This week in tax: Ireland sees corporate tax revenue surge
The Irish government has seen corporate tax revenue rise after it signed up to the OECD’s two-pillar framework, including the plan for a global minimum corporate tax rate.
Irish Revenue has reported a €2 billion ($2.3 billion) increase in corporate tax revenue taking the total corporate tax receipts to €9.5 billion. Overall, the Irish government has seen tax receipts increase by 20% since last year.
“Corporation tax receipts in October were higher than expected, once again illustrating the inherent unpredictability and volatility of this revenue stream,” said Paschal Donohoe, Ireland’s finance minister.
“Despite the further clarity that now exists with international tax reform, there is still a high level of uncertainty in relation to its impact on Ireland,” he said.
The Department of Finance has attributed the sudden jump in revenue to unscheduled payments by pharmaceutical companies. These payments include a €297 million settlement from drug company Perrigo as part of its €1.6 billion tax bill.
The majority of tax revenue came from personal income tax and VAT, where there was strong growth in reflection of rising employment and higher consumer demand. VAT raised €12.6 billion, whereas income tax generated €20.6 billion.
This puts the Irish government on course for a record-breaking increase in tax revenue. Nevertheless, the Irish government is unlikely to splurge given it expects to increase the corporate tax rate in the near future.
“The best form of defence against any negative impact is to have strong and stable public finances,” Mr Donohoe said.
As a well-known low-tax jurisdiction, Ireland was originally one of the most prominent hold-out nations in Europe. However, the Irish government decided to sign up to 15% after the European Commission gave it assurances that the final rate would not continue to rise.
This move helped tip the balance in favour of the OECD-brokered deal. Ireland may be better placed to raise taxes in the long-term, but the government will be looking to make sure the country stays competitive somehow.
G20 endorses a global minimum tax, but falls short on climate change
Leaders at the G20 Summit in Rome formally backed a 15% global minimum tax, arguably the only concrete outcome from the summit alongside weak discussions on climate change and debt relief.
The G20 endorsed the OECD Inclusive Framework’s (IF) two-pillar proposal of a 15% global minimum tax rate and a redistribution of 25% of the largest companies’ residual profits to market jurisdictions.
The US Secretary of the Treasury Janet Yellen said: “Every G20 head of state endorsed a historic agreement on new international tax rules, including a global minimum tax that will end the damaging race to the bottom on corporate taxation."
The deal also includes tax credits for companies facing digital services taxes (DSTs) in advance of the pillar one implementation. This was a requirement from the US to agree to the framework for reallocating residual profit under pillar one.
The agreement to introduce a floor on tax competition and a system to redistribute corporate profits across more than 130 countries is significant. Yet several stakeholders said the solution disadvantages around 70 other countries outside the IF, as well as some developing countries within the IF too.
Transfer pricing problems continue as the LIBOR deadline approaches
Transfer pricing (TP) directors must ensure internal contracts reflect external ones and amend any file used to justify the firm’s application of arm’s length pricing when moving away from the London interbank offered rate (LIBOR).
The transition from LIBOR continues to be a significant hurdle for many companies. TP directors must ensure that their companies are transitioning the same way with their external and internal counterparts. This is yet another difficulty for TP directors, but they also have to make sure that the documentation supports the rates they use
As the December 31 deadline approaches, businesses will have no choice but to amend their TP or could risk facing some unpleasant surprises in 2022.
“The concept of TP is not threatened by benchmark because the differences are quite tight – you’ve got the adjustment spreads. If you simply apply them, then you’re backed from a documentary point of view. Then, when you look at figures, the differences are very small,” said Edouard Nguyen, partner at Kleber Advisory.
“However, you need to make sure you are still in back-to-back and not transitioning on one side and not the other,” he added.
While the move from LIBOR to risk-free-rates (RFRs) might not seem a significant business risk, transitioning away from the benchmark implies more than an easy swap. Corporations will need to ensure their internal contracts mirror external ones and files match the arm’s length requirements.
Next week in ITR
ITR is following the tax policy developments at the COP26 with a close eye. One key area is carbon taxation and how the impact of such levies can have implications for transfer pricing by forcing changes to inter-company transactions.
The tax profession is changing given the demands of environmental sustainability. Readers can expect an in-depth look at hiring trends since tax departments have a crucial role to play in promoting sustainability in businesses.
At the same time, the OECD’s two-pillar plans are set to become a reality. National governments around the world are preparing their budgets and getting ready to adapt their tax systems to a global minimum corporate rate.
Readers can expect these stories and plenty more next week. Don’t miss out on the key developments. Sign up for a free trial to ITR.