Last Thursday, Ireland said it would join an international agreement that sets taxes on profits for multinational corporations at a minimum rate of 15 percent. It is a major shift for the country in terms of tax laws. The country has the European headquarters of many large US pharmaceutical and tech companies including Google, Apple, and Facebook.
Statistically, the increase from the current rate of 12.5 percent to 15 percent might not be large by itself but signing an Inclusive Framework Agreement with Organization for Economic Cooperation and Development (OECD) is actually a two-pillar plan aimed at helping end tax avoidance and making international tax rules fairer and more transparent. The agreement was outlined in July.
The OECD estimates that a 15 percent tax rate would generate some $150 billion in global tax revenue annually and it would help to stabilize the international tax system. Ireland signed the deal ahead of a Friday meeting at the OECD. It was one of 140 countries signing the agreement.
With this agreement, global companies would have to pay taxes in countries where their products or services are sold even if they don’t have a physical presence there. Incidentally, it will apply to multinational companies with revenues above €750 million. However, for companies with less revenue than the benchmark, the current rate of 12.5 percent would continue to remain in effect in Ireland.
In the past decades, Ireland has served as a tax shelter for many large tech companies due to its comparatively low corporate tax rate. Over the years, multinational firms all over the world have typically created Irish subsidiaries of their companies that license their intellectual property on which the subsidiary pays royalties. According to the American Chamber of Commerce Ireland, it is estimated that as many as more than 800 US companies have operations in Ireland. These companies employ about 180,000 people.
Apple’s first Ireland based plan was established in 1980. It now employs around 6,000 people on its campus in the city of Cork. Similarly, Facebook established its international headquarters in Dublin in 2008, and in 2003, Google announced its European headquarters would be in Ireland.
In a statement, Irish finance minister Paschal Donohoe said that the agreement will “address the tax challenges of digitalization.” Donohoe said he believes companies will still choose to locate their headquarters in Ireland. He said “I am confident that Ireland will remain competitive into the future, and we will remain an attractive location and ‘best in class’ when multi-nationals look to investment locations. “These multinational enterprises support our economy with high value jobs, and at the same time, Ireland provides a stable platform and a long proven track record of success for MNEs choosing to invest here.”
The OECD agreement provisions can be expected to take effect from 2023 onwards.