The arguments of the Irish government to oppose a global effort to reform the tax system are not convincing and might push Ireland farther away from the EU, argues Trinity's Dr Jim Charles Stewart.
A total of 131 countries representing more than 90% of global GDP are celebrating a landmark deal to overhaul the global tax system and increase their revenues to finance the costly post-coronavirus recovery. From Argentina to Japan, from Canada to Turkey, developed and developing nations are gearing up for a transformative reform.
Ireland, however, has chosen to stay on the sidelines and refused to endorse the agreement, reached under the auspices of the Organisation for Economic Co-operation and Development (OECD).
The stated position of the Irish government was, until recently, that tax reform proposals agreed by the OECD would also be agreed by Ireland. Dublin's decision to oppose a 15% minimum corporate tax that has the backing of so many countries, including all G20 members, is thus puzzling – not only to its fellow EU countries but, increasingly, to Irish citizens themselves.
One reason behind the Irish objection is the often-cited assertion that the country's current 12.5% tax rate is the "cornerstone" of its industrial policy. A worldwide minimum corporate tax rate, the thinking goes, would reduce incentives to locate in Ireland.
Undoubtedly, Ireland has been successful in attracting Foreign Direct Investment (FDI), particularly from Silicon Valley: the likes of Apple, Google and Facebook have all presence in the Republic. According to the US Chamber of Commerce, over 800 American companies employ 180,000 people in Ireland, many of whom enjoy high paid jobs, while US investment brings $5.3 billion (€4.5 billion) each year.
Perhaps counterintuitively, despite low tax rates, revenues from corporations in Ireland are large, standing at €11.8 billion in 2020, or 20% of total tax revenues. Tax payments and corporate profits are high because profits are switched to Ireland by multinational enterprises via, among other methods, transfer pricing and R&D payments.
But protecting the 12.5% tax rate as the cornerstone of industrial policy is problematic: for a start, the tax rate has never been the key fiscal incentive in practice.
What has been really attractive for foreign companies are other features of the Irish fiscal regime, which regularly offer complementary strategies, allowances and incentives that create an economic landscape of low or even zero effective tax rates.
Previous OECD tax reforms agreed and implemented in Ireland have had a considerable impact in curtailing these tax strategies, which critics argue turn the island into a tax haven. Recently agreed reforms by the European Union, like the country-by-country reporting directive, will further reduce artificial tax avoidance strategies.
The ever-present question of tax sovereignty
Asked about the global push for tax reform, Paschal Donohoe, the Irish finance minister, listed his three reasons for opposing a minimum corporate tax rate:
In order to compete against larger economies, small countries – like Ireland – need to use tax policy to compensate for factors such as lack of scale and industrial heritage.
An agreement on rates needs to allow tax competition.
The need to respect "tax sovereignty" of every nation state.
These are not convincing arguments.
Many small countries – Denmark and New Zealand, for example – are not accused of being tax havens. So-called "industrial heritage", such as ship building, coal mining and steel production, are often economic liabilities rather than assets. Surveys indicate that tax rates are not the most determining factor for a company when choosing its location.
On the question of national sovereignty, Ireland has already ceded plenty of sovereignty in many economic and political areas as part of its EU membership. In fact, since joining the bloc in 1972, Ireland has agreed to implement several EU directives related to taxation, like those on exchange of information and binding arbitration in tax disputes.
For Ireland, the principles on which "tax sovereignty" is ceded and not ceded are unclear and may rather reflect plain reasons of practicality and expediency.
Within Ireland, some have argued that the OECD agreement is premature because it will not survive the United States Congress, where the Republican Party is vividly opposed to any reform that raises taxes. This assumption might explain Dublin's "wait-and-see" strategy and lets ministers declare in public they will continue to engage "constructively" in the global discussions.
It has been claimed – falsely – that most of the 131 countries who agreed to the tax reform deal did so on the basis of gaining concessions, and that Ireland should also demand and negotiate them.
However, current proposals in Pillar 1 and 2 of the OECD scheme actually put developing countries at a disadvantage in various ways. Developing countries are the ones that need concessions. Developed, high-income countries, like Ireland, do not.
Ireland's position is undoubtedly influenced by current high levels of Foreign Direct Investment, which are the envy of many other countries around the world.
There are prominent advocates for FDI-friendly policies within the Irish government, who are routinely lobbied by business organisations and Big Tech representatives eager to maintain the status quo.
A risky strategy of semi-detachment
Another reason to oppose the OECD reform, according to senior Irish politicians, is that, in the post-Brexit era, Ireland is acting as the diplomatic bridge between the European Union and the United States. Similarly, the small island has been described as a bridge between the UK and the EU.
Irish Prime Minister Micheál Martin has declared that "our aim and our objective as a government — [is] to maintain a constructive relationship with Britain", while at the same time, arguing before his EU colleagues that "the only future has to be a constructive UK-EU relationship".
Intentionally – or unintentionally – this bridging policy implies acting as an intermediary and, as a result, entails a certain degree of detachment from EU policymaking.
A semi-detached view of EU policymaking, in turn, may mean Ireland has no hesitation in blocking proposals at the EU Council in relation to taxation and the bloc's common financial resources.
The introduction of a 15% minimum corporate tax rate across the EU requires a directive, as pointedly noted by the Irish finance minister. According to EU treaties, any taxation matter must be approved by unanimity, which means that one simple "no" can derail the "yes" of the other 26 member states.
At the same time, Ireland is very dependent on EU support and solidarity as a response to the coronavirus pandemic, which has destroyed thousands of jobs, bloated the public deficit and significantly increased government debt.
But Ireland also needs to have Brussels by its side to tackle the economic dislocation arising from Brexit and problems related to the Northern Ireland protocol. Future difficulties and confrontations stemming from the UK decision to leave the bloc are likely to be long-lasting and will need continuing European support for Ireland.
Solidarity is a two-way street: it requires mutual adjustment and compromise.
It is time for Ireland to recognise this reality, adopt a strategy of closer engagement with the majority of EU member states and embrace the global effort of tax reform.
Dr Jim Charles Stewart is an adjunct associate professor at Trinity Business School.