After signing up to the OECD’s global minimum tax rate, Ireland is set to raise its headline corporate tax rate from 12.5% to 15% as part of its end of the deal. Finance Minister Paschal Donohoe played a leading role in defending Ireland’s position and reaching a compromise.
The Irish government backed this shift because there is still hope that Ireland will be able to maintain a competitive tax system. “The framework will still enable tax competition in the future, it will just be inside parameters that can maintain tax cooperation and stable trade in the future,” said Donohoe.
Ireland was a part of the original set of holdout nations, including Hungary and Estonia. The three countries eventually agreed to support the OECD plan to impose a global minimum corporate rate, albeit with strings attached.
The Irish government decided to accept the agreement once the European Commission gave it guarantees. The final rate would not be 21%, but 15%. However, it was not the only concession. The Irish government wanted to maintain the offer of 12.5% for smaller companies that do not fall in scope of the tax deal.
Before these concessions, the Irish government was very unlikely to accept the deal. Donohoe said that he was hesitant about ongoing pillar two negotiations because the objective of the OECD’s digital tax agenda was moving towards global tax harmonisation.
“Tax policy is important to compete with the location, scale, and resources of larger countries, and the OECD’s digital tax agenda should work for smaller countries like Ireland too,” said Donohoe.
Taoiseach Leo Varadkar’s cabinet appointed Donohoe after winning power in 2017. Once in office, Donohoe became the public face of Ireland’s low-tax policy. He defended the country’s low-tax pro-business record countless times.
By this point, the US was embarking on an ambitious tax reform package to combat the inversion boom. Almost every US political figure from Barack Obama to Donald Trump condemned the practice as ‘unpatriotic’. Except the Trump administration had made US tax reform its priority.
The Varadkar government picked up where the Kenny government had left off. The Kenny government had vowed no changes to the Irish corporate tax system for the sake of securing greater investment. However, international pressure was growing.
Ireland abolished its controversial double Irish loophole. The Varadkar government showed it had an appetite for fiscal reform, however, change would be slow. Five years later, Paschal Donohoe is still finance minister but a grand coalition came to power in 2020.
Taoiseach Micheál Martin took over from Leo Varadkar after the 2020 general election. Fianna Fáil and Fine Gael formed a grand coalition, including the Green Party. Donohoe will continue to play an indispensable role in Irish politics.
Ireland’s low tax strategy
Donohoe may be about to preside over the greatest shift in Irish tax policy for almost 20 years. No Irish government has raised corporate tax since the 1980s, yet the government has been following a low-tax strategy for a long time.
“The low tax rate started in the 1960s at zero and then went to 10%,” said Seamus Coffey, an economist at University College Cork and former chair of the Irish Fiscal Advisory Council.
“The point of it was never to generate corporate tax revenue, but to use relatively low corporate tax to attract the companies to set up in Ireland and let them build big factories and facilities,” he stressed.
The Irish government was moving towards a low corporate tax regime to secure greater foreign direct investment (FDI). The strategy was defined by an open door to taxpayers looking for a good deal. Apple opened its plant in Cork in 1980. It was just the beginning.
The Irish government would turn the country into a gateway for US investment into European markets. Ireland cut its headline corporate tax rate from a high point of 50% in 1987 to 12.5% in 2003. The shift to 15% could be seen as a step backwards.
As part of its strategy, Ireland has welcomed companies such as Apple, Google and Facebook to its shores. Many of these technology companies have built a sizeable presence in Dublin and elsewhere in the country. Some worry these companies will move away from Ireland, but experts disagree.
“In the short to medium term, no, there won’t be an exodus, the change from 12.5% to 15% is not that significant,” said Coffey.
It is this strategy that the case brought into question. Critics have claimed Ireland has become a ‘tax haven’ through schemes like the double Irish. Nevertheless, the supporters of Ireland’s low-tax strategy would defend it on economic grounds.
The ‘Celtic Tiger’ economy was in serious trouble when the 2008 financial crisis hit. Not only was the prosperity coming to an end, the Irish tax system was going to face more scrutiny as a result of public outrage over tax avoidance.
Eventually, the EU pushed for Ireland and the Netherlands to implement reforms. In 2015, the Irish government decided to wind-up the double Irish loophole for new companies and gave businesses until 2020 to restructure.
The double Irish loophole, which was phased out in 2020, allowed companies to place their intellectual property (IP) in Ireland and then channel the income through countries like Bermuda, the British Virgin Islands and the Cayman Islands.
Companies had to abandon double Irish structures over the ensuing controversy. However, as the loophole was closed, US multinational companies like Google, Facebook and Apple found alternatives to such aggressive tax planning.
Tax planning is still the name of the game, but it is not so brazen anymore. The Irish government will have to be very creative to maintain its competitive tax system once the global minimum rate becomes the standard.
