The global corporation tax rate: what are the implications for Ireland?

The new 15 percent global corporate tax rate will have a big impact in countries across the world, but arguably nowhere more so than in Ireland’s small FDI-reliant economy. Three Chartered Accountants dissect the implications of the tax change and how it could reshape our economic landscape.

Paul Dillon, Tax Partner, Duignan Carthy O’Neill

Ireland has signed Pillar Two of the OECD agreement on taxation into Irish law, introducing a minimum corporation tax rate of 15 percent for large domestic groups or multinationals with revenue of €750 million or more in at least two of the four preceding fiscal years.

The current 12.5 percent corporation tax rate will remain in place for most companies in Ireland, with certain groups having to pay a top-up tax of 2.5 percent – the qualified domestic top-up tax (QDTT) – directly to the Irish exchequer.  

The QDTT is initially due for periods commencing 1 January 2024, but the first payments will not be made until 2026. 

The rules are complex and will require significant investment from the companies it applies to so that they can understand the scope and application of these new provisions. 

In the short-term, Pillar Two provisions could lead to the Irish exchequer collecting additional tax as it is estimated that close to 1,600 entities in Ireland will be liable to pay QDTT.

If a group entity is liable to pay QDTT in a jurisdiction such as Ireland, the top-up taxes due outside Ireland are expected to reduce to zero. These safe harbour rules should protect the Irish tax base and result in more taxes being collected in Ireland in the short term.

It is also worth noting that any QDTT paid in Ireland should be allowed as a credit against what is termed an Income Inclusion Rule (IIR) or Undertaxed Profit Rule (UPR) tax liability a group is due to pay in other jurisdictions. This will provide additional protection to the multinational tax base in Ireland.

In brief, the IIR requires the ultimate parent entity of the group to determine if its constituent entities have paid the minimum 15 percent tax in each jurisdiction and pay the additional taxes in its jurisdiction to meet the minimum tax rate. 

The UPR taxes groups that are not resident in a jurisdiction that has adopted the Pillar Two rules and applies to groups not paying the minimum 15 percent tax. The UPR rule will require an increase in tax at the subsidiary level. 

In the short term, most economic commentators believe that the new Pillar Two provisions will lead to Ireland collecting additional tax. In the longer term, the taxes collected will depend on the economic presence of groups in Ireland and how they organise their structures going forward. 

The impact of the proposed Pillar One changes, which will reallocate some taxing rights based on market jurisdictions, may ultimately have an adverse effect on the tax base in Ireland and could, in the longer term, reduce the taxes collected from multinationals in Ireland.

Alma de Bruijn, Tax Director, PwC Ireland

The introduction of a global minimum effective tax rate of 15 percent has come after a lengthy period of negotiations as part of implementation of Pillar Two. Ireland was actively involved in these negotiations, securing the removal of “at least” with respect to the rate and thereby ensuring that the rate could not be increased in the future.

The newly introduced provisions, which will lead to an effective 15 percent tax rate, could lead to incremental Irish corporate tax for many companies, i.e. above Ireland’s long-standing corporate tax rate of 12.5 percent. 

Ireland’s corporate tax policy has generally focused on ensuring substance-based investment, coupled with a rounded tax regime of incentives. 

A significant number of multinationals are well established in Ireland, and while Pillar Two may increase the effective tax rate of multinational groups, the new rules should not act as an incentive to move investment out of Ireland in favour of other OECD jurisdictions. 

This is supported by the OECD’s recent taxation working paper, The Global Minimum Tax and the Taxation of MNE Profit, in which a key finding was that the global minimum tax substantially reduces the incentives to shift profits. 

It is also worth noting that the domestic effective tax rate applicable in many other jurisdictions will significantly exceed the 15 percent effective rate that will apply under Pillar Two.

While the introduction of the new global minimum tax rate marks the biggest change in the corporate tax landscape in a generation, it is a change that has been embraced by Ireland. 

Ireland has been clear in its commitment to the implementation of the Pillar Two rules from the outset and has consulted with stakeholders throughout the implementation process. This commitment and consultation have offered certainty to businesses. 

I think that, despite the change in rate for large multinationals, Ireland will continue to remain competitive with a highly educated, skilled workforce, direct access to the EU market and international supply chains, and a stable business environment that promotes investment.

James Smyth, Partner, Deloitte 

Following the adoption of the EU directive on the adoption of a global minimum tax by EU Member States, Ireland has taken steps to enact the required legislation to comply with the provisions of the directive. 

The Irish legislation on the global minimum tax came into effect from the start of this year.

The reality for any impacted group is that the rules are very complicated and require careful analysis to assess the impact fully. It’s fair to say that the level of complexity in the new rules is not like anything we have seen before in the tax world and requires an increased level of interaction between global tax and finance teams.

The likely impact on Ireland is difficult to assess and there are certainly different views on it. The 15 percent minimum tax rate could impact Ireland’s competitiveness, but the wider offering for businesses looking to invest in Ireland extends far beyond tax alone, including an English-speaking population, an educated workforce, membership of the EU and favourable business conditions. 

The mechanics of how the rules work are such that the imposition of the global minimum tax rate of 15 percent in Ireland should not automatically result in an additional tax liability of 2.5 percent (being the differential between Ireland’s headline rate of corporation tax of 12.5 percent and the new global minimum tax rate of 15 percent). 

The devil is in the detail and the new rules could result in a neutral or positive impact on Ireland.