Minister Donohoe Keynote Speech to the Irish Tax Institute Global Tax Policy Webinar

Introduction

Good afternoon everyone.

I would like to begin by thanking the Irish Tax Institute and Harvard Kennedy School for inviting me to speak with you today at this Global Tax Policy webinar.

I want to commend both the ITI and Harvard for putting together such an excellent programme of speakers.

The global tax system must interact with the global challenges we face, both now and in the future including the digitalisation of the economy and climate change.

I know there will be important discussions over the next two days on those and other economic and social challenges and opportunities and how tax policy can and should respond.

Your discussions will shape the debate beyond taxation into the broader economy and indeed will ultimately help shape society in the years ahead.

OECD International Tax Agreement

I last spoke at this seminar in May 2019 – at that point, the OECD had just proposed a two pillar solution to address the tax challenges of globalisation. As we all know, a lot has changed in the intervening period.

Last October, Ireland joined 136 other jurisdictions in reaching an agreement on a two pillared solution to address the tax challenges arising from digitalisation of the global economy. I believe that this agreement represents a fair compromise reflecting the interests of the many countries involved in the negotiations, large and small, developed and developing.

The decision to join the global agreement was not taken lightly, and I both sought your views and valued the input received to the public consultation process, which informed my thinking, and that of the Government, when weighing up what was in Ireland’s best interest.

I firmly believe this agreement brings a unique opportunity to reframe the international taxation architecture which has largely remained in place for almost a century. This agreement will come at a cost, a substantial cost even, to Ireland, but I believe that this is a price worth paying to bring certainty and stability to the global trading environment and move away from the risk of trade wars, the impact of which would be amplified at a time of economic challenge.

The two pillared solution provides for a reallocation of residual profit under Pillar One and the introduction of a minimum effective rate under Pillar Two. Importantly for Ireland, the agreement provides that the minimum effective rate for those companies in the scope of the agreement will be 15 per cent, and this will provide the critical certainty for Government and business alike. At the same time we protected the 12½ per cent rate for out of scope business which will continue to be an important part of our offering in the future.

Importantly also, the agreement will continue to support innovation and growth by acknowledging the need for vital innovation incentives such as for research and development.

This is a global agreement which will ultimately underpin the required certainty and stability in the international tax framework, so important to both business and government when it comes to making future investment decisions and future policy decisions at a time of such change.

Technical work on key elements is continuing and it is important that the outcome of this work is faithful to the October agreement and represents a fair outcome to all jurisdictions.

It is essential that the agreement we have reached continues to strike an appropriate balance between the reforms needed to ensure that the international tax framework reflects the changes in how businesses operate, while providing the certainty and stability which we committed to last October.

I am also keenly aware that the success of the agreement will be in its consistent implementation across the globe, which leads me on to where we stand with the Minimum Effective Tax Directive within the EU.

EU Minimum Tax Directive

In December, the European Commission proposed a Directive to transpose Pillar Two of the OECD agreement, known as the Minimum Tax Directive. It was very important to Ireland that the proposal remained faithful to the OECD agreement and did not go beyond the international consensus. That happened and is why I am fully supportive of the Directive and have worked to reach agreement of this legislative proposal during the French Presidency.

The EU Minimum Tax Directive has been discussed at ECOFIN on a number of occasions, however to date unanimity was not achieved. It is my firm belief that an agreement on this file will be reached in due course and legislation will be brought forward to transpose the Directive in Finance Bill 2023, if and when the agreement is reached on the Minimum Effective Tax Directive.

The Directive will require the introduction of complex new provisions into our tax legislation and, as has been demonstrated throughout the process of transposition of the Anti-Tax Avoidance Directives, stakeholder consultation is a crucial element of this process to ensure legislation can be operated effectively. I intend to launch a consultation on implementation of the proposed EU Minimum Tax Directive shortly.

I welcomed the revised implementation date of end 2023 as it provides greater opportunity to engage with you to ensure that the new rules work in the way we all intend.

