Ireland enters OECD International Tax agreement for new 15% minimum corporate tax rate

What is changing?

The Irish government has approved OCED proposals to introduce a global minimum corporate tax rate of 15%, applying to companies with a global group turnover in excess of €750m. This represents a significant change in policy from Ireland’s long standing 12.5% corporate tax rate.

Background

Ireland’s 12.5% corporation tax rate has been in place for over two decades, forming part of long-term government policy to attract foreign direct investment (’FDI’), offering a fixed low rate to facilitate long term capital investment.

On 1 July 2021, the OECD/G20 Inclusive Framework on Base Erosion Profit Shifting reached agreement but not unanimous consensus on key aspects of the two-pillar solution to address tax challenges arising from digitalisation and globalisation. Pillar One proposes a re-allocation of a proportion of tax to the market jurisdiction, while Pillar Two seeks to apply a global minimum effective tax rate.

While it did not join the agreement when initially proposed, the Irish government was clear in expressing broad support for a minimum rate but expressed reservation regarding the text of the Framework proposing a global minimum effective tax rate of ‘at least 15%’

Following negotiations in recent days and weeks with the OECD, EU Commission and other countries party to the agreement, a revised draft text of the Framework removes the contentious ‘at least’ wording, alleviating concerns from an Irish perspective that the minimum rate may be raised at a future date. This allowed the Irish government to support the proposal, as ratified at a Cabinet meeting on Thursday 7 October.

What impact will these proposals have on Irish corporate taxpayers?

The proposed Pillar Two minimum rate will only apply to groups with a global turnover of €750m a year or more. Accordingly, the proposed changes will only impact large MNCs.  Crucially, the Irish government confirmed it received assurances from the EU Commission that maintaining the headline 12.5% corporation tax rate for businesses out of scope of the OECD agreement does not present any difficulties.

What potential impact will this have on Ireland Inc.?

The real long-term impact of this policy change on FDI trends is difficult to predict. The Department of Finance has estimated the introduction of a 15% minimum rate, along with changes to where revenue is taxable, could reduce Ireland's tax take by €2bn a year (circa 20% - 25% of corporate tax receipts), which national budget forecasts now incorporate.

The Minister’s press release noted the increased rate will impact on 56 Irish MNCs that employ approximately 100,000 workers, and 1,500 foreign owned MNCs that according to Revenue employ approximately 400,000 workers.

While the loss of the 12.5% for Ireland’s largest corporates is a blow, this change has been well flagged. Ireland’s policy to hold the maximum Irish rate at 15% retains a competitive position internationally. The proposed rate change is not expected to impact on well-established FDI businesses, which account for the largest employers in the State. This is evidenced by the number of Ireland’s largest FDIs recently committing significant investment programmes in their Irish operations, while the year to date in 2021 has seen significant private equity driven investment in Ireland.

In offering access to EU markets and its labour pool, a highly skilled workforce, strong supports for R&D and innovation, and in particular as it now represents the only English-speaking EU member state following Brexit, Ireland’s attractiveness to existing and new FDI’s remains strong and competitive.

Next steps

As referenced in the Minister’s press release, much technical work is required finalise the new model framework. Ireland’s agreement to the proposals now provides a significant boost to this initiative. Final approval of the OECD Inclusive Framework is expected at the G20 Summit this month along with agreement of an implementation plan. For EU member states including Ireland, the EU Commission will table a Directive for the implementation of Pillar 2 in the EU. Implementation is planned for 2023.

Please see the Department of Finance press release here. 

Please contact your usual contact at RSM for any queries on this matter.