Taxing times as reform remains high on the global agenda

At one time, Ireland’s top selling point for foreign direct investment (FDI) was its low rate of corporation tax. Indeed, for many years overseas companies with manufacturing operations in Ireland were subject to a zero rate. That was amended to a 10 per cent rate for all manufacturing companies, and in the 2003 the current 12.5 per cent rate was introduced for all businesses regardless of sector or country of origin.

That rate was still highly competitive, and the Irish government came under sustained pressure from Brussels and other European capitals to raise it. There were also attempts at European Union level to introduce a common consolidated corporate tax base (CCCTB) as a means of taxing companies in countries where sales were made rather than where products or services were produced. Those attempts failed but tax reform has remained high on the global agenda and the recent introduction of the global minimum tax rate has been among the most significant changes.

“Implementation of the OECD BEPS 2.0 Pillar Two rules will fundamentally reshape the global tax landscape for the world’s largest businesses,” says Tom Woods, head of tax with KPMG in Ireland. “While Ireland’s 12.5 per cent rate of corporation tax will remain an attractive feature for many investors, it will be less important for some, who currently contribute a proportionally higher amount of tax revenues to the exchequer.”

In these circumstances, tax is likely to diminish in importance. “While it is difficult to predict how this might affect future investment into Ireland over the longer term, what is clear is that Ireland will need to differentiate itself from its competitors by enhancing its value offerings to businesses and individuals,” Woods contends. “It will be important that all of the other parts of Ireland’s value offering are best in class. In particular, steps need to be taken to ensure that the cost of doing business in Ireland is minimised. We would like to see steps taken to reduce the cost of employment and to minimise the administrative burden on businesses.”

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Alan Connell, managing partner and head of the tax group at Eversheds Sutherland Ireland, also sees tax receding in importance. “Ireland will likely remain competitive in the future, and we will remain an attractive location when multinationals look for investment locations,” he says. “Despite such 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.

“Taking account of recent global tax reforms, Ireland still offers a powerful combination of benefits,” he continues. “In addition to providing the free movement of goods, people, capital and services within the EU’s single market, Ireland still offers a low-tax, EU and euro-zone jurisdiction with a pro-business environment, talented workforce and the necessary physical, legal, regulatory and commercial infrastructure of a highly developed OECD jurisdiction, with the ease of connection to the rest of the EU and US with direct flights.”

Close to 140 countries have signed up to the OECD’s Pillar Two reform and there will, therefore, be a level playing field with these jurisdictions, says Rory MacIver, international tax and transaction services partner at EY Ireland. “Importantly, however, Ireland’s additional advantages such as a highly skilled and educated workforce, political and economic stability, and our status as the largest English-speaking country in the European Union remain. Looking to the future, we must continue to leverage these advantages that make Ireland such an attractive location for FDI investment, particularly investment from the United States where we perform particularly strongly in a European context.”

There is room for improvement in our tax system, however. “From a taxation perspective, the global minimum rate may have levelled the field somewhat, but there are a number of areas that we can look to refine and improve to boost our attractiveness,” says McIver. “These include reassessing the rules around dividend exemptions and interest deductions, and the ability to secure a binding ruling from the authorities where this is required.”

That’s a point echoed by Connell. “In relation to foreign sourced dividends, Ireland currently operates a ‘tax and credit’ system,” he notes. “However, a participation exemption in respect of qualifying foreign dividends is due to commence in 2025 which would exempt these foreign dividends from Irish corporation tax. A welcome addition to this would be if a similar participation exemption was to be implemented in respect of foreign branch profits.”

Woods believes the personal tax system should come in for attention as well. “A key component of attracting FDI is attracting and retaining talent. Measures that should be taken to enhance our personal tax regime include increasing the entry point to the marginal income tax rate and capping the amount of income subject to PRSI, enhancing the SARP regime, simplifying the taxation of share-based remuneration, enhancing tax relief for personal pension provision and rebasing the standard fund threshold to 2024 levels.”