The Irish Department of Finance hosted an International Tax Seminar on 21 April 2021. As part of the seminar, Paschal Donohoe, Minister for Finance, confirmed in his opening remarks that Ireland is committed to the OECD BEPS process and advocates an agreement on the BEPS 2.0 project. Tom Woods and Anna Scally of our Tax team explain.
BEPS 2.0 contains two Pillars - Pillar One which seeks to address challenges in taxing the Digital Economy by allocating more profits to market jurisdictions and Pillar Two which seeks to implement a global minimum effective corporate tax rate.
The Minister reaffirmed that any global agreement must facilitate healthy and fair tax competition and he wants Ireland’s 12.5% rate to be accommodated within that framework.
Actions taken by Ireland to date
The Minister noted that Ireland has to date already implemented several measures to address base erosion and profit shifting, some of which were agreed under BEPS 1.0 and some of which Ireland implemented unilaterally to ensure its regime is in line with international best practice.
Such measures include; amending our corporate tax residence rules to abolish the possibility for companies to be stateless, ratifying the BEPS Multilateral Instrument, adopting the 2017 OECD Transfer Pricing Guidelines, implementing EU Anti-Tax Avoidance Directive measures, including anti-hybrid rules, Controlled Foreign Company rules, and a new Exit Tax regime. Later this year Ireland will adopt the Transfer Pricing Authorised OECD Approach for Transfer Pricing of Branches, Interest Limitation rules and Anti Reverse-Hybrid rules meaning that it will have fully adopted the internationally agreed BEPS 1.0 measures in advance of many other countries.
Regarding BEPS 2.0, Minister Donohoe commented that in 2019 he expressed reservations with respect to Pillar 2 while at the same time signalling his openness to a Pillar 1 solution, which could address the specific tax challenges of digitalisation. Regarding Pillar 1, he considers that much of the work on the solution has advanced in the right direction. Regarding Pillar 2, he expressed reservations that it would be used as a mechanism for global tax harmonisation rather than to address aggressive tax planning and remaining BEPS issues. The narrative in recent weeks of high minimum effective taxes has confirmed his reservations.
A global minimum effective tax rate
Minister Donohoe stressed that small countries, including Ireland, need to be able to use tax policy as a legitimate lever to compensate for advantages of scale, location, resources, industrial heritage and the real, material and persistent advantages enjoyed by larger countries.
The long-established Irish corporate tax rate of 12.5% is an appropriate and fair rate and within the ambit of healthy tax competition. It is a rate that can contribute to Exchequer revenues for investment in infrastructure and capacity, and one that can also stimulate investment, growth and innovation, which are core to Ireland’s industrial policy.
Minister Donohoe noted that an agreement can be reached by the Inclusive Framework and Ireland will work constructively towards such an agreement. In that context the Minister outlined five key principles that must be taken into consideration in determining a global minimum effective tax rate;
- an agreement needs to accommodate healthy, proportionate and fair tax competition, and one which can respect tax sovereignty.
- an agreement must deliver certainty for administrations and business. It needs to ensure that countries play to the same rules with strong foundations, welcoming a peer review process.
- any agreement must have common benefits. It must ensure that jurisdictions who sign up and comply with these rules are treated equally and should not be subject to any adverse listing process or more onerous unilateral measures.
- ensure that compliance burdens on business are minimised. This can be achieved through a global blending approach.
- once agreement is reached, all jurisdictions should act and implement together.
He also noted that an agreement must continue to support innovation and growth whilst guarding against abusive practices.
Key comments from other seminar participants
The seminar included a panel discussion moderated by KPMG’s Anna Scally with Pascal Saint-Amans (from the OECD), Benjamin Angel (from the European Commission) and Fabrizia Lapercorella (from the Italian Ministry for Finance in the context of Italy’s role as president of the G20).
Pascal and Fabrizia noted that substantial agreement is expected at the OECD Inclusive Framework level in mid-July though some details may need to be finalised thereafter with a view to having full and final agreement in October.
All panellists noted that the recent proposals by the Biden administration had given the BEPS 2.0 project some momentum and were broadly welcomed. Political decisions will now need to be taken by the Inclusive Framework members in terms of the scope and framework of any final agreement. It was acknowledged that there were challenges in getting the US tax proposals approved. A recent article on the Biden administration tax proposals is available to view here.
Benjamin Angel confirmed that any agreement on both Pillars would be implemented in the EU by way of a Directive and that any agreement on Pillar One will be separate to the EU’s work on a Digital Levy. There was some debate as to whether an additional EU Digital Levy would have sufficient support of Member States and also whether it would be acceptable by other OECD Inclusive Framework members – the current OECD and US proposals on BEPS 2.0 make it clear that countries must forego Digital Services Taxes as part of the overall agreement.
Impact on Ireland
Minister Donohoe confirmed that agreement on the BEPS 2.0 proposals will have a cost for the Irish Exchequer, which is estimated to be at around 20% of Ireland’s corporate tax revenues. He noted that Ireland will nonetheless remain competitive, continue to have a forward-looking business environment and act as a bridge from the US into the European Union market. Ireland will remain agile and competitive, and, importantly, will continue to invest in an educated, adaptable and dynamic workforce - a workforce that has consistently delivered innovation, profitability and stability over many decades for businesses that have taken the strategic decision to build a substantial presence here in Ireland.
Ireland has for many years been an attractive location for inbound investment for a wide range of reasons, not least for its highly educated English-speaking workforce, common law legal system, EU membership and market access, etc. These attributes should not be impacted by global tax reform, but such changes will heighten the importance of Ireland remaining attractive and competitive across all areas, including ease of doing business, regulation, skilled labour, etc.
While these measures are complex and depending on their final shape, are likely to have some impact on where large businesses pay their corporate tax, in our view, Ireland is likely to remain an attractive location to invest and do businesses in for the many reasons that have contributed to its success over the last number of decades, as noted above.
Get in touch
If you have any queries on the impact of corporate tax changes for your business, please contact Anna Scally, or Tom Woods of our Tax team. We’d be delighted to hear from you.
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