Speech
Statement by Minister Donohoe on decision for Ireland to enter OECD International Tax agreement
Published on
Last updated on
Published on
Last updated on
Check against delivery
The Agreement
The Government today considered the question of Ireland joining the international consensus on a suite of far reaching reforms to the global corporate taxation framework arising from the latest round of discussions at the Organisation for Economic Co-operation and Development – the OECD.
Our focus over recent weeks has been to secure the necessary changes to provide certainty, stability and certainty in the revised framework and to ensure that our strategic interests have been protected. I believe that we have now reached that point and following a detailed discussion at Cabinet today the Government approved my recommendation that Ireland joins the international consensus which secures certain significant priorities for Ireland.
Joining this agreement is an important decision for the next stage of Ireland’s industrial policy - a decision that will ensure that Ireland is part of the solution in respect to the future international tax framework. It is a sensible and pragmatic decision made by Government in Ireland’s interests and ultimately a decision which will provide the conditions to provide long term certainty for business and investors to the benefit of the many thousands of employees across Ireland.
Joining this agreement is a serious and significant decision. The Government and I have considered this very carefully as we did in July in not signing up. It is a sensible and pragmatic decision made by Government in Ireland’s interests and ultimately a decision which will provide the conditions to provide long term certainty for business and investors to the benefit of the many thousands of employees across Ireland.
In making this decision, the Government is taking due regard of tax developments internationally – the plans for implementation within the European Union and also notably in the United States where a debate is currently underway in the US Congress on changes to their tax system so that the US is aligned with the outcome of the OECD agreement. This will also be important for taxpayer certainty in Ireland given the significant investment by US Multinationals here.
While this consensus amongst countries at the OECD is an important step towards the implementation of a new international tax framework and the decision of the Irish Government today will bring renewed momentum to the process, there is much technical work to take place on the new model framework but I am satisfied that Ireland’s interests are better served within the agreement from my contact and negotiation with international stakeholders in Europe, the United States and beyond.
The case for signing the agreement
I say this while recognising that Ireland’s corporate tax regime has been built on certainty and predictability for Multinational companies that have made Ireland their home, that have been here for many decades, are significant employers and contributors to the Exchequer through corporate taxes and income taxes paid by the many thousands of our citizens’ who work in good and stable jobs linked to Foreign Direct Investment.
It is clear also that Ireland has benefited from globalisation and the international standards which underpin globalisation. But it is also essential that as a small and open economy, that we can adapt and evolve in line with new international rules.
As I set out before the summer, Ireland was not in a position to sign up to the interim agreement in July as there were important issues that needed to be resolved, not least in respect to the minimum effective tax rate proposed of ‘at least 15%’ noting the desire of some countries to seek higher rates. Ireland has rightfully protected our economic interests, and I believe this has been recognised by key stakeholders. Since July, I have been engaging with the OECD and our international partners to arrive at an equitable agreement which can bring long term stability and certainty in the international tax framework. We have now reached that point.
The agreement provides that the minimum effective rate for those companies in the scope of the agreement will be 15%. Importantly we have secured the removal of ‘at least’ in the OECD text as we had sought. Some countries wanted higher minimum tax rates and I believe our position moderated those ambitions in the context of broader consensus and agreement. This provides critical certainty for Government and industry. This will impact on 56 Irish Multinational companies that employ approximately one hundred thousand workers, and one thousand five hundred foreign owned Multinational companies that according to Revenue employ approximately four hundred thousand workers.
The EU Commission has also provided assurances to me that that the Directive it will shortly propose to transpose the OECD agreement will be faithful to the agreement and not go beyond the international consensus. This will be a global agreement, implemented consistently by all in a timely manner underpinning the required certainty and stability in the international tax framework to support future investment decisions.
Importantly also, the agreement will continue to allow our tax system to support innovation and growth including through the use of R&D tax credits.
In joining this agreement, we must remember that there are 140 countries involved in this process and many have had to make compromises. But I also believe that the agreement Government has agreed to sign up to today is balanced and represents a fair compromise reflecting the interests and input of the many countries involved in the negotiations. For Ireland, the agreement will allow for the retention of our statutory 12.5% rate for businesses with annual revenues of less than €750million. This will mean that there will be no increase in the corporate tax rate for one hundred and sixty thousand businesses representing approximately 1.8 million employees and they will continue to enjoy all the benefits of Ireland’s longstanding 12.5% rate. I am happy to confirm that I have received assurances from the EU Commission that maintaining the headline 12.5% corporation tax rate for businesses out of scope of the OECD agreement does not present any difficulties.
Overall I believe this agreement will bring long term stability and certainty to the international tax framework. We have been involved in these discussions for many years and this is the significant milestone in what has been an ongoing process to reform the international tax rules.
