"He's prepared to cop the flak." That was the summary of one high-level source when asked about the fallout for Ireland and for Minister for Finance Paschal Donohoe from Ireland's decision last week to refuse to sign up to the OECD agreement on a minimum effective tax rate check.
Donohoe is president of the Eurogroup of finance ministers, many of whose members are ardent supporters of the idea of taxing multinationals more – a lot more. It is well that he is prepared, because there will be lots of flak to cop.
On July 1st, Ireland was one of only nine of 139 countries in the “inclusive framework” at the Organisation for Economic Co-operation and Development (OECD) to reject a draft agreement on international corporate tax reform.
The agreement paves the way for a global minimum effective tax rate for multinationals of at least 15 per cent – and would, if adopted here, mean the end of Ireland’s signature 12.5 per cent rate of corporation tax.
Ireland's refusal to sign up came despite intense pressure from a variety of directions, including Washington and Paris. The pressure will continue; Donohoe will meet US treasury secretary for a breakfast meeting in Brussels on Monday.
There is, sources in Dublin admit, significant reputational damage for Ireland internationally for refusing to sign up, joining a series of tax havens such as Barbados and St Vincent and the Grenadines, as well as fellow EU refuseniks Estonia and Hungary.
Open anger
Ireland's position on jealously guarding its tax regime is well known. Even still, holding out against an agreement signed by 130 countries took some people aback. The French minister for European affairs Clement Beaune published a letter in The Irish Times appealing for the Government to change its mind. There is open anger in some quarters.
Others, more familiar with Ireland's dogged defence of its tax arrangements, shrug in despair. "There is a German saying," says MEP Sven Gielgold, a campaigner for international tax reform, "'Once your worldly reputation is in tatters, the opinion of others hardly matters.' There was no big outcry about Ireland because everyone was not expecting anything else."
After years of beating back EU attempts at corporate tax reform, insisting that it wanted to prioritise the broader reform project co-ordinated by the OECD, Ireland has now decided to leave the OECD at the altar.
Looked at from Dublin, it’s a pretty audacious assertion of Ireland’s national interest in the face of an emerging global consensus (though one political source notes with satisfaction there has been no domestic political fallout); looked at from abroad, it’s an outrageous manoeuvre, which puts Ireland on a short-list of tax havens – a “rogue state” on taxation, as Fintan O’Toole put it this week.
So what is Ireland at? What is the strategy?
Conversations with a series of high-level sources this week suggest two things: firstly, that the emerging global consensus is likely to lead to a change in the way multinationals are taxed, and Ireland is unlikely to stand outside that new world order indefinitely. Secondly, that Ireland will not alter a long-time pillar of its economic strategy without certainty on what replaces it.
As more than one source put it last week: “We can only move once.”
Refusing to sign up last week was less about sending a signal to the multinationals that Ireland is their friend on taxation. They know that already. It was more about an unwillingness, as the Government sees it, to buy a pig in a poke.
Is it 15 per cent? Is it more? Is it actually going to happen? Let's wait and see, is the attitude in Merrion Street. Nowhere does that wait-and-see attitude apply to more than the situation in the US. It is very clear that tax reform is at the centre of president Joe Biden's agenda, and that nothing is a greater priority for his administration. It is also very clear that there is formidable opposition, both politically and from US business to the plan, and there is no certainty at all that Biden will get his reform plan through Congress. A summer of politicking and arm-twisting in Washington lies ahead.
Biden’s plan
The great fear in Dublin – and what, above all, led to the decision not to sign up last week – is that after everyone commits to a 15 per cent rate, Biden would fail to get his plan through. That would then leave Irish tax policy dependant on what happens in Washington. No way will we do that, say Irish officials. “We won’t sign up for anything until we actually see what it is,” says one source.
Irish officials are also acutely aware that the European Commission wants to push for reforms that would pose even more of a threat to Ireland's tax structures and bulging corporation tax revenues. They worry that once a move to 15 per cent is conceded, there will come a push for the EU to go to 21 per cent. "We know that the train coming to nail us is Brussels, not the OECD," says one source.
Nothing is new about this. Ireland has been fighting for many years to defend its corporation tax regime. EU efforts to erode the Irish tax base go back 20 years, and more. But there is remarkably broad political support for the 12.5 per cent rate here; none of the Opposition parties who might be in Government say they will increase the rate. As one politician noted, taxi drivers from the airport can tell you about the 12.5 per cent rate. Even during the darkest days of the financial crisis and bailout a decade ago, Irish governments refused to budge on giving up the 12.5 per cent.
Ireland is not going to change its open economic model, which relies heavily on inward investment, and has made it one of the richest countries in the EU. But it might increase the rate of corporation tax if it could be done in a way that maintains the essence of the economic model. That’s probably the best-case scenario.
And ultimately that may well be what’s done. But it will not be done lightly, nor in a hurry. These are far-reaching decisions, with huge economic and political consequences. Says one person closely involved, “It’s high-wire stuff, alright.”
