Taxing questions

Agreement was reached almost a year ago on the global minimum effective tax rate of 15 per cent. However, it has yet to be introduced. What is causing the delay? When is it likely to be introduced? And what impact might it have on Ireland’s competitiveness as an FDI location when it is?

The OECD corporate tax reform poses additional opportunities for Ireland to ensure that the Irish tax regime remains competitive, effective and appropriate in an ever-changing global trading landscape

It is not disputed that Ireland has a proven track record as a successful location for world-leading, established and high-growth multinationals from around the globe. Ireland’s performance as a hub for FDI is unrivalled. One-third of the multinationals already in Ireland have had operations in the country for over 20 years. This record illustrates the longevity, resilience and commitment of these companies to Ireland and indeed, of Ireland to those companies.

However, in October 2021, 136 Inclusive Framework member countries agreed to the implementation of a global minimum tax in line with the OECD Pillar Two model rules. This was swiftly followed by a proposed EU directive on Pillar Two on December 22nd, 2021. It was initially intended that this directive would be adopted by June 2022; however, a consensus was not reached at the ECOFIN meetings on April 5th, 2022 and June 17th, 2022 on the Directive – the delay here would appear to be driven in part by the complex nature of the rules and also by the refusal of key member states to agree to the Directive.

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Lorraine Griffin, head of tax at Deloitte Ireland, notes that there was some dissension with Poland, in particular, previously maintaining its position that Pillars One and Two should be viewed as a “package deal”.

“While under the current state of play Poland appears to now be ready to accept the directive, new concerns were raised by Hungary in June 2022 which remain outstanding. Significant further work is still required regarding Pillar Two both on substantial technical and administrative issues, however, the sentiment from EU-centric business is that Pillar Two is on its way to approval in the coming months. The current view is that the Income Inclusion rule provided for under Pillar Two should be in effect for periods beginning on or after December 31st, 2023, with the undertaxed profits rule coming into effect from 2024 onwards, with exact timing remaining unclear,” says Griffin.

“Ireland has been a major beneficiary of globalisation, and while there are a range of factors responsible for economic success in the past decade, we cannot ignore the reality that the 15% minimum tax will to some degree level the playing field with other competitor countries,” she says.

Mick Murray, head of AIB international corporate banking, also strikes a note of caution. He, too, points out that the EU directive on Pillar Two proposals will be transposed into law by December 31st, 2023 by EU member states, including Ireland.

“Hungary still has to sign up to proposals and of course it will be interesting how the results of the US midterm elections might impact US ratification. There appears to be significant political will in Europe to press forward with the proposals,” says Murray.

Alan Connell, managing partner of law firm Eversheds Sutherland is confident Ireland will continue to perform despite these challenges: “Ireland has much to offer outside of tax: EU membership and the ability to serve global markets as an EU jurisdiction, common-law framework, English language, skilled and adaptable workforce, ease of connection to the EU and US with direct flights, and a business-friendly environment.

“In addition, amid global tax changes and policy shifts, Ireland has been at the forefront in ensuring long-term stability and certainty for businesses, whilst also adhering to best practices and regulations emanating internationally.”

Griffin is confident overall but says Ireland needs to addresses outstanding issues such as personal taxation: “Accordingly, other areas of the tax system and economy must be adequately served to ensure that Ireland remains a competitive location in which to invest and grow business. While Ireland remains competitive in terms of our well-educated workforce and focus on innovation and the knowledge economy, several areas requiring attention include our relatively high rates of personal tax and the complexity of our taxation regime, particularly cumbersome interest relief rules and double taxation provisions,” she says.

Murray also believes that corporate tax rises in other countries help to lessen the overall impact. He also praises Irish institutions, in particular the IDA.

“It is not expected to significantly impact Irish FDI as there are bigger hikes planned in corporate tax rates in the UK and US in coming years and the new Irish 15% rate still is quite low by European standards. Ireland’s FDI performance indicates that there is much we are doing right as a country. Our value proposition for FDI is strong and our pro-business environment and consistent government policies will provide a platform to grow into the future. The IDA does a tremendous job in attracting new FDI companies and will continue to do so,” says Murray.

It is also important to note that when Ireland signs the OECD International Tax agreement, it still allows for the retention of Irish statutory 12.5% rate for businesses with annual revenues of less than €750 million – there is no increase in the corporate tax rate for over 160,000 businesses representing approximately 1.8 million employees. This is significant in terms of Ireland’s continuing attractiveness as a preferred jurisdiction of choice for ongoing and future investment.

Connell also feels there is a general sense globally that corporate taxes are on the rise.

“We see that trend in the US and, indeed, in the UK. So, organisations are preparing to pay a little more. As a result, large multinationals are generally sanguine about the minimum tax proposals. As it is multilateral, then such global organisations will be less concerned, as the playing field so to speak will be level.

“Ireland will likely remain competitive into the future, and we will remain an attractive location when multinationals look to investment locations. The outlook for Ireland remains really positive as multinationals and indigenous entities can avail of the possibilities presented, including the continued availability of the 12.5% tax rate for many. As part of the bundle of FDI benefits, Ireland will continue to have an attractive tax offering,” Connell says.