The Organisation for Economic Co-operation and Development’s (OECD) two-pillar tax reform plan is essentially an enormous jigsaw puzzle. Agreement on one piece, the 15 per cent rate, is welcome but there are many other pieces that need to be developed, agreed and linked together before the overall picture becomes clear.
Yes, the recent agreement does provide elements of certainty for Ireland. The global minimum effective tax rate will be capped at no more than 15 per cent, the EU won’t seek to increase this rate by gold-plating the legislation for the bloc, and Ireland gets to keep 12.5 per cent for, broadly speaking, the domestic economy and smaller multinationals.
But make no mistake: the agreement did not clarify how all of the pieces of this multifaceted puzzle fit together, let alone what all of the pieces will look like. The overall picture remains far from clear and certainty seems some way off.
What comes next is the real question. While the rate is important – and we wholeheartedly praise the efforts of Minister for Finance Paschal Donohoe in securing this rate as part of the wider agreement – we need to remember that how you calculate the profits which will ultimately be subject to the 15 per cent rate is just as important.
The key word to remember with the rate is that it is an “effective” rate, not a headline or statutory rate. This means that the tax charge divided by taxable profits needs to be at least 15 per cent.
The calculation of the taxable profits will be different under Pillar Two (the part of the OECD agreement that deals with the minimum effective global corporate tax rate) to the normal method of calculating taxable profits in Ireland. The details of how the Pillar Two tax base is to be calculated have not yet been fully determined but, based on what we hear, the adjustments needed will be complicated.
Missing piece of the puzzle
Calculating the new taxable profits (or the base) is a key missing piece of the puzzle. Details on how this will be done are expected to be announced in November. Given the technical nature of this part of the plan, don’t expect this announcement to make headlines in the same way as the rate did.
Complex and legalistic (and to most non-tax people, boring) tax rules do not make headlines in the same way as countries haggling over a simple number do. But it is absolutely critical that this next technical stage of the discussions goes well and that businesses get a set of rules that can be applied in practice and without undue burdens.
Only once the technical rules are agreed does the bigger picture come into play.
Another major piece of the puzzle is how the US will seek to introduce the rules domestically. This will depend to a great extent on what is agreed in terms of the proposed US tax reforms, how far-reaching these will be and what they can get Congress to sign up to.
A key item that needs to be clarified is whether the US GILTI (global intangible low-tax income) rules, which impose a minimum tax rate on the foreign profits of US-headquartered multinationals, will be treated as an equivalent regime to Pillar Two.
Treating GILTI as an equivalent regime would remove the need to apply further top-up taxes in Ireland or another intermediate location under the Pillar Two rules for US-headquartered multinationals. If GILTI is not treated as equivalent, the US political commitment to Pillar Two is likely to weaken significantly.
Prepare for more disputes
In terms of Pillar One (the part of the OECD agreement that seeks to redistribute tax to markets), we anticipate that the fight over the repeal of unilateral tax measures, mainly digital service taxes, is far from over – particularly with regards to an EU-wide digital levy, the details of which will soon be announced.
Pillar One of the OECD plan did not attract much in the way of headlines in recent weeks.
However, it too requires a raft of decisions to be made, not least who ultimately pays for Pillar One. Ireland could find itself back in a sticky situation if Irish entities end up bearing the brunt of paying Pillar One on behalf of multinational groups.
This will inevitably result in an increase in international tax disputes between the Irish and global tax authorities. While an effort has been made in the agreement to prevent these disputes arising in the first place, profit re-allocation according to a mathematical formula, without a clear guiding principle, will drain the resources of tax authorities in dealing with complex disputes and add a time and monetary cost for businesses in applying the rules.
While we welcome the clarification on both the 15 per cent effective rate and the continued 12.5 per cent rate, the impact of the new OECD rules for our economy and for the businesses community are far from certain, and we should not be complacent in the face of all that remains subject to change.
There is a long and obstacle-laden road ahead of us in reaching the holy grail of a certain tax system that allows Ireland to offer a best-in-class and competitive investment location for business.
We can get there. But without further clarity and agreement on key pieces of this puzzle, tax certainty continues to remain out of reach.
Susan Kilty is head of tax with PwC Ireland
