Profit shifting costs countries $100bn to $240bn in lost tax revenue each year, estimates the OECD, with developing nations particularly losing out. In response, the OECD is leading on the Base Erosion and Profit Shifting – BEPS – initiative to reduce the loss in tax revenues.
BEPS is proposed through two measures. Pillar One addresses the allocation between jurisdictions of rights to levy taxes, while Pillar Two – the GloBE proposal – provides potential rules to deal with low effective tax rates.
Ireland accepts the need for some reform, but not Pillar Two. A spokesman for Ireland’s Department of Finance explains: “We believe that the Pillar One proposals, which seek to agree new approaches to how value creation is recognised and taxed in highly digitalised business models, are better placed to deliver a globally agreed sustainable solution.
“We remain to be convinced that the Pillar Two proposals on minimum effective tax rate measures are appropriate or necessary to address the tax challenges of digitalisation. We are also concerned about the lack of clarity as to the main objective of the proposal. Ireland is committed to examining what actions are needed to address aggressive tax planning, but we do not support proposals which seek to eliminate fair tax competition.
“Nevertheless, Ireland continues to engage positively in the discussions at OECD, and remains open to solutions which respect our right to compete fairly and which respect the legitimacy of Ireland’s longstanding 12.5% corporate tax rate.”
PwC Ireland tax partner Peter Reilly believes both sets of proposals must overcome significant challenges if they are to be implemented. He says: “The two workstreams will both require political agreement by the large power broker countries across the globe. Pillar One seeks to attribute a portion of the profits of certain multinational groups to the jurisdictions in which their customers are based. While there are a number of open questions as to how this will be applied technically, any such proposal would be a significant change from the rules as they currently stand.
“Pillar two, on the other hand, proposes that multinational groups pay tax at a minimum level. This would mean that groups may have to make top-up payments – or other adjustments – to bring their tax up to a minimum level. Again, there is a significant amount of work to be done on the technical elements of this proposal with open questions around whether this minimum basis would be set at a global, jurisdictional, or entity level.
“It is likely that Ireland will be impacted by any of the proposed changes. Any move towards a market basis of taxation could impact our tax receipts and similarly a global minimum tax could also hurt our regime if it was enforced at a jurisdictional level and at a rate greater than 12.5%. However, there is still much to play for and the work being undertaken in the coming weeks and months by the broad range of OECD and non-OECD countries, through the OECD’s inclusive framework, will be critical in determining to what extent these proposals impact Ireland, and indeed other jurisdictions across the world. What is clear, however, is that change is coming and it is likely to be fundamental.”
Aidan Clifford, ACCA Ireland’s advisory services manager, suggests there is no need to panic. “The single competitive advantage of a 12.5% corporation tax has already been eroded by other countries converging towards that rate and by the uncertainty over the BEPs project,” he points out. “Investment decisions are based on projections for many years into the future and those projections already include assumptions over the tax uncertainty caused by BEPs, yet FDI still floods into Ireland. FDI continues because we have strong intellectual property rights, an asset class that can account for the vast majority of an investor’s balance sheet.
“FDI continues because we are the only English-speaking EU country with the capacity to host large FDI projects, including the skilled staff necessary for these projects. And FDI continues because in the area of financial services we are internationally recognised and independently externally assessed as having a robust regulatory and anti-money laundering regime in place; something foreign financial services companies find administratively burdensome, but still very attractive for the reputational benefits that such a regime brings. The absolute amount of corporation tax is likely to decrease, but the tax base will broaden and FDI will continue.”
However, IDA Ireland is concerned at the risk to inward investment as other European countries exploit opportunities to offer low corporate tax rates. Announcing that 250 FDI projects created almost 22,000 jobs in Ireland last year, IDA Ireland chief executive Martin Shanahan warned against taking FDI for granted. “The challenge,” he said, “particularly if international market conditions become more difficult in the years ahead, is to maintain Ireland’s competitiveness and our attractiveness to overseas firms.”