The Organisation for Economic Cooperation and Development (OECD) announced a new programme of work, which described as BEPS 2.0. It introduces further reforms to the framework for international taxation. BEPS 2.0 follows the OECD’s project for countries to adopt in order to counteract Base Erosion and Profit Shifting (BEPS) project by companies operating internationally (MNCs). OECD-led work on taxing the digital economy may radically change the Irish business regime, therefore the Iris Business Group (IBEC) warns Ireland to focus on its nontax attractiveness to remain competitive once those changes are in place.
The OECD’s base erosion and profit-shifting project represents the biggest change in the global corporate tax system in a century, but that work is not yet finished, pointing to ongoing OECD-led discussions to overhaul the international tax rules to tax the digital economy, a process nicknamed BEPS 2, or BEPS 2.0.
Countries are negotiating to find consensus on a common approach to adapt the international tax system for the digital age by the end of 2020. That approach will adopt two pillars, one to address the allocation of taxing rights between countries and one that could lead to a global minimum effective tax rate.
According to the Ibec’s report, BEPS 2.0’s proposals, in particular Pillar 1, will mean some re-allocation of taxing rights to larger importing countries and, as a small exporting country, consequently Ireland will lose a proportion of its corporate tax base. Further, in relation to Pillar 2, which seek to introduce a minimum effective corporate tax rate globally, it is set at a level which focuses on addressing actual profit shifting concerns and does not infringe on our right to set competitive tax rates. These proposals are gaining significant momentum amongst the G20 and many of Ireland traditional allies on tax issues.
Ibec’s observations about the effects of BEPS 2.0 come amid a high-profile U.S. Trade Representative hearing on August 19 about its section 301 investigation into France’s controversial digital services tax, and ahead of the G-7 leaders’ summit August 24-26, where the French G-7 presidency hopes to reach agreement on a common approach to tax the digital economy.
Irish Finance Minister Paschal Donohoe has expressed concerns about the BEPS 2.0 work in the past, especially in the context of the country’s overreliance on corporate income tax. Donohoe generally supports the ongoing negotiations but has repeatedly expressed his opposition to any solution involving global minimum taxation, which could threaten small economies like Ireland’s.
It is pertinent to note that Ibec’s report is to address the concern of ireland’s main attraction which rely on the low tax rate. Ireland is the biggest “tax haven” in the world used by multinationals to shelter profits, according to a new study by economists from the United States and Denmark. Ireland’s 12.5 percent corporate tax rate has given the country a major advantage in the past 20 years, but average corporate income tax rates in developed countries have dropped significantly, from 32.5 percent in 2000 to 23.9 percent in 2018. Countries that now have effective corporate tax rates within 10 percentage points of Ireland’s rate include Denmark, Finland, Israel, Sweden, and the United Kingdom, according to the report. The United States, with its recent corporate tax rate cut under the Tax Cuts and Jobs Act, is also poised to ratchet up the pressure, it added.
Therefore, competing in tax rate would be difficult for Ireland. Instead of focusing on lowering taxes to attract investor amidst the application of BEPS, Ireland should improve the non-tax features such as education, innovation, and infrastructure investment.