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Dublin may miss the diversion of Brexit talks

Sunday, 31 January 2021
This is an opinion article by an external contributor. The views belong to the writer.

Ireland’s long and fruitful love affair with multinationals could soon be on the rocks. 

As Joe Biden embarks on his first 100 days in office, the Irish government will be keeping one eye on the President’s approach to the OECD global tax reform process. Developments have been on pause since June after former President, Donald Trump, withdrew US involvement. It is expected Biden will soon reopen talks.

It comes as the EU settles into a post-Brexit world. The immediate focus is to roll out the Covid-19 vaccine as efficiently as possible. However, myriad policy proposals that were delayed while Brexit negotiations took up time and energy are now to be prioritized.

These developments could take many forms, but the one that would impact most heavily on Ireland would be further tax harmonisation. The country currently has a low corporate tax rate of 12.5%. That said, the actual amount paid by multinationals has often been much lower due to generous tax breaks and the use of base erosion and profit-sharing tools. This has contributed to Ireland becoming the European hub for many of the world’s leading tech companies.

It is also worth noting, however, that Ireland has one of the best-educated workforces in the world, as well as having the youngest population in the EU. Nevertheless, if the corporation tax regime is to change, it’s unclear whether the country would remain such an attractive location to invest and do business. 

Corporate tax haven

The Republic of Ireland’s corporate tax policies reached the mainstream this summer after the government successfully appealed a European Commission decision that Apple owed €13.1 billion in back taxes to the country. This solidified a perception in Brussels that the Irish, despite already maintaining a low corporate tax rate, selfishly bends the rules for its own gain. 

But successive Dublin governments have rejected the notion that the country is a tax haven. However, this isn’t an opinion shared across the EU. In September 2020, the Notre Europe Jacques Delors Institute published a report in which Ireland’s tax regime is labelled “harmful”, placing it sixth – ahead of Bermuda – in a list of the world’s 10 main tax havens. It is joined by EU members Luxembourg (2nd) and Belgium (9th).

Moreover, tax reform is a major part of Ursula Von der Leyen’s vision for the EU. Following her confirmation as Commission President in July 2019, she stated that she will “ensure that taxation of big tech companies is a priority,” and “differences in tax rules can be an obstacle to the deeper integration of the single market.” Now that Brexit is behind her, she can prioritise these goals.

Indeed, since March 2019, the European Parliament has officially identified Ireland as one of the bloc’s tax havens. This highlights that while certain elements of increased integration, such as the establishment of a European army, may remain divisive, there is a growing commonality that fairer taxation of multinationals is a pressing issue.

Unlike many EU countries, the pandemic has had a minimal effect on Ireland’s GDP. The Dublin-based Economic and Social Research Institute (ESRI) attempted to explain why this was the case by charting the performance of the economy during the first half of 2020. Its October publication tells the story of two economies. 

The domestic economy, including construction, hospitality and the arts, experienced one of the largest declines in Europe. However, the country experienced export growth across computer services and pharmaceutical goods. Both are strong sectors due to the presence of multinational companies; crucially, they are relatively immune to the pandemic and have remained buoyant throughout. 

Unfair advantage

For this reason, despite having one of the strictest lockdowns with an unemployment rate that peaked at one in every three workers, Ireland’s economy has fared better than most of its fellow member states. But it also demonstrates why some European countries believe the country has an unfair advantage. If they felt it a bit before the pandemic, they certainly feel it now. 

From an Irish perspective, it emphasizes the degree to which the economy is reliant on multinationals. Whether or not the country is overdependent is too difficult to gauge, particularly while the world is still reeling from a Black Swan like the pandemic. However, as domestic business activity continues to suffer – pushing up the national unemployment rate – questions are being asked about the country’s strategic economic planning.

And it is not only from abroad that calls to change Ireland’s corporate tax rules have come; in the last few months, the leading opposition party in Ireland, Sinn Féin, has voiced its assertion that tax reform for multinationals might be a way to generate much-needed revenue as the country begins to plan its post-Coronavirus recovery. 

Sinn Féin is a centre-left party which enjoyed unprecedented success in the country’s February election. Winning the second-highest number of seats, it ran a campaign centred on affordable housing. This resonated across the country, but particularly in Dublin, it being one of the most expensive cities in the world in which to live. 

There are a number of reasons for this – the capital is small, there are simply not enough properties to meet demand, and social housing targets routinely fail. However, some would argue that the high-wage incomes of those employed by the multinationals has increased rent and prices to a point simply unattainable for those not in the corporate sector. 

Again, the pandemic has amplified this notion of two co-existing economies in Ireland. This will likely be an issue upon which Sinn Féin will capitalize in its opposition to the government going forward. Moreover, if the fallout of Covid-19 proves to exaggerate economic inequality, corporate tax reform will likely be a popular policy on which to campaign. 

That said, Irish governments have not been completely idle when it comes to corporate tax reform. The “Double Irish” – a taxation tool which allowed companies to establish a subsidiary in Ireland yet have it tax resident elsewhere – has been phased out. However, the current coalition will do everything in its power to resist any change to the 12.5% corporation tax rate.

Corporate tax reforms 

It is for this reason that Paschal Donohue, the Irish Minister for Finance, has been so committed to the OECD corporate tax reform process – any agreement is likely to be broad, global and, crucial from an Irish perspective, vague. Whereas the alternative could be the introduction of a Common Consolidated Corporate Tax Base (CCCTB) within the EU.

This idea has been flatly rejected by Ireland in the past, with the country saying it would veto any attempt to establish such a policy. However, it is believed French President, Emmanuel Macron, may push for replacing unanimous voting with qualified majority voting for matters of fiscal concern in the future. 

Ireland would likely be joined by the likes of the Netherlands and Luxembourg in opposing such a proposal. But with the UK now gone from the union, the country has lost its strongest and most powerful ally in battling any further tax harmonisation plans.

Therefore, it is now incumbent on the Irish government to ensure the country is perceived as being open to compromise, whether that be with the OECD or in Brussels. This is critical in proving to its European partners that it is willing to acquiesce on matters that promote the betterment of the union as a whole. 

Without it, the country will damage its reputation as one of the EU’s most loyal acolytes, and harden those who already view the country’s tax policies as harmful. Moreover, being proactive in discussions, rather than parroting its objection, would position Ireland front and central during talks.

Brexit unified the EU at a time of unprecedented challenge for the future of the European project. Undoubtedly, internal tensions will now surface as the bloc looks forward. Tough talking lies ahead as Ireland must acknowledge corporate tax reform is inevitable if it is to satisfy its fellow member states, and heed political pressures at home.

It may be the only way to guarantee the love affair between multinationals and the Irish endures.