Significant day for Ireland as corporate tax rate set to move to 15%, for larger groups

The decision by the Irish government today to agree to sign up to the latest updated OECD global tax proposals, if not unexpected, represents a momentous day for tax policy in Ireland.

The Cabinet decision paves the way for a new 15% corporate tax rate, likely to apply only to larger groups.  Subject to agreement at EU level, the existing 12.5% rate will thus continue to apply to the vast majority of Irish companies.

The 12.5% rate has been in place since 2003 and has been a cornerstone of Ireland’s tax offering for foreign investment since then.  However uncertainty around the future tax landscape was damaging for Ireland and the certainty that comes with the new proposals will be welcomed by many.

The revised OECD agreement vindicates the approach taken by the Minister when not signing up to the original proposals, which provided for a new minimum tax rate of “at least” 15%.  It would appear that discussions since the publication of the original proposals have led to a much clearer picture, with a fixed rate of 15%.  Obtaining certainty on the longevity of that rate will be critical.

A point often missed is that by signing up to this agreement Ireland is not obliged to increase its corporate tax rate.  In theory, we could sign the OECD agreement and retain our 12.5% rate.  However, by not increasing our corporate tax rate, Ireland would effectively be ceding tax revenues to other countries.

The positives today for Ireland are the removal of uncertainty over the tax rate and the fact that we will continue to offer one of the lowest corporate tax rates in the developed world.  The case for companies to invest in Ireland will remain compelling.  However other non tax factors are likely to play an increasingly important role going forward in retaining and attracting investment here.  These factors include transport, infrastructure, broadband, education and supply of labour. 

While the headline items in the OCED proposals appear to be reaching a consensus point, the detail will be equally critical.  Reaching a consensus on the detail will be challenging and may see the date of implementation pushed out beyond the 2023 target.

However, as the OCED process nears resolution, arguably the greater threat now to foreign investment in Ireland will be any future US tax changes.  While the OCED has landed on a 15% global minimum tax rate, the US may seek to levy tax in excess of 15% on the foreign profits of its overseas subsidiaries.  This would represent a greater threat to both new and existing investment here than the OECD reform package.  While the latest proposed US changes face many challenges before they become law, it’s a process that could have significant implications for Ireland.

While Ireland has played a strong hand in the international negotiations, it is imperative that we continue to make sure our own regime remains as competitive and business friendly as possible, in particular in the current climate.