Donohoe keeping close eye on US as he stages last-ditch corporation tax battle

Paschal Donohoe's refusal to back an outline OECD agreement on corporate tax has left the Minister for Finance in peculiar company. The eight other dissenters include Caribbean tax havens Barbados and St Vincent and the Grenadines. Another is Hungary, the European Union's most troublesome member state as new anti-gay laws compound anger over assaults on the rule of law by prime minister Viktor Orbán.

These are not ideal bedfellows for Donohoe, who is president of the Eurogroup of finance ministers. But this is a holding position. The push for a global 15 per cent corporate tax rate is gaining momentum. Soon he will have to decide whether to drop the 12.5 per cent rate that has served Ireland well but led to friction with European partners. By refusing to support the OECD deal at this point, he has reserved some flexibility for himself. His public insistence on defending the current rate to the last does not conflict with discussing what should be done if he is forced to capitulate.

“The argument is the Alamo argument: ‘We were the last to go down’,” said one participant in talks behind the scenes with officials on the future of the corporate tax regime. With some distance still to go in the global negotiation, there is more at stake for the Minister than protecting the 12.5 per cent rate. One concern is to ensure a global minimum rate, if agreed, rises no further than the 15 per cent settled at the outset. “What Paschal would like to deliver for business interests here is that it’s ‘no more than 15 per cent’ and not ‘at least 15 per cent’.”

Refuse support

The Minister’s decision to refuse support for the OECD plan obscures a big concession he has already made. He has backed measures to impose corporate tax in countries where companies make sales without having a physical presence. Such moves could cut more than €2 billion from Ireland’s annual corporate tax haul, a big chunk from receipts that are forecast to come in this year at €11.6 billion. This is the pillar one part of the OECD plan. “The concern for many small economies will be that with the first pillar the money will be flowing to the larger economies,” said a senior business figure.

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To buy time on pillar two, the minimum global rate that Donohoe forcefully opposes, he will hold a formal public consultation. But informal talks with business have been under way privately for months, according to people involved in the discussions. Asked whether any papers were in circulation, one said there were not. Still, there have been extensive “chats” to explore how business might respond if the rate is raised. “They are looking at a huge variety of options,” said a second participant in these talks. Most companies appeared “relaxed enough” about the debate. “There is a belief that Ireland would only give up on 12.5 per cent if it has no option.”

Despite big steps forward at the OECD and at a recent Group of Seven summit, there are questions over implementation. From the Irish perspective, these centre on whether President Joe Biden can get the plan through the US Congress. If he does, then many believe Dublin will have to move and that large investors will accept the change. But there is enough doubt over the American position for Donohoe to hold fire for now, even if it means he is criticised for standing apart from the 130 countries who backed the OECD plan.

Historic resistance

This is crucial. Close observers believe Donohoe will have but one hand to play whenever the fateful day comes. They say the last thing he wants is to publicly accept the principle of raising the Irish rate to 15 per cent in line with global moves, only to see the endeavour fall apart in the US Congress. Such a situation would still leave him open to pressure from Brussels to dismantle the 12.5 per cent regime even if there was no alignment with the US. This is a no-go for Ireland given its historic resistance to European tax harmonisation and the strong sense that small countries lacking big country advantages have much to gain from tax competition.

For all that, the direction of travel right now is clear. “There’s an inevitability that the effective minimum corporate tax rate is going to go to a minimum 15 per cent,” the senior business figure said. “The pivot point for Ireland, given the scale of foreign direct investment, is the US.”