A global minimum corporate tax rate could boost the effective tax rates paid by multinational firms by as much as 10 per cent, a study by the International Monetary Fund (IMF) has concluded.
In a new report, the Washington-based fund described proposals for a new global minimum rate of 15 per cent agreed by G7 finance ministers at the weekend as "historic" and an important step forward on the road to corporate tax reform.
It said a minimum rate would help to reverse nearly four decades of falling global corporate tax rates while “mobilising revenue” for cash-strapped countries in the wake of the pandemic.
Using tax revenue statistics and company-level data, it calculated that introducing a minimum tax would increase the average effective tax rate – the rate actually paid by corporations after taking into account tax breaks – by around 10 per cent.
While the Republic’s statutory rate is 12.5 per cent, the effective rate for the majority of companies is 11 per cent.
The agreement reached by the G7 finance ministers has provided fresh impetus to overhaul the international tax rules.
The Organisation for Economic Cooperation and Development (OECD) has proposed a global minimum corporate tax that would apply to profits of multinationals.
Countries would still set their own local tax rates, but if a multinational company paid less than the global minimum rate in another country, that company’s home or source jurisdiction could supplement its tax liability to ensure it paid the minimum.
Minister for Finance Paschal Donohoe has said that the Republic could lose up to a fifth of its overall corporate tax revenue if the proposals are adopted.
‘Unusual tension’
In its report, the IMF said: “There is an unusual tension in the world of corporate taxation. On the one hand, countries compete vigorously to lure businesses and investors within their borders by offering numerous profit- and cost-based tax incentives, driving their tax rates down.
“On the other hand, governments decry these multinational enterprises – once they have been successfully attracted to the country – for not paying their fair share of corporate taxes, leaving the burden to fall on often-struggling local firms,” it said.
While welcoming the new proposals, it said tax incentives to attract multinationals were likely to persist even after the introduction of a global minimum tax, as countries will continue to do what they can to entice foreign investment for growth and development.
“But the value of these incentives will decline, as multinationals will only be able to reduce their liabilities to 15 per cent and not zero,” it said.
The Department of Finance, meanwhile, has said it will further examine the likely impact of proposed tax reforms on Ireland's corporate tax base when "there is greater visibility on the detailed rules underpinning any OECD agreement".
“The OECD proposals to reform the international tax rules include a number of complex dimensions and moving parts, and it is critical to note that agreement has not yet been reached in respect to these,” it said.
“The department previously estimated that the cost to the Exchequer of the OECD reforms may be up to €2 billion annually, and this is the estimate we have included in the Stability Programme Update published by the Department in April to apply from 2025,” it added.
