23/08/2021

23/08/2021

Global Tax Reform

Ireland’s 12.5% Corporation Tax Regime

Background

Since 2017, efforts have been made by 139 countries to jointly develop a “two-pillar” framework to address tax challenges arising from the digitalisation of the world economy. The purpose of this paper is to give a general overview of what are very complex proposals.

Pillar One

The scope of Pillar One rules is multinational entities (MNEs) with global turnover above €20 billion and profitability above 10%. A review is proposed after 7 years with the intention of reducing the turnover threshold to €10 billion. For in-scope MNEs, between 20% - 30% of profit in excess of 10% of revenue, would be allocated to market jurisdictions where the MNE derives at least €1 million in turnover using intricate rules and formulae. 

Pillar Two

New rules will ensure that large multinational businesses pay a minimum effective rate of tax of at least 15% on profits in all countries. Again, there are complex rules which apply regarding calculation of “top up” tax and what jurisdiction is entitled to the tax.

Current Position

G7, G20 and OECD are backing the “two-pillar” framework. 130 of the 139 countries have supported the proposals. Nine countries have not opted in yet, including Ireland, Hungary, Estonia, Kenya, Nigeria, Peru, Sri Lanka, Barbados and Saint Vincent and the Grenadines.

Ireland

Ireland is in favour of Pillar One, but opposes Pillar Two because the minimum tax rate is set at 15% which will put our 12.5% Corporate Tax rate at risk.  The effect of Pillar One changes could lead to a reduction of around €2 billion in Irelands Corporation Tax take, while Pillar Two could slightly benefit Ireland’s tax take, as it is not considered that a 2.5% Corporate Tax increase will greatly reduce Ireland’s attractiveness to foreign multinationals who are considering investing in Ireland or indeed those here already here, including Microsoft, Google, Facebook and Apple.

Conclusion

There will be severe pressure put on Ireland (and indeed Hungary and Estonia) as all other EU countries are backing the tax reform proposals. But the EU require all 27 countries to back the proposals otherwise the EU will not be able to formally endorse the tax reform. It is not considered that the increase in Ireland’s Corporation Tax rate from 12.5% to 15%, will greatly effect the Irish economy, or its ability to attract and retain foreign direct investment. Ireland is likely to hold out to see how the detail of these proposals work out and  to see if the proposals can get past the US Congress, where there is substantial opposition to same.

HOW CAN WE HELP?

We are here to support you and your business in these unprecedented times. We would encourage you to reach out to us if you would like to discuss any of the matters referred to above. Equally feel free to call if you would like to discuss matters generally.  Please accept this communication as our interpretation of the subject matter. Always take tax advice specific to your fact pattern. You are encouraged to contact us if you are unclear or would like to discuss the content.