Could Ireland really thwart the introduction of a global minimum corporation tax rate?

Some have suggested opposition from Dublin could derail the drive for a solution to multinational tax avoidance. But is that really a danger? Ben Chu investigates

The Irish finance minister Paschal Donohoe has reiterated Dublin’s resistance to any minimum corporation tax rate (EPA)

The recent backing of Joe Biden’s White House for a global minimum corporation tax rate has raised hopes of a cure for the long-running ailment of rampant multinational corporate tax avoidance.

Yet some have suggested the opposition to the plan from Ireland – a country that has successfully used its low corporate tax rate to attract many multinationals to base themselves on its territory – could derail the drive for a solution.

Ahead of a key meeting of G7 finance ministers on the issue next week, the Irish finance minister Paschal Donohoe has reiterated Dublin’s resistance to any minimum corporation tax rate breakthrough.

“We do have really significant reservations regarding a global minimum effective tax rate status,” Mr Donohoe told Sky News, predicting that Ireland’s current 12.5 per cent rate would remain in place for the foreseeable future.

So: is it conceivable that (relatively) little Ireland might frustrate the introduction of a global minimum tax rate?

This is a political negotiation between national states, each with their own often diverging interests, so it’s impossible to be definitive. It’s also the case that a minimum corporation tax rate would be an unprecedented innovation. Yet there are grounds for being sceptical that Ireland’s opposition alone will prevent progress.

To grasp why, it’s vital to understand the somewhat complex mechanism through which a minimum corporation tax would come into being.

This would not be a case of every nation signing up to a binding agreement to put a floor under their own headline tax rates.

Rather, it would be achieved through a new approach being negotiated at the OECD (a multinational network comprised of mainly rich countries) and the G20 group of nations.

The negotiations are part of the “Base Erosion and Profit Shifting” (BEPS) initiative (which began in 2013, with the current phase beginning in 2019) and is designed to prevent multinational companies artificially shifting their profits (through accounting techniques) into jurisdictions where they can pay the lowest amount of tax.

There are two “pillars” to BEPS.

Under Pillar 1, countries would agree to implement a range of specific measures to ensure the corporation tax due from the largest and most profitable multinationals better reflects where their profitable commercial operations are located.

And under Pillar 2, states would have the ability to top up the corporate tax bill of a firm if it was going to pay anything lower than a global minimum rate as result of transferring profits to a subsidiary abroad.

It is the second which would represent a de facto minimum tax rate, with a 15 per cent levy now being proposed by the US.

And, crucially, the introduction of Pillar 2 would not require a change in the OECD tax treaty, something that would need unanimity from all members (including low corporate tax jurisdictions such as Ireland, the Netherlands and Luxembourg).

“It can work as a coalition of the willing – that’s the reason Ireland can’t block it”, explains Alex Cobham of the Tax Justice Network.

“If all the G7 and major G20 economies join that coalition you’re talking 80-90 per cent of the world economy.”

The G7 does not have a formal role in the BEPS initiative, but agreement among its membership is seen as crucial for driving agreement in the broader G20 and OECD.

It’s true that there would be nothing to prevent those outside the coalition – perhaps including Ireland – from maintaining their low headline corporation tax rates.

But with the major economies within the coalition topping up the tax rates of multinationals operating from their territories it would eliminate the incentive for companies to engage in this practice.

“Ireland could keep a low tax rate but if it’s on French and German and US [multinational] activity those countries will simply top up the tax and there will be no greater incentive to be in Ireland and Ireland won’t get the revenues,” says Mr Cobham.

It’s true that Ireland can block Pillar 1 of BEPS, which does require OECD treaty change.

But analysis suggests Pillar 1 would bring in only a fraction of the additional revenue of Pillar 2 in any case.

A complication is that the European Union, which is represented in the G20, wants its own position to be unanimous on both pillars. And for the EU itself to get unity does require Ireland’s agreement.

However, Mr Cobham argues that even if there is no EU unanimity, individual EU members could still introduce Pillar 2 in a way which would not interfere with their EU obligations.

And if the likes of France, Germany and Italy signed up for Pillar 2, as they have indicated they will, the global coalition of the willing would still be perfectly viable.

One final upset could be from domestic American politics.

The Biden administration will need to get its own plans to raise America’s headline corporation tax rate to 25-28 per cent through the US Congress, where the Democrats have only slimmest of majorities since last year’s elections.

Some of the more cautious Democrat members of Congress might be worried about damaging the competitiveness of US multinationals.

The Biden administration would greatly benefit from being able to point to a rock-solid G20/OECD agreement on a corporate minimum tax rate to assuage those fears.

Any suggestion of fragility around the coalition – perhaps combined with pressure from the Irish-American lobby in Washington – could be an obstacle to the passage of the legislation. But set against this are the clear benefits to the US exchequer from collecting greater tax revenues from US multinationals through these reforms.

“An Irish opposition being critical in Washington is not helpful, but I don’t think it’s enough to stop it,” says Mr Cobham.

Indeed, the question engaging analysts and campaigners is not whether Ireland will thwart a breakthrough but whether it will come at the meeting of G7 finance ministers next week, or whether it will be held back to be announced at the full leaders’ summit in Cornwall later in the month.