22 April 2021

POLITICO: Ireland frets as Biden tax plan throws doubt on economic model

The US plan threatens a key economic advantage for Ireland — its 12.5 percent corporate tax rate. U.S. President Biden often proclaims a sentimental soft spot for Ireland. But his administration’s vision of a 21 percent tax rate on American firms’ overseas profits could hit the Irish the hardest.

Over decades, Ireland has honed a sales pitch that has wooed hundreds of U.S. firms to an island on Europe’s edge that offers few natural resources beyond its people. Key to the attraction has been Ireland’s 12.5 percent rate of corporate tax in place since 2003.

France and Germany – which charge headline rates topping 30 percent – have long complained that Ireland unfairly hoovers up too much U.S. corporate investment at the expense of the wider EU single market. The Irish counter that the French and Germans ought to cut their own rates to compete.

That argument appears to be running out of road. If rising political forces on both sides of the Atlantic have their way, a global minimum rate of tax will finally blunt if not eliminate Ireland’s advantage.

“The genie is out of the bottle. We have seen a very significant shift in the U.S. position,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers in Dublin.

“We need to prepare for receiving less revenue from corporate tax. That’s something we can plan for,” O’Leary said. “The bigger issue is what it does to our industrial strategy. That requires a rethink about what we can offer multinationals that base themselves here.”

Even though concrete change could be years away, senior officials in Dublin already are wargaming the potential damage that a globally enforced higher rate of corporate tax would do to Ireland’s ability to keep landing U.S. investment.

While it’s still a whisper in the corridors, for the first time the Irish are imagining a future where their world-beating rate no longer represents an immovable pillar of industrial policy.

“We’ve been saying forever: We’ll never touch 12 point 5. But there’s little practical point in continuing to draw that line in the sand if the OECD tide is finally coming in,” said a senior Irish official, referring to the Paris-based Organisation of Economic Cooperation and Development. It is seeking a minimum rate to be enforced in 139 nations, including the U.S. and Ireland.

Defending the golden goose

While Donald Trump rejected the OECD effort, Biden and his treasury chief, Janet Yellen, support it and, as part of any deal, want American multinationals to pay 21 percent on their profits overseas.

Ireland is banking on other OECD nations lowering that proposed rate and leaving wiggle room for Ireland to keep offering a tax discount versus France, Germany and other larger competitors. It seeks common cause with other small EU nations adept at winning foreign direct investment, including the Netherlands and Luxembourg.

“Small countries, such as Ireland, need to be able to use tax policy as a legitimate lever to compensate for advantages of scale, resources and location enjoyed by larger countries,” Irish Finance Minister Paschal Donohoe told POLITICO.

His Finance Department published fiscal plans Wednesday that presume Ireland will lose €2 billion in annual corporation tax collections by 2025 because of global tax reform. This would reflect the impact both of a potential minimum tax regime and a parallel OECD effort to spread tax gains more equitably to nations where multinationals’ products are sold, not only where those products are owned or managed.

Donohoe, who is also the Eurogroup president, said Ireland is “in much better position to absorb the expected shock to corporate tax revenue” because it has broadened its tax base over the past decade and refinanced much of its national debt at historically low rates.

But he said Ireland was determined in any talks with the U.S. and OECD to preserve “legitimate tax competition” within rules that were “fair and sustainable.”

For now, Ireland is winning that competition. Last year it banked a record €11.8 billion in corporate tax, representing a fifth of total revenues second only to income tax. Most came from U.S. firms, including two-fifths from 10 companies that Ireland’s revenue agency declines to identify.

The multinationals’ footprint today is enormous. The American Chamber of Commerce in Ireland says more than 700 U.S. firms in the country employ 160,000 people directly and 130,000 more in support roles, an eighth of the labor force.

Seamus Coffey, a University College Cork economist and former chairman of Ireland’s budgetary watchdog the Fiscal Advisory Council, in 2017 authored the state’s blueprint for corporate tax reform. He says Ireland is far and away the biggest per-capita overseas beneficiary of U.S. multinationals in the world, both in jobs and revenue....

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