For years, Ireland prospered economically because it had a very low tax rate that attracted some of the largest companies in the US to set up large factories and business facilities in its areas.
Now, a U.S.-led effort to stop world-class tax evasion programs threatens Dublin because Washington wants an international agreement that would set a minimum tax rate for large companies, and a right to levy taxes on profits for companies where the services and goods are sold and not where they are manufactured.
In the last two decades, international companies have flocked to Ireland because of the low corporate tax rate of 12.5%. Most American tech giants use Ireland as their European headquarters. Nine of the largest pharmaceutical companies in the world own large factories in Ireland, and sometimes manufacture drugs that are later sold in the United States.
Ireland’s low tax rate has helped attract many digital companies that do not have to be close to their customers to sell to them, and can register their intellectual property – from which profit comes – more or less anywhere in the world.
Now, the U.S. is leading an effort to set a minimum corporate tax rate of 15% on corporate profits, a plan that recently received support from the Group of Seven Big Economies after meeting in the UK this week.
The Irish government fears that the G7 plans to renew the international tax system will leave the country with a big budget hole, making it at least attractive to many American companies whose decision to move into it has changed their economic destiny in recent decades.
Signs of change
But there are signs that Ireland is ready to accept a comprehensive reform supported by most of its allies, not just its most important US ally. Many smaller countries with low tax rates face similar pressures after years of OECD-led negotiations Now to the stage of serious decisions, when a possible agreement may already be in the coming summer.
“The change is coming,” said Thomas Byrne, Ireland’s European affairs minister, in a television interview on Thursday. “We are committed to working with the OECD and seeing where it goes.”
If the G7 reforms happen, other, poorer countries will be banned from following in the footsteps of Ireland, which used the low tax rate to attract businesses that brought new technology and better jobs, as well as the money needed to raise education levels significantly.
“The tax rate has been very attractive on its own for a few years,” Byrne said. But what has happened is that many of these companies that came after the tax have stayed here for the educated workforce and business-friendly policies. “
As part of the G7’s proposal, Ireland will lose a significant portion of its corporate income tax revenue. The Irish government estimates that its annual corporate tax revenue will be € 2 billion lower in 2025 than if the current rules were implemented, but an independent body examining the budget thinks lost revenue would be closer to € 3.5 billion, equivalent to $ 4.24 billion.
However, the scale of economic damage may be much more significant if some of the larger American companies decide to leave Ireland. The Irish Fiscal Advisory Council estimates that the departure of half a dozen major U.S. companies will cost the government $ 3 billion in tax revenue and the loss of more than 10,000 jobs.
But Sebastian Burns, council chairman, said it was hard to be sure how negative the impact of the tax changes would be. The government receives about twice as much corporate tax revenue as other rich countries, or about one-fifth of total tax revenue in 2020.
The tax rules that the G7 companies seek to change were designed in the 1920s for a global economy in which only a small number of companies held operations – mostly manufacturing plants – in more than one country. Car manufacturers were among the leading international companies and most often built factories in countries where they had a relatively large number of potential customers.
During this period Ireland did not attract international companies. Its home market was too small and it lacked resources like coal, oil and iron. It was also geographically marginal compared to Europe at a time when the cost of transporting raw materials was high.
But by the time Ireland cut corporate tax rates to 12.5% in 1999, a large number of international companies were no longer consuming the missing raw materials in Ireland and physical proximity to customers was no longer important.
In recent decades, international companies have evolved in size and complexity. Their profits are more easily attributed to pieces of intellectual property. This allowed Ireland to attract big companies like Facebook, Google and Apple.
$ 616 billion
Economists monitoring tax evasion say Ireland’s low tax rate has allowed companies to avoid paying taxes to any government. According to Thomas Treslav of the University of Copenhagen and Gabriel Zuckman of the University of Berkeley, out of $ 616 billion in profits transferred to low-tax countries in 2015, one hundred billion was transferred to Ireland. This has made it the main destination for transferred profits, ahead of Singapore, the Netherlands, tax havens in the Caribbean and Switzerland.
The Irish government says it wants to maintain a 12.5% tax rate and that the freedom of small states to levy lower taxes is essential for attracting foreign investment because it compensates for some of the less attractive features of the states.
“I believe that small countries, including Ireland, should be able to use tax policy as a legitimate lever to compensate for the benefits of scale, location, resources, industrial heritage and the real material advantage that the larger countries enjoy,” Ireland Finance Minister Pascal Donohey said in April. .
Sanctions and punishment
The frustration with the American move was so great that in April, when US Treasury Secretary Janet Yellen first introduced the show, Donohei found himself defending US President Joe Biden on one of Ireland’s most popular radio shows. “He’s not going out against anyone,” he said, “he’s not going out against Ireland.” It is unclear whether formal adherence to the 12.5% tax rate will change as part of the Biden administration’s proposals.
The US changes will punish companies operating in the US and also enjoy tax rates that are lower than the new global minimum tax. If approved by Congress, the new US system will not allow tax benefits while countries make internal payments to low-tax countries, and this change will effectively tax them. This can be a particularly serious blow to companies with offices in Ireland, many of which have extensive operations in the United States or are managed from offices in the United States.