Ireland is one of just seven countries who have not signed up to an outline OECD tax deal. A vital issue is the lack of clarity on the minimum tax issue, including what the agreed rate would be. The agreement is a minimum effective rate of "at least 15 per cent". There have been indications of a push in talks for a rate as high as 18 per cent, with the European Commission and big member states including France pushing for a figure above 15 per cent. But this is very much in the balance and a lot will come down to what the US Congress can sign up to in terms of the tax rate it applies to the international earnings of its companies, the so-called Gilti rate. Currently 10.5 per cent – with significant allowances – the Biden administration has proposed a rate of 21 per cent. But Congress will likely seek to bring this down. It would make sense for the US rate and the OECD minimum rate to be the same – but there is a way to go in both processes.
4. How will countries who do not sign up fare?
Potentially not well, with significant pressure on countries who do not come on board if a deal is agreed. This will come from parts of the OECD deal and also from what the US does with its own domestic legislation. The latter is vital for Ireland, given the large number of US multinationals here.
What happens to the tax arrangements of US multinationals will be one vital issue for Ireland. Under OECD proposals, if the Irish rate remained below the new agreed minimum rate, then the US could collect the balance in relation to their companies – and other countries can do the same. So, for example, if US companies paid 12.5 per cent on earnings declared here, and the minimum global rate was 15 per cent, American multinationals would pay another 2.5 per cent in the US. If the global minimum rate was 18 per cent, then the top up would be 5.5 per cent. There is also a backstop provision in the OECD proposals to combat any attempt to stop profits being shifted to low-tax jurisdictions.
5. What about Irish investment in the US?
The administration has proposed new rules referred to as Shield (Stopping Harmful Inversions and Ending Low-Tax Developments). This is to replace existing rules due to stop corporate inversions, where US firms move their headquarters overseas to cut their tax bill. But it also targets companies from countries who do not sign up to a global tax deal and have operations in the US.
Part of this would deny normal tax deductions to companies operating in the US who were sending the likes of dividends, interest payments or royalties to headquarters based in countries which did not apply the new OECD minimum rate – or if there is no OECD deal, whatever rate the US itself applies on overseas earnings.
This would potentially have a big impact on many big Irish companies with operations in the US. In the normal course of business these companies would send payments back to Irish headquarters, availing of normal tax deductions to allow this to happen. Under the Shield plan, if Ireland did not sign up to the global minimum rate, then these deductions would not apply and these payments would be exposed to tax at the main US rate, now 21 per cent and possibly heading higher, with Biden seeking a 28 per cent rate, though this may be negotiated down in Congress.
This would be hugely disadvantageous to the companies, who under current rules might also face tax bills in Ireland in some cases. Many Irish companies have big investment in the US, including big industrial companies like CRH, Smurfit Kappa, Kingspan and a number of the big dairy companies.
The exact impact would depend on what the US agrees and a lot of detail remains unclear. And here we come back to Congress. As well as arguments over what the main US tax rate would be, proposals such as Shield remain highly uncertain and are not included in some compromise proposals circulating in Washington, including those by Democratic senators.
However, the plan illustrates the extent to which the Biden administration is willing to put pressure on to get its way internationally, in a plan at least as aggressive in the tax field as anything Donald Trump did in terms of tariffs. It is effectively threatening to make access to its market very difficult for companies coming from non-compliant countries.
6. The bottom line for Ireland
Ireland will most likely have to sign up to a deal if one is done. Not doing so would mean handing tax revenue to other countries, mainly the US, which could be collected here, all to “defend” a 12.5 per cent rate which won’t mean much anyway. As of now, of course, we still don’t know if a deal can be done and what happens if the US Congress fails to pass Biden’s plans.
The complexity is the timing – if the OECD agree, will the US be ready to sign up to the same rate? And a lot of details remain in play – OECD research published this week shows that investment in research and development in Ireland is highly attractive for companies, due to the tax deductions and write-offs which apply. As each country argues for “carve-outs” from the new rules, Ireland will be focusing on this area. Indeed, work by the EU Tax Observatory in Paris, which is attached to the Paris School of Economics, has shown how carve-outs in other areas already on the table could reduce the impact of a global minimum rate significantly.
The Department of Finance has already pencilled in a revenue loss of over €2 billion a year in corporate taxes, compared to what they would be otherwise. This is from the part of the plan which involves companies paying tax in markets where they do business but don't have a physical presence, and thus they would pay less where they have international or European headquarters, as many do here. Increasing the corporate tax rate could wipe out much of this revenue loss, if we assume that the upheavals do not lead to investment leaving Ireland.
Much would depend on what companies did with their intellectual property assets – copyrights, patents and trademarks – many of which are now held in Ireland and will, if they stay, be an increasing source of revenue in years to come. Beyond that, there is a wider and vital question of what the changes will mean for the flow of investment here in the years to come.
