On October 7th 2021 the then Minister for Finance, Paschal O’Donoghue, issued the Government’s statement on joining Pillar Two of the OECD’s framework agreement to address the global tax challenges of digitalisation.
Irish acceptance of Pillar Two of the Two Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy followed uncertainty about the proposed implementation of the minimum tax rate and its impact on Irish attractiveness as a hub for investment.
Since the statement’s publication, the Government has engaged with stakeholders at every level, seeking views and feedback through consultations, to understand the effects that the agreement will have in practice.
The public consultation process raised questions about implementing the agreement and invited responses on topics including the possible legislative approach to transposing the EU Minimum Tax Directive; OECD model rules; approaches to legislative implementation of the Qualified Domestic Top-up Tax; and administrative guidance.
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Alan Connell, managing partner and head of tax at Eversheds Sutherland, lists the four key elements that needed to be transposed into Irish law as being: the Income Inclusion Rule (IIR); the Undertaxed Profits Rule (UPR); the Qualified Domestic Top-up Tax (QDTT); and the Subject to Tax Rule (STTR).
The IIR will apply to corporate groups with an ultimate parent entity which is Irish resident where consolidated group revenue exceeds €750 million, says Connell. It will also apply to Irish intermediate parent entities of foreign-headquartered groups where those entities are more than 20 per cent owned by minority investors or are controlled by parent entities which are not located in a jurisdiction which has introduced Pillar Two.
The UPR will be transposed to allow top-up tax to be collected in instances where the IIR does not apply.
“The QDTT will likely be introduced domestically given Ireland’s 12.5 per cent trading rate of corporation tax,” adds Connell. “The views of stakeholders domestically were sought to inform the making of this decision and particular focus was placed on revenue protection and ensuring that top-up taxes due from in-scope entities could be collected in respect of profits arising in the State. In addition, consideration was also given to the need to minimise the administrative burden placed on those in-scope groups.
“The consultation allowed participants to suggest amendments to domestic legislation to address the potential of, or interactions with, the STTR on a broad and general level, through the use of questions of an undetailed nature.”
Anthony O’Halloran, corporate and international tax partner for Deloitte, points out that the international framework for harmonisation of tax rates comes into effect on December 31st.
“Basically, the upshot is that Pillar Two seeks to apply a minimum effective rate of tax of 15 per cent to companies with a turnover of greater than €750 million in two of the preceding four accounting periods,” says O’Halloran.
“From an Irish perspective, for those companies below that threshold the 12.5 per cent tax will still apply and those over that amount will need to apply the revised 15 per cent.”
The Irish Finance Act 2022 provided for changes to both the research and development (R&D) tax credit regime and the knowledge development box in light of the Pillar Two model rules and the EU directive.
Connell sees Ireland offering a powerful combination of benefits.
“In addition to providing the free movement of goods, people, capital and services within the EU’s single market, Ireland still offers a low-tax, EU and Eurozone jurisdiction with a pro-business environment, talented workforce and the necessary physical, legal, regulatory and commercial infrastructure of a highly developed OECD jurisdiction, with the ease of connection to the rest of the EU and US with direct flights,” he says.
“A lot of Ireland’s success is driven by us being an international jurisdiction of choice for investment out of the US. Ireland’s approach enables companies to set up swiftly, with minimal red tape, in a connected English-speaking and common-law environment. The talented and youthful workforce is well-educated, mobile, ambitious, and adaptable.
“As a country, Ireland combines competitive salaries with a high standard of living to attract talent from every corner of the world. It is the people, rich with creativity, skills and culture, who drive Ireland’s and its FDI investors’, success.”
O’Halloran also sees the R&D tax credit regime as being among Ireland’s trump cards.
“Companies which incur qualifying expenditure on R&D can avail an increased tax credit – revised in the last budget from 25 per cent to 30 per cent – which is seen as best in class. We have also introduced a new digital gaming credit where qualifying spend can avail of tax credits of up to 32 per cent. These amendments have been well received by the business community,” says O’Halloran.
Connell says: “For Ireland, signing the OECD international tax agreement allows for the retention of our statutory 12.5 per cent rate for businesses with annual revenues of less than €750 million – so no increase in the corporate tax rate for 160,000 businesses, representing approximately 1.8 million employees. And, as Ireland is one of the most productive countries in the EU, this will not greatly affect clients, particularly their ongoing investment decisions, other than slightly increasing the level of tax paid globally.”
O’Halloran concludes: “In addition, we’ve got a track record since the 1960s and 70s of companies continuing to reinvest in Ireland. We are a strong committed member of the EU, English speaking and enjoying a good geographical location to the US time zones, as well as being a natural entry point to the EU market.
“These factors are definitely at the forefront of people’s minds when they are looking at a new international location.”