Few topics are so surrounded in jargon as corporate tax. And so the deal which 140 countries are trying to do to find a new way to tax multinational companies is as complex as things get.
The next week will now be crucial and Ireland could be faced with a big decision of whether to sign up to revised deal terms – and abandon the long-standing 12.5 per cent rate.
Here is a guide to what you actually need to understand. So what is this actually about?
It’s about where big companies pay tax
The corporate tax system was designed for a world where stuff was built in factories,sent around the world in ships and sold in shops.
It has creaked in the digital era, where a lot of sales are arranged, marketing undertaken and orders taken online.
This has led to questions of fairness about where taxes are paid – and also opportunities for companies to shift profits around the world to cut their tax bill.
To combat this the first part of the deal – know as Pillar One – proposes to allow countries in which sales are made digitally by the largest multinationals to raise some tax relating to this.
So online sales made by, say, a digital company in the German market , managed and undertaken from a European HQ in Dublin, would in future lead to some tax being paid to the German exchequer, even if the company had no physical presence on the ground there.
This is a change in what are called taxing rights.
This works to the advantage of the exchequers of countries with big markets and to the disadvantage of tax collectors in smaller countries like Ireland, where the international operations of big players tend to be based.
What does it mean for Ireland?
The Department of Finance has estimated that the cost to the Irish exchequer of this change could be €2 billion to €2.5 billion a year, or a fifth of all corporate tax revenues.
The key issue will be how a deal finally agrees to divvy up tax collection rights and how much is paid where goods are sold. This remains one of the outstanding issues in the talks, as does how disputes in this area are settled.
You can appear clever by saying . . .
“I wonder will they reach a deal on Amount A in the Pillar One talks.” Amount A is the amount of tax which countries will pay above a certain cut off point in the countries where they sell. It determines the amount of profit which will be taxed in the market where sales are made.
2. It is about how much tax companies pay
This whole Organisation for Economic Co-operation and Development (OECD) process was started by controversy over how little tax some big multinationals were paying, particularly US firms on earnings made internationally. One of the key measures to try to address this is a proposed minimum effective tax rate on their earnings.
This is so-called Pillar Two of the talks. The idea is that wherever taxes are shifted to by companies, they will still be subject to a minimum tax level. As has been much discussed, the draft OECD agreement reached in July proposed that there be a minimum rate of “ at least 15 per cent.”
The wording of this is now a key issue in the negotiations. So is exactly how the tax would apply and where exemptions or special leeway would be granted, for example in areas like research spending or some areas of physical investment.
The final crunch issue in this part of the talks - and a contentious one – is how countries which have already rolled out digital sales taxes, which achieve the same goal as this reform in a different way , will roll back these unilateral measures to be replaced by the structure agreed at the OECD. This is a sensitive issue for the US in particular, as it feels its companies have been targeted by these measures.
What does it mean for Ireland?
Ireland has reservations about this part of the talks and is one of six countries who did not sign the draft deal, saying it gave no certainty on the future rate. The indications are that in the event of a deal, Ireland would agree to raise its rate to 15 per cent, but only if it could be certain – or fairly certain – that pressure would not come on for a higher figures.
For example, the EU would have to introduce a directive to implement the minimum rate and Ireland would be concerned that countries like France would push for a higher EU rate.
Keeping a rate of 15 per cent would allow Ireland to remain a lower tax jurisdiction than many other countries.
A complication is that Ireland may have to decide before it is clear what new tax rules the US Congress will accept, as part of major negotiations now underway on massive spending and tax plans put forward by US President Joe Biden.
Here initial proposals have been watered down in compromise talks – but the whole package is on a knife-edge.
Compromise – it if emerges – could settle around proposals for a US domestic corporate tax rate of 21 per cent and a rate of 16.125 per cent applied as a kind of minimum rate on the international earnings of US companies, just above the 15 per cent rate which may emerge in the OECD talks.
For Ireland, a key problem may be pressure to decide on the country’s attitude to the OECD plan, before it is clear what the US Congress will sign up to. However this is an issue for the other countries in the talks, too.
So a lot is in play on both sides of the Atlantic and while the G7 finance ministers meetings showed the strong political push for a deal, a vital week of talks lie ahead.
If a deal is done on the rate, Ireland really can’t stay outside the tent. If the US does sign up – and Ireland stayed out and kept the 12.5 per cent rate, then big American companies would be liable for top up payments to the new minimum in the US.
As this would be no advantage to the company and mean a loss of cash for the Irish exchequer – which could otherwise collect all the tax here – it would make no sense to stay out.
Another factor which has to be sorted is whether, if the 12.5 per cent rate was changed for big multinationals, it might remain for the rest of Irish business.This would be likely to require clearance under EU rules.
You can appear clever by saying . . .
“I wonder can the US align their new GILTI rate with the OECD minimum. “The GILTI rate is the rate which the US charges to try to catch the international earnings of its companies,
“ The carve-outs under Pillar Two are looking tricky.” Carve-outs is the name given in the talks to the special areas exempted or relieved from the new global minimum.
So, for example, there might be special allowances for spending on research and development and special arrangements for the financial sector. These are all likely to be controversial.
