Ireland will lose out the most if global tax reforms agreed at this month's G7 meeting set a floor on corporate tax rates and allow countries to apply a levy on companies where they generate income, according to new research.
The reforms will leave Ireland as one of the most highly indebted economies in Europe, with the Irish government forced into difficult trade-offs as its high concentration of corporate tax receipts from a few key multinationals make it vulnerable to relocation decisions, a study from Oxford Economics found.
Other countries set to lose out include the Netherlands and Luxembourg, while the continent's more advanced economies of Germany, France, Italy and Spain stand to be the main winners from the proposed tax reform.
“Beyond the impact on public finances, it’s clear that the reform process could affect these countries’ (Ireland, Netherlands and Luxembourg) economies and employment, particularly if multinationals relocate profits and investments as a result,” according to the study.
Hailed as historic by the countries that brokered the agreement, the G7 deal is made up of two pillars: the first would see companies pay a percentage of their profits in markets where they make large gains, despite a low corporate presence, while the second is a global minimum corporation tax of 15 per cent.
Under the first pillar, the G7 agreed that governments should have the right to tax at least 20 per cent of the profit earned in their country by a multinational over a 10 per cent margin.
The second pillar agrees on a global minimum tax, giving countries the right to add a top-up tax on company profits in countries with tax rates lower than the global minimum.
However, to make this agreement a reality, the proposal then needs to be evaluated by the 139 countries negotiating the OECD/G20 Inclusive Framework on Base Erosion and Profit Sharing, known as BEPS 2.0.
Oxford Economics said the need for a shake-up of the international tax system is “acute” after the pandemic delivered a huge hit to public finances around the world, while public dissatisfaction with aggressive tax planning by multinationals has grown.
However, for Ireland, which currently has a 12.5 per cent corporate levy, any reform would be costly.
The research group assessed which countries would win or lose from a BEPS framework by assessing five metrics, such as how reliant a country is on corporate tax revenue, what their corporate tax rate is and their foreign direct investment position.
While corporate taxes are a modest source of revenue in most countries, they accounted for around 15 per cent of Luxembourg’s total tax revenue in 2019 and 14 per cent of Ireland’s, with that figure rising to 21 per cent in 2020. Corporate taxes accounted for 9 per cent of the Netherlands’ tax revenue in 2021.
Oxford Economics found that more one-third of multinational profits were booked in the Netherlands, Ireland and Luxembourg, but in aggregate these countries amount to less than 5 per cent of Facebook users and e-commerce revenue with the countries set to lose out if pillar one is enforced.
However, Germany, France, Italy and Spain would win in this scenario as their combined share of US multinational profits booked in Europe stood at 7.6 per cent while their combined shares of Facebook customers and e-commerce revenue were above 40 per cent.
FDI analysis also shows Ireland, Luxembourg and Ireland accumulating large FDI stocks relative to the size of their economies, which indicates a considerable amount of investment is driven by multinational tax planning strategies.
“Relative to a no-change scenario, the BEPS 2.0 scenario will push these countries’ debt ratios higher, with a cumulative impact on debt-to-[gross domestic product] of over 6 percentage points by 2028 in Luxembourg, below 5 percentage points in the Netherlands, and 2.4 percentage points in Hungary," Oxford Economic said.
“For Ireland, the hit to the debt-to-GDP ratio is below 5 percentage points but using modified gross national income (GNI) – a more appropriate metric in this case, given the known multinational-related distortions to GDP in Ireland – the hit to the debt-to-GNI ratio is larger – at nearly 9 percentage points by 2028.”
This means Ireland will also be one of the most highly indebted countries in Europe with debt-to-GNI standing at over 122 per cent.
The economic performance of countries dependant on their ability to attract foreign investment could be undermined by the tax reforms, Oxford Economics said, and a larger-than-anticipated shock to economic growth would also hamper fiscal performance.
If the downside risks were to materialise, the Irish government may have to consider raising the corporate tax rate to the new global minimum to compensate for the loss of the tax base, or tightening fiscal policy more generally.
Ireland warned earlier this month that a global agreement could cost it about 20
per cent of its corporate tax revenue.
The country's finance minister Paschal Donohoe has argued that tax competition is a legitimate tool for smaller countries that don’t have the same resources as larger ones, and has pledged to find other policy areas to ensure the nation remains a “very attractive place” for international investment.
