Government plans to abandon 12.5% tax rate for fear of ‘pariah’ status

Ireland is set to abandon its long-held 12.5% corporation tax rate later this year, several senior Government sources have suggested.

While no formal government decision has yet been made, several Government sources have told the Irish Examiner it is the expectation that our major tax incentive for large multi-national firms is set to be relinquished as part of a new OECD tax agreement in October.

Earlier this month, the G7 and OECD countries reached agreement but not unanimous consensus on the key aspects of a global tax deal which seeks to introduce a minimum rate of 15%.

Finance Minister Paschal Donohoe has so far only signalled a willingness to discuss the impact of a new global minimum rate of 15%, but behind the scenes there is believed to be a “clear direction of travel”.

“Ireland will continue to make the case for the rights of small countries to retain some competitive advantage, but we don’t want to be an outlier in terms of a global tax deal,” a senior coalition figure said.

While there is a concern about the potential impact on Ireland of a move away from the 12.5%, ministers speaking to the Irish Examiner have made clear that a new global rate of 15%, undermines the robustness of Ireland’s rate.

Therefore, they say it is not worthwhile becoming an “international pariah” so there is momentum behind signing up to the 15% with “some flexibilities”.

At a meeting of Fine Gael ministers this week, it is understood that junior finance minister Patrick O’Donovan raised concerns about the issue and the potential impact of the increase on multi-national investment in the regions.

The Department of Finance told the Irish Examiner that Ireland was broadly supportive of the OECD agreement but signalled a reservation in the respect of commitment to a rate of ‘at least 15%’ for a global minimum effective tax rate.

Ireland is ‘engaging constructively’ in discussions

Ireland has consistently said that it wants to be part of the agreement at OECD, the department said.

“Negotiations on a comprehensive agreement are continuing and Ireland is engaging constructively in these discussions. There are important issues which still need to be addressed in these discussions,” the spokesman said.

The department said it will launch a short public consultation on the proposed OECD agreement in the coming days.

As recent as May, Mr Donohoe insisted the 12.5% rate was a long-term commitment for the government. 

Asked in an interview with Sky News whether he expected the 12.5% rate to remain in place for the next five to 10 years the Minister said: “Yes, I do. I do anticipate that there will continue to be a place for a rate such as this and for low rates.”

At the Oireachtas Finance Committee on Wednesday, Mr Donohoe said: “I think it’s important to realise and recognise that we are still in a political process here that is due to conclude in October.”

“And I think that is the best time to evaluate where we stand, what could be the effect and our reputation will be well after that point, if an agreement is reached, and by, by the metric of who’s actually implemented the agreement,” he said.

IDA Chief Executive Martin Shanahan has said while the State’s 12.5 per cent corporation tax rate was an important factor in attracting FDI, it is just one factor.

Meanwhile, Fine Gael has secured a major Budget win with one in three euros spent next year going on tax packages.

As a result, €500 million of the €1.5bn of unallocated monies will go on reducing taxes. Covid spending is to be slashed by almost €7bn, as the Government hopes that as supports are phased out the cost of Covid-19 will drop. Housing will also receive a significant funding boost in October’s Budget. 

The measures are outlined in the Government’s Summer Economic Statement which sets out medium-term budgetary strategy and outlines the fiscal parameters within which discussions will take place ahead of Budget 2022.

The document states that “pandemic-related supports must be unwound as appropriate over the course of this year and next”.

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