The Government's decision not to sign up to the original draft terms of the OECD deal on corporate tax has been justified by the outcome of subsequent negotiations. Clarity on the future of the 15 per cent minimum corporate tax rate has been given by the final text and the Government has received assurances that the European Commission will not seek to "gold-plate" the agreement by adding new terms when it is transposed into European Union law.
Credit is due to Minister for Finance Paschal Donohoe, who led the negotiations and decided to run the risk of not signing up to the draft agreement in July. This could have back-fired if no real concessions had been won. However the clarity on the 15 per cent rate and the retention of lower 12.5 per cent rate for the bulk of companies were valuable from the Irish viewpoint.
For Ireland, this has always been a game of damage limitation, as changes in the international corporate tax regime moved up the international agenda. Ireland has benefited over the years from having a low tax rate – though it was indefensibly slow to close off some of the associated loopholes. And the country benefited hugely from the first phase of OECD reform.
As the final agreement came into view, dangers from earlier versions of the tax reform plan – at the OECD and in the US – started to recede, and then Ireland managed to swing some additional factors in its favour. The country will still lose revenue from the part of the plan which changes where tax is paid – correctly identified by Tánaiste Leo Varadkar as driven by the desire of bigger developed countries to win more revenue.
The increase in the corporate tax rate on big companies will, on the other side, increase revenue here in the short term and offset some of the estimated loses. In the longer term the balance for tax and jobs will depend on how the new tax environment affects foreign direct investment (FDI), and on where companies book their profits.
For now the Department of Finance is sticking to its original estimate that the change in taxing rights could cost the exchequer up to €2 billion a year. Much still depends on what legislation passes the United States Congress in the weeks ahead and this will be vital for Ireland and the wider OECD deal.
Perhaps the key message from this in terms of policy is the importance which now needs to attach to other areas vital to attract investment. These include investment in education and research, progress on the housing crisis and wider developments of infrastructure and the green agenda outlined in the National Development Plan. If Ireland’s case is that we have a lot of other attractions for FDI above and beyond tax, then determined action on this wider competitiveness agenda is clearly vital.