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DUBLIN — U.S. President Joe Biden often proclaims a sentimental soft spot for Ireland. But his administration’s vision of a 21 percent tax rate on American firms’ overseas profits could hit the Irish the hardest.
Over decades, Ireland has honed a sales pitch that has wooed hundreds of U.S. firms to an island on Europe’s edge that offers few natural resources beyond its people. Key to the attraction has been Ireland’s 12.5 percent rate of corporate tax in place since 2003.
France and Germany – which charge headline rates topping 30 percent – have long complained that Ireland unfairly hoovers up too much U.S. corporate investment at the expense of the wider EU single market. The Irish counter that the French and Germans ought to cut their own rates to compete.
That argument appears to be running out of road. If rising political forces on both sides of the Atlantic have their way, a global minimum rate of tax will finally blunt if not eliminate Ireland’s advantage.
“The genie is out of the bottle. We have seen a very significant shift in the U.S. position,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers in Dublin.
“We need to prepare for receiving less revenue from corporate tax. That’s something we can plan for,” O’Leary said. “The bigger issue is what it does to our industrial strategy. That requires a rethink about what we can offer multinationals that base themselves here.”
Even though concrete change could be years away, senior officials in Dublin already are wargaming the potential damage that a globally enforced higher rate of corporate tax would do to Ireland’s ability to keep landing U.S. investment.
While it’s still a whisper in the corridors, for the first time the Irish are imagining a future where their world-beating rate no longer represents an immovable pillar of industrial policy.
“We’ve been saying forever: We’ll never touch 12 point 5. But there’s little practical point in continuing to draw that line in the sand if the OECD tide is finally coming in,” said a senior Irish official, referring to the Paris-based Organisation of Economic Cooperation and Development. It is seeking a minimum rate to be enforced in 139 nations, including the U.S. and Ireland.
Defending the golden goose
While Donald Trump rejected the OECD effort, Biden and his treasury chief, Janet Yellen, support it and, as part of any deal, want American multinationals to pay 21 percent on their profits overseas.
Ireland is banking on other OECD nations lowering that proposed rate and leaving wiggle room for Ireland to keep offering a tax discount versus France, Germany and other larger competitors. It seeks common cause with other small EU nations adept at winning foreign direct investment, including the Netherlands and Luxembourg.
“Small countries, such as Ireland, need to be able to use tax policy as a legitimate lever to compensate for advantages of scale, resources and location enjoyed by larger countries,” Irish Finance Minister Paschal Donohoe told POLITICO.
His Finance Department published fiscal plans Wednesday that presume Ireland will lose €2 billion in annual corporation tax collections by 2025 because of global tax reform. This would reflect the impact both of a potential minimum tax regime and a parallel OECD effort to spread tax gains more equitably to nations where multinationals’ products are sold, not only where those products are owned or managed.
Donohoe, who is also the Eurogroup president, said Ireland is “in much better position to absorb the expected shock to corporate tax revenue” because it has broadened its tax base over the past decade and refinanced much of its national debt at historically low rates.
But he said Ireland was determined in any talks with the U.S. and OECD to preserve “legitimate tax competition” within rules that were “fair and sustainable.”
For now, Ireland is winning that competition. Last year it banked a record €11.8 billion in corporate tax, representing a fifth of total revenues second only to income tax. Most came from U.S. firms, including two-fifths from 10 companies that Ireland’s revenue agency declines to identify.
The multinationals’ footprint today is enormous. The American Chamber of Commerce in Ireland says more than 700 U.S. firms in the country employ 160,000 people directly and 130,000 more in support roles, an eighth of the labor force.
Seamus Coffey, a University College Cork economist and former chairman of Ireland’s budgetary watchdog the Fiscal Advisory Council, in 2017 authored the state’s blueprint for corporate tax reform. He says Ireland is far and away the biggest per-capita overseas beneficiary of U.S. multinationals in the world, both in jobs and revenue.
Based on IRS figures for 2018, he said, corporate tax paid to Ireland by U.S. multinationals amounted to €1,400 per man, woman and child — or equivalent to the entire cost of state pension payments to the country’s 600,000 retirees.
The OECD’s first attempt to crack down on base erosion and profit shifting (BEPS) in 2013 unintentionally helped drive more U.S. corporate assets to Ireland. This happened because the new rules required firms’ international tax-reporting hubs to have “substance” – real factories and real workers.
In the meantime, a new elite has emerged, triggering a relentless real estate boom. Just as in San Francisco, this elite’s exceptionally high salaries have helped to drive Dublin residential rents to the highest in the EU. This residential pressure is felt to a lesser extent in the second-largest city of Cork, where Apple and a slew of pharmaceutical companies are major employers, and in Galway’s medical technology cluster.
Those high salaries, in turn, have bolstered an income tax haul that has proved the most resilient in Europe despite more than a year of mass layoffs of lower-paid service workers. While Ireland keeps taxes low for corporations, it does the opposite for well-paid workers, who are taxed close to 50 percent on their income above €34,000.
Victory by fine print?
Amid the soul-searching, government economists and outside analysts argue that Ireland’s multinational clusters are deeply rooted here and will keep growing operations even if the tax environment sours.
“People aren’t going to leave Ireland for lots of good reasons. But the higher the taxation rate goes, the less attractive Ireland becomes. So it is in Ireland’s interest to keep that agreed minimum rate relatively low,” said Peter Vale, head of international tax at Grant Thornton in Dublin.
Vale expects the U.S. target of a 21 percent rate to be whittled down in OECD negotiations to between 15 percent and 17 percent. This would leave Ireland with a residual tax advantage that could grow again as Britain – traditionally Ireland’s closest competitor for U.S. corporate investment – loses leverage from leaving the EU and hikes its own rate to 25 percent.
“Let’s say it’s a 15 percent global rate. You’d be paying 12.5 percent here and 2.5 percent in the U.S.,” Vale said. “Ireland would still be the best place from a tax perspective in Europe.”
He doubts that, in such a scenario, Ireland would raise its 12.5 percent rate to claim that extra 2.5 percent, rather than let it sail off to America. The reason? Irish firms will gain an edge in a world with global minimum tax on foreign-domiciled profits.
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