Future of Corporation Tax

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Ireland’s Corporation Tax Roadmap January 2021 Update reaffirms Ireland’s commitment to a multilateral approach via the OECD/G20 Inclusive Framework to address the tax challenges posed by the digitalisation of the economy. It also contains a welcome recognition that a multilateral approach will require compromises and trade-offs.  A minimum effective corporate tax rate must be a policy instrument for consideration in light of the ever-changing global context and our commitment to the OECD/G20 Inclusive Framework. 

The report details Ireland’s actions thus far in addressing some of the challenges posed by the digitalisation of the economy.  It also outlines a series of commitments to further action (outlined below).  In particular Social Justice Ireland welcomes the commitments to proactively respond to the outcomes of international reform efforts, adopt the Authorised OECD Approach for transfer pricing of branches, publish a new tax treaty policy statement having particular regard to treaty policy for developing countries, and the commitment to a new domestic stakeholder engagement process to be established in 2021.

Further Commitments to Action, Consideration and Consultation contained in Ireland’s Corporation Tax Roadmap January 2021 Update

• Consider additional defensive measures re countries on EU list of non-cooperative jurisdictions

In 2021 consideration will be given to introducing additional restrictive measures, if required, including denial of tax deductions or imposition of withholding taxes where material payments are made from Ireland to listed jurisdictions.

• Consider actions that may be needed in respect of outbound payments

In 2021, commence a consideration of broader issues related to outbound payments from Ireland and our wider withholding tax regime.

• Adopt the Authorised OECD Approach for transfer pricing of branches

Extend transfer pricing rules to the taxation of branches in Ireland in line with the Authorised OECD Approach. Work will commence in early 2021 on this policy and it is intended to bring forward the necessary legislation in Finance Bill 2021.

• Continue to meet international best practices on exchange of information and support efforts to enhance information exchange

Ireland is, and will continue to be, at the forefront of developing and implementing the latest standards for exchange of information among tax authorities.

• Proactively respond to the outcomes of international reform efforts

As the future direction of the global tax framework becomes clearer, the Department will continue to take a proactive, consultative approach in ensuring Ireland’s corporation tax system is well-placed for the changing environment.

• Publish a tax treaty policy statement taking account of International developments

New tax treaty policy statement having particular regard to treaty policy for developing countries.

• Continued engagement in international fora and develop a new framework for domestic stakeholder engagement with a new domestic stakeholder engagement process to be established in 2021.

Minimum Effective Corporate Tax Rate

Social Justice Ireland regrets that there is no mention of a Minimum Effective Corporate Tax Rate in the update, although we note that the OECD Report on the Pillar Two Blueprint on the Tax Challenges arising from Digitalisation discusses in detail how the establishment of a nominal rate of corporate taxation and a minimum rate of corporate taxation and a minimum effective rate of corporate taxation might operate and what would happen if there is a difference between the rates in different jurisdictions[1]. 

It is clear that a minimum effective corporate tax rate is a policy instrument that will be under consideration at an international and a national level.  Reform of Ireland’s corporation tax structure should be a priority for Government. Ireland’s headline corporation tax rate of 12.5 per cent has been the subject of increasing controversy in recent years. This is not so much because it is low, but because the effective rate that many firms pay is considerably lower. The adequacy and fairness of corporate tax payments has been a recurring issue for a number of years. Despite a low headline rate (12.5%), there is limited data on the effective rate of corporate taxation in Ireland.  A recent report from the Comptroller and Auditor General (C&AG) shed new light on this sector[2]. Using the approach used by the Revenue Commissioners to calculate the effective tax rate (tax due as a % of taxable income) they found an overall effective corporate tax rate of 9.8% in 2016. Among the top 100 corporate tax payers, who account for 70% of corporation tax paid, eight had a 0% or less rate, five paid between 0% and 1%, one paid between 1% and 5%, seven paid between 5% and 10%, while the remainder (79 firms) paid more than 10%. It is clear that a small number of very large firms are at the core of the tax adequacy issues in this sector. 

In a post-COVID-19 environment, it is likely that addressing the tax challenges of the digitalisation of the economy and ensuring that Multinational Corporations (MNCs) pay a minimum level of tax will be of even greater importance.  The OECD pointed out in mid-2020 that rising pressure on public finances may strengthen the push for a minimum effective corporate tax rate and that there will be a need to ensure that there is a level playing field in the levels of effective taxation between major MNCs and SMEs who may suffer disproportionately from the crisis[3]. As the international tax landscape changes and there is a renewed focus on the international corporate tax system, the introduction of a minimum effective corporate tax rate would serve as another opportunity for Ireland to take a leadership role in implementing progressive moves relating to the international corporation tax system. 

Social Justice Ireland believes that the issue of corporate tax contributions is principally one of fairness. Profitable firms with substantial income should make a contribution to society rather than pursue various schemes and methods to avoid these contributions.  We have consistently proposed the introduction of a Minimum Effective Corporate Tax Rate of 6 per cent with a pathway to move to 10 per cent over time subject to the outcomes of the ongoing OECD BEPS process. 

Looking to the future

Regardless of how it is measured, Ireland is a low-tax economy.  As we look to the future and rebuilding our social and economic infrastructure our taxation system will have a key role to play both in terms of our overall tax take, and how it is structured.  We must explore all tax options available to us, including redesigning old tools, introducing new ones, and bolstering ongoing efforts to address the international tax challenges posed by the digitalisation of the economy. 

We welcome the publication of the update to Ireland’s Corporation Tax Roadmap and we hope that Government will make it a priority in 2021 to take the first steps towards reforming our taxation system and raising the overall tax take over time in a modest, realistic and progressive manner. 

For further information on international developments see the European Commission Tax Package[4] adopted in July 2020 and the OECD Pillar One and Pillar Two blueprints published in October 2020[5] .

[1] https://www.oecd.org/tax/beps/tax-challenges-arising-from-digitalisation-report-on-pillar-two-blueprint-abb4c3d1-en.htm

[2] https://www.audit.gov.ie/en/find-report/publications/report%20on%20the%20accounts%20of%20the%20public%20services/

[3] https://read.oecd-ilibrary.org/view/?ref=128_128575-o6raktc0aa&title=Tax-and-Fiscal-Policy-in-Response-to-the-Coronavirus-Crisis

[4] https://ec.europa.eu/taxation_customs/general-information-taxation/eu-tax-policy-strategy/package-fair-and-simple-taxation_en

[5]See https://www.oecd.org/tax/beps/tax-challenges-arising-from-digitalisation-report-on-pillar-one-blueprint-beba0634-en.htm and https://www.oecd.org/tax/beps/tax-challenges-arising-from-digitalisation-report-on-pillar-two-blueprint-abb4c3d1-en.htm