I am acutely aware of the challenges that the pace of this work creates for all of us. That is why seminars such as today’s event are so important. My objective is that Ireland will remain best in class when it comes to creating, attracting and maintaining the good jobs that you and your companies provide.

OECD Pillar One

You will be aware that in parallel with this, the OECD is developing the key components of the Pillar One architecture. Implementation of Pillar One will be complex for governments, tax authorities and businesses alike. There is a series of public consultations underway and I urge you all to avail of this opportunity to have your voice heard in shaping the rules as they are developed.

The devil is in the detail - there are 14 different building blocks to the draft architecture, each determining a specific aspect of the Pillar One rules which will introduce a new taxing right over a portion of the profit of the world’s largest companies for jurisdictions in which goods or services are supplied or consumers are located.

These new rules will bring complexity and the voice of stakeholders is vital in ensuring that they can function as intended and avoid unintended consequences.

Work on the technical detail is ongoing, developing the building blocks that underpinned the October deal, such as:

• how to operationalise the elimination of double taxation,
• ensuring tax certainty for taxpayers and Governments alike,
• developing the Marketing and Distribution Profits Safe Harbour, and,
• the critical issue of the removal of relevant unilateral measures such as digital taxes.

This is really demanding. Ireland is constructively engaging, progress is palpable and the elements of the Agreement are being developed and published for public consultation as we move ahead.

For Ireland, as I have stated for some time, there will be a cost with Pillar One in terms of reallocated profit, especially under Amount A and particularly the mechanism for elimination of double taxation. But for us, the cost of this agreement must be balanced against the benefits that will be achieved through greater tax certainty and the removal of unilateral measures.

This should and will be delivered through a Multilateral Convention - an international agreement that will be both legally and legislatively challenging to develop and deliver.

While I acknowledge that there will be a big price to pay for Ireland with this agreement but it is a price that we are prepared to pay if it ensures tax certainty, and reduces the risk of disputes and trade tensions – none of which is in anyone’s interests.

Just Carbon Transition - Tax System Incentivises

The tax system that we are in the process of shaping, is one of the powerful policy levers available to Government and can be utilised effectively both in terms of push and pull factors. This is especially important in the context of the other existential challenge of our time – climate change.

In Ireland, for example, Carbon Pricing is at an advanced stage with the EU Emissions Trading System, our own domestic carbon tax, the embedding of a shadow price of carbon in the appraisal of public spending projects and the impending Carbon Border Adjustment Mechanism Regulation.

A key pillar underpinning the Government’s Climate Action Plan is to halve emissions by 2030 and reach net zero no later than 2050. I have legislated for a pathway of carbon taxes out to 2030 with annual increases in the rate designed to introduce a glide path to a transition to a carbon neutral economy.

However, pricing is only one side of the equation, complementary policies are also necessary.

The tax system also offers a variety of incentives to ensure the move away from carbon intensive practices, such as accelerated capital allowances with regard to energy efficient products, and how the motor tax system incentivises the use of the most energy efficient cars and electric vehicles. The Research and Development tax credit incentivises the development of technologies which will assist in decarbonising society.

I believe the OECD have a role to play in this process and I welcome the proposal from the OECD to examine a general framework on carbon pricing. Of course such a project must not prevent countries from moving ahead with policy measures to decarbonise our economies. This is the most pressing global problem for us all and a global solution represents the best way forward.

Conclusion

I would like to finish by reiterating that we are living in challenging times, we are in the process of reform and we can also see emerging challenges on the horizon. This is true not only of the changes we are seeing to our tax system but also of the world we live in.

However, we have the tools at our disposal to ensure that the right balance can be struck to overcome these challenges. Working together we can deliver the framework that provides for a decarbonised society and also for economic prosperity. A stable and progressive tax system has an important role to play in realising those ambitions.

I wish you a fruitful discussion and hope you all enjoy the forthcoming sessions of this conference.

Thank you.

ENDS