Cliff Taylor: Thumbscrews on hand if Ireland does not sign tax deal

Governments don't admit they are going to change things – until they do. Minister for Finance Paschal Donohoe is caught between declaring commitment to the Irish 12.5 per cent corporate tax rate and conceding that there are circumstances in which it might be gone.

The problem, he says, is a lack of clarity in the current Organisation for Economic Co-operation and Development (OECD) plans. This is a fair point – “at least 15 per cent” does not translate into a tax rate. And there are a host of other issues to be sorted too, some of which may yet see backtracking from some of the 131 countries who have signed up to the outline OECD plan.

But in the background the pressure on Ireland, one of the eight countries who have not signed up to the draft OECD plan, is building. If there is a deal there will not really be any choice. We will sign up.

The consultation process launched by the Department of Finance looks partly like a delaying tactic – it runs until early September, when a hectic period of deal-making will be underway – and partly cover for a likely change of course.

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It reads a bit like the question you hear in wedding ceremonies – does anyone know of any reason why we should not sign up to this?

And, ironically, the main question is what the Biden administration – the key supporters of the OECD deal – can deliver through the US Congress.

If Biden and Treasury Secretary Janet Yellen can get Congress on side, then an OECD deal is surely on. But with learned US scholars arguing about what processes are needed to get the deal through Congress – and in particular whether a two-thirds majority in the Senate and thus Republican support will be needed for some of it – there is a way to go yet.

The results of the Irish consultation will be entirely predictable. The big businesses will praise the Irish tax regime and call for stability and certainty.

The non-governmental organisations and tax-justice campaigners will call for Ireland to get with the game and move faster to close off loopholes.

Pressure

Amid the acronyms and jargon in the consultation document issued by the Department of Finance are references to devices which will put pressure on countries who do not sign up to a global tax deal.

If a deal is done, then the thumbscrews are there for those who do not sign up.

First of all, if Ireland maintains a 12.5 per cent rate of tax and there is a global deal on a higher minimum rate, then other countries, such as the US, can collect the balance for their exchequer.

So, if the US signed up to a 15 per cent new global minimum rate, then American companies would pay an extra 2.5 per cent in America on earnings already declared in Ireland and taxes here at 12.5 per cent. This is called the income inclusion rule.

There is also a backstop – the Under-Taxed Payments Rule – to catch companies who use intercompany transfers to try to get around this.

So even if Ireland kept the 12.5 per cent rate, the top-up payments would be collected elsewhere.

The 12.5 per cent would then be no more than a token. It shows the exposure of the Irish position, or that of any other low-tax country, in the OECD process.

Collect in Ireland

In that scenario it makes more sense to collect the extra revenue in Ireland, presuming it is clear that the new global minimum rate is going to hold. It would make up for some of the losses Ireland faces in other parts of the OECD deal.

If there is no global deal it gets more complicated, as the US is likely to push ahead with its own reforms, including a minimum tax on the international earnings of its big players.

And Ireland will not want to be following US international corporate tax rate (the Gilti rate) up and down in the years ahead.

As if all that was not enough, there is the so-called Subject to Tax Rule, which would allow other countries to tax some of the earnings of Irish companies operating in their territories, if on return to Ireland these earnings were due to be taxed at below the new global minimum. So some of the earnings of the big Irish dairy companies in the US could face a top-up tax in America before being returned to Ireland and taxed at 12.5 per cent here.

And those are only the bits we know about. Who knows what else Yellen has raised in the one-to-one meetings she has had with Donohoe? There are plenty of other tax, trade or political buttons the US can press to get Ireland onside. And it would. This is why Ireland will sign up to the deal.

The “ if” comes in the US Congress and the uncertainty about whether Biden and Yellen, for all the pressure they are putting on overseas, can deliver at home.