Caption. Image: 

Corporate tax

Ireland, global tax avoidance and constructive engagement

The Republic of Ireland’s longevity as an international leasing hub has come into question following the latest round of OECD talks seeking a uniform tax policy. Philip McQueston, counsel for A&L Goodbody, a Dublin-based corporate law firm, outlines the timetable for recasting global corporate tax policy and what this might mean for Ireland.

In early July there was a breakthrough in the process to reach an international agreement on the BEPS 2.0 proposals (base erosion and profit shifting), aimed at addressing the tax challenges arising from the digitalisation of the economy.

The 30 June to 1 July meeting of the 139-country OECD Inclusive Framework concluded with agreement from 130 countries on the proposed two-pillar approach.

While Ireland did not sign the agreement, notably the signatories include all of the G20 countries. Indeed, the two-pillar approach was agreed on by the G20 finance ministers at their meeting on 9 and 10 July 2021.

Philip McQueston, counsel for A&L Goodbody

Two-pillar timetable

The ambitious timetable for progress on BEPS 2.0 continues with the Inclusive Framework looking to have a detailed implementation plan in place, and finalisation of remaining issues, by October of this year. The expressed aim is for a multilateral instrument through which Pillar 1 will be implemented to be developed and opened for signature in 2022, with Pillar 1 coming into effect in 2023. The implementation plan will contemplate that Pillar 2 should be brought into law in 2022, to be effective in 2023.

The OECD statement released concerning the agreed solution refers to multinational groups with more than €20bn in revenues and a profit margin above 10% coming within the scope of Pillar 1. A portion of the profits of a group coming within scope would be taxed in jurisdictions where they have sales; between 20 per cent and 30 per cent of profits above a 10 per cent margin may be taxed.

Extractives exemptions

A review is to be undertaken seven years after implementation, the outcome of which may result in a reduction of the €20bn threshold to €10bn. Groups in the extractives sector (such as oil, gas, and mining) and regulated financial services sector will be excluded from the scope of Pillar 1.

The OECD statement does not provide any new details on "Amount B” of Pillar 1, a simpler method for groups to calculate the taxes they owe on foreign operations such as marketing and distribution.

Concerning Pillar 2 and the global minimum tax, the statement refers to groups with more than €750m in revenue coming within the scope. The minimum rate of tax to be used under the Pillar 2 rules "will be at least 15 per cent", according to the statement. International shipping is to be excluded from the scope of Pillar 2.

Ireland & the OECD

Ireland, along with low tax EU Member States Estonia and Hungary, is among the nine countries of the Inclusive Framework that did not sign the agreement on the two-pillar proposals.

(Another EU Member State, Cyprus, is not part of the Inclusive Framework and has stated its opposition to the two-pillar approach and any implementation by EU directive when the proposals are finally agreed.)

The Irish Finance Minister, Paschal Donohue, at a press conference following the announcement of the OECD agreement, indicated his reservations about the minimum 15 per cent tax rate. However, he indicated that he could support many other elements of the two-pillar proposal. Despite Ireland's refusal to agree with the 130 other countries, the Minister said that he is "absolutely committed" to global tax reform, that Ireland will continue to negotiate and engage in good faith and that he is going to make the case for the Irish 12.5 per cent corporation tax rate. He did not say what changes to the proposals would be necessary for Ireland to agree to the proposals.

Regardless of what Irish political party has held power in recent years, Irish administrations have consistently mounted a stout defence of Ireland's 12.5 per cent rate. Referencing the retention of the rate has become a type of mantra for Irish finance ministers, with particular strong statements made when Ireland came under severe pressure from some EU Member States to increase the rate during the economic crisis and consequent IMF led bail-out of Ireland.

The 12.5 per cent rate is seen as a cornerstone of Ireland's attractive package for foreign direct investment, although it cannot of itself explain the enormous success the country has had in attracting foreign investment. Given the sustained cross-party support for the 12.5 per cent rate, any change to it should be politically sensitive in Ireland. It is unsurprising therefore that Donohue announced a public consultation on the matter. Given the tight timeframe for further progress at the international level, it should be expected that any Irish consultation process will need to be undertaken quickly.

While the Irish Minister for Finance may seek to press for changes to Pillar 2 during the technical discussions over the coming weeks, following the recent Inclusive Framework agreement, the direction of momentum is very much towards international agreement in principle on the two-pillar proposals being reached shortly.

G20 agreement on Pillars 1 and 2

On 10 July 2021, the G20 endorsed that broad framework for Pillars 1 and 2 and the ambitious timetable for bringing the new rules into force in 2023. This was expected, given the 1 July 2021 agreement reached by the OECD Inclusive Framework (which includes all G20 members). There is now broad political consensus for a substantial revision to global tax policy.

That said, the political consensus is couched in general terms and the details of the framework have yet to be arrived at for sign off at the G20 meeting to be held on Halloween this year.

US and EU implementation

Even if a final political agreement can be reached, there remains the practical issue of implementation, in particular in the US. Pillar 1 is to be implemented through a new multilateral income tax treaty, proposed to be signed and ratified by the end of 2022. This would be a new development for the US. It did not sign up to the BEPS 1.0 multi-lateral instrument (MLI). Treaty ratification in the US requires ratification by two-thirds of the US Senate and so is likely to be politically challenging.

Implementation in the EU may also be challenging, given the refusal by three EU Member States, Ireland included, to sign the Inclusive Framework agreement and Cyprus' stated opposition to Pillars 1 and 2.

Ireland's position

Notably from an Irish perspective, the communique issued by the G20 expressly called upon all members of the Inclusive Framework that have not yet joined the international agreement to do so. After talks with US Treasury Secretary on 12 July, the Irish finance minister Paschal Donohue said that Ireland remains "very, very committed to the process". He said that he and the US Secretary "understand how important the agreement is and both of us understand the work that does need to be done to hopefully get to a better place and to an agreement in October".

EU Commissioner Paolo Gentiloni recognised the Irish willingness to continue constructive engagement with the process. He said that "we fully respect the importance of the challenge that, for Ireland, this kind of issue represents, and we appreciate the engagement of the Irish government".

Following the meeting with the US Treasury Secretary, the EU announced its decision to put on hold its proposal for the introduction of an EU wide digital services tax, with German finance minister Olaf Scholz noting that the EU’s decision was "a sign that we are now really making the progress to get a global agreement".