The risks of not getting on board
In making a recommendation to Government that Ireland will join this international agreement, it was important to consider the alternative of staying outside the process:
First, it must be recalled that Ireland is a small open economy which is highly connected including with our fellow EU Member States, the United States, and many of the members of the G20 such as the UK, China, Japan, and Australia. These relationships are important for our business, for trade, and society more broadly, and thus it is essential that Ireland continues to stay in line with key international accords particularly one that is likely to have the support of 140 countries.
Second, if Ireland is not in the agreement we will lose influence in respect to the critical discussions which will take place in the coming months on the implementation rules.
Third, failure to sign up to an agreement will lead to continued uncertainty for businesses operating in Ireland.
Finally and critically, it should be stressed that the design of the global minimum tax means that a country can apply a top-up tax to the subsidiary of a multi-national enterprise which has been taxed below the minimum effective rate. If Ireland is not to apply the global minimum effective tax rate it means that another jurisdiction will collect those taxes. So, not joining an agreement will result not just in reputational risks, but also economic and fiscal risks.
I believe that the upsides of being in such a historic international agreement far outweigh the downsides of staying out. This is a difficult and complex decision but I believe it is the right one.
What will this agreement mean for multinational enterprises?
One of my key objectives in this process is to arrive at an outcome in which Ireland can continue to provide long-term predictability for businesses – this is a critical issue as a key element of our industrial policy has been certainty in our tax offering. I believe that this agreement will bring long-term certainty and stability to business.
Important details need to be resolved, regarding how any agreement will be implemented in practice, recognising also that the proposed OECD agreement will allow certain deductions (the so called substance based carve-out) to take account of asset value and payroll which will be important for the effective tax rate to be paid by businesses.
My Department will continue to engage with key stakeholders in respect to the implementation of this agreement. There is still a lot of work to be done at the OECD and within the EU, and stakeholder input is critical to how we will proceed.
What will the agreement mean for SMEs?
The Government values the role of SMEs and microenterprises in our economy and as creators of employment throughout Ireland. Balancing our enterprise policy between foreign direct investment, SMEs, export-only businesses and non-exporting indigenous firms is an important policy consideration. It is important to highlight that this agreement will not impact on the vast majority of Irish businesses, particularly SMEs. The scope of the global minimum effective tax is that it will apply to multinationals with a threshold of €750 million.
Our statutory 12.5% tax rate will continue to apply to the vast majority of businesses in Ireland given they operate below the EUR 750m threshold set out in the agreement.
The Cost of the agreement
I have indicated for some time that there will be a cost to the Exchequer arising from this agreement. While the final cost is very difficult to predict the Department of Finance and the Revenue Commissioners have estimated that the cost of the agreement will be up to €2 billion annually when both pillars come into effect. This must also be considered in the context of strong growth in corporation tax receipts over recent years.
While this is a significant cost to the Exchequer, I believe that staying outside such an international agreement would have had a far higher cost in terms of our international reputation, would have led to business uncertainty, and risk our attractiveness as a prime location for multinational investment. This will also create Revenue loss.
It is important also to outline that the critical technical discussions will continue over the coming months in line with the framework of the political agreement. There remain sensitive issues for Ireland including in respect to the method of reallocation under Pillar 1, as well as detailed technical provisions under Pillar 2. I believe that being in the agreement means we can shape and influence those critical technical discussions.
The outcome of these discussions, coupled with the future business decisions of multinationals, will have significant implications for our future corporation tax receipts – the scale of the effect will only become fully known with time.
The Business Environment
I am confident that Ireland will remain competitive into the future, and we will remain an attractive location and ‘best in class’ when multi-nationals look to investment locations. These multinational enterprises support our economy with high value jobs. It is important to recognise that these MNEs provide tax revenues which are critical to the provision of public services and our capital investment. At the same time, we cannot be complacent and we need to reflect on both tax and non-tax aspects of our offering including in respect to simplification of the tax code.
All countries, including Ireland, will need to assess the compatibility of their tax systems with new global norms. My commitment, and that of the Irish Government, remains clear – we will ensure that Ireland’s corporation tax regime will remain competitive, fair and sustainable. Ireland will continue to have an attractive tax offering. This is a minimum rate, and Ireland will be at the minimum – no country can undercut the rate and many of our competitors have higher tax rates.
We will also continue to develop the talent of the future by investing in human capital and skills. Government will promote and encourage innovation, we will work together to deliver a low carbon economy, and nurture SMEs and grow Irish multinationals who can compete across the globe.
The Government has made important steps this week through the publication of the new National Development Plan. This plan not only includes significant projects to improve our physical infrastructure, but also looks to invest in further education and skills. The NDP is a clear signal of intent by Ireland to invest in our future and invest in our people.
This is an important decision for Ireland’s industrial policy, for our future, it is complex, there will be consequences, but there will also be opportunities.
We will continue to be highly competitive, keep and create many good jobs. This agreement is a balance between our tax competitiveness and our broader place in the world.
I believe it is the right agreement for Ireland.