Global minimum tax rate and what the future holds for Ireland

Published on April 29, 2021



On 31 March 2021 the White House released a factsheet titled “The American Jobs Plan” which has created quite a stir in Ireland. Why would a US fact sheet named the American Jobs Plan cause Ireland to feel the need to have to defend it’s Corporation Tax rate of 12.5%?  The first paragraph of this document states that The American Jobs Plan is an investment in America that will create millions of good jobs, rebuild the American infrastructure, and position the Unites States to out-compete China. It follows on with a list of goals which it hopes to achieve like fixing highways, revitalising America’s digital infrastructure, modernising schools and so on. With an extensive work program and a cost of two trillion dollars, the next question which needs to be asked is how the Biden Government is going to pay for this investment. This is revealed in the last few paragraphs of the plan titled  ”The Made in America Tax Plan”. Here we will see a proposal to increase the American corporate tax rate to 28% and increase the minimum tax on U.S corporations to 21% calculated on a country-by country basis. It has the potential to hit profits taxed in other jurisdictions. President Biden is also proposing to encourage countries to adopt minimum tax rates on corporations.

According to the American Chamber of Commerce Ireland, today over 160,000 people are directly employed in Ireland spread over 700 US firms with collective investment in Ireland amounting to some $444bn. Some of the largest US companies have bases in Ireland such as Google, Facebook, Twitter and AirBnB to name but a few. There are also a wide variety of large US pharma companies established here for many decades.

What is the reason that so many US companies are located in Ireland, is it the common ancestral ties with the US or perhaps is it the lure of a corporation tax rate of 12.5%?  If the US government proposals become a reality and foreign US companies have to pay additional corporation tax in the US to meet the 21% minimum corporate tax rate, will this affect Ireland’s attractiveness to US corporations?

There is a perception in Ireland that while other countries have a higher corporation tax rate, the net tax rate in these countries is reduced through the availability of reliefs and various capital allowances. This allows some countries to take the moral high ground in respect to what they deem “low tax economies” while the reality is that their own net tax rates may be just as competitive when the various reliefs are taken into consideration.

With what seems like a push from the US for a global corporate tax rate we now look to the Organisation for Economic Co-operation (OECD). In October 2020 the OEDC published Tax Challenges Arising from Digitalisation – Report on Pillar One Blueprint and also Tax Challenges Arising from Digitalisation Report on Pillar Two Blueprint. Pillar Two addresses remaining BEPS challenges and is designed to ensure that large international businesses pay a minimum level of tax regardless of where they are headquartered or based, while avoiding double taxation or taxation where there is no economic profit.

Although the US is a member of the OECD/G20 Inclusive Framework on BEPS, there has been no effective tax rate set by the OECD. A target date for Mid 2021 was set for the successful conclusion on proposals.

The Pillar Two report does not interfere with a jurisdiction to determine it’s own tax system however it does consider the right of another jurisdiction to apply an internationally agreed Pillar Two regime where income is taxed below an agreed minimum rate and sets out a number of rules which it hopes will achieve this.

The document follows on with details of: 

  • Scope of the GloBE rules
  • Calculating the ETR under the GloBE rules
  • Carry-forwards and carve-out
  • Simplification options
  • Undertaxed Payments Rule
  • Special rules for Associates, joint ventures and orphan entities
  • Subject to tax rule
  • Implementation and Rule Co-ordination

As we can see from the White House proposal and the OECD BEPS 2.0 Blueprint, it appears that there is a growing international consensus that there should be a global minimum corporate tax rate.

In the Irish Governments fiscal plans published on the 14 April 2021, it states that “international corporate tax reform could weigh more heavily on revenue streams than is currently assumed and, leaving aside the fiscal implication, could undermine Ireland’s attractiveness as a location for inward investment”. This would indicate that with the release of BEPS 2.0 in October and the recent White House Statement, the Irish Government are aware of the significant impact these proposals will have on Ireland and its attractiveness for US and foreign investment.

Despite the concerns of the Irish Government in respect to future inward investment, the reality on the ground appears somewhat different.  US multinationals are continuing to invest in Ireland, Tik Tok recently announced a major expansion and companies like Dell, Facebook and Twitter are also expanding their operations here. Even the issue surrounding the Apple case has not deterred that company from remaining in Ireland. US pharma companies are also firmly embedded into the Irish economy and do not appear to be intent on leaving in the near future. 

This appears to indicate that US companies are attracted to Ireland for reasons more than just a favourable Corporate Tax rate. Ireland is viewed by US companies as a country with a well-educated workforce, common language, is business friendly with little bureaucracy and has a thriving entrepreneurial work ethic.  

There is also the fact that post Brexit, Ireland is now even more important to US companies looking to trade with the EU and the wider EMEA region.

While the 12.5% Corporate Tax rate is seen as sacrosanct by many sectors in Ireland, the Irish Government have a difficult decision to make. If it transpires that international treaties result in multinational companies paying more corporate tax arising from profits generated through its Irish hubs, the Irish Government must decide if it is better that they receive a larger share of that tax by increasing the Irish corporate tax rate or leave the 12.5% rate in place to instil confidence in international investors.

Whatever the outcome, it seems certain that there will not be a mass exodus of US companies from Ireland any time soon.

 

John Conway
Ormsby & Rhodes
E john.conway@ormsby-rhodes.ie
W www.ormsby-rhodes.ie