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Budget 2022 has come at a time of significant international tax reform and raises questions in many people’s minds about the impact it will have on the future attraction of Ireland for foreign direct investment.  Tom Woods, Head of Tax with KPMG in Ireland, explains.

The Budget announced by Ministers Paschal Donohoe and Michael McGrath had the stated aim of investing in our future, of meeting the needs of today, while putting the public finances on a sustainable path. Last year, the Budget was shaped by the risks posed by Brexit and Covid-19.

This year the focus turned to the final stages of the Government support for the pandemic recovery, restoring public services and living standards, and repairing the public finances.

Key tax measures

The key tax measures announced were €0.5 billion of an overall budgetary package of €4.7 billion. To deal with the continued impact of Covid-19 on certain sectors of the economy, the minister announced the extension of both the Employment Wage Subsidy Scheme (EWSS) until 30 April 2022 and the reduced VAT rate of 9% for the tourism and hospitality sector until 31 August 2022.  There were also supports announced for innovating companies with a new innovation equity fund being established and the introduction of a 32% digital gaming tax credit, subject to EU approval.  The Employment Investment Incentive Scheme has also been enhanced and extended for a further three years.

But what does this mean in the wider context of Ireland signing up to the OECD tax deal and the future of FDI?

FDI value

The value of foreign direct investment to Ireland cannot be understated.  For decades, in fact as far back as the 1950’s, a cornerstone of our industrial policy has been a low corporation tax rate.  Our current rate of 12.5% stands as the third lowest in the OECD.  This policy has served us well and has supported substantial overseas investment into Ireland.   There is no doubt that over the years the other benefits that Ireland offers have gained much more prominence as relevant factors supporting investment here and are now a much greater influence on such decisions.

From 1995-2004 over US$90bn was invested into companies in Ireland.  In the midst of the recession, between 2009-2013, a further €125bn was invested.  By 2012, foreign multinationals accounted for 79% of all corporation tax receipts.  Investment continued to flow and grow and hit US$528bn between 2015 – 2020.  In 2020, foreign owned multinationals paid €9.7bn of corporation tax, accounting for 82% of all such payments.  These multinationals also accounted for 32% of all corporate employments and paid €10.5bn in employment taxes and PRSI (49% of the total from all companies) in 2019.  These are extraordinary contributions, over €20bn, and ignore the contributions of many businesses in the domestic economy that exist because of the business generated from these companies.  It is therefore understandable that any proposals that could impact on our attractiveness to foreign investment are robustly challenged and debated.

BEPS 2.0 support

Last week in the offices of the OECD in Paris the BEPS 2.0 proposals were being finalised and endorsed by 136 members of the Inclusive Framework.  Ireland provided its support.

BEPS 2.0 consists of two proposals – the first, Pillar One, allocates taxing rights to market jurisdictions where some of a company’s profits are earned from customers in that jurisdiction.  This pillar addresses issues arising from the digitalisation of economies and the fact that many companies no longer need physical presences in a country, and therefore a tax nexus, to do business there.  Under Pillar One, 25% of the relevant profits above a 10% return are to be allocated to the market countries.  This allocation will only apply to groups with a global turnover of €20bn or more, with this turnover threshold to reduce to €10bn in seven year’s time, assuming a successful implementation. It is expected to initially impact about 100 groups globally.   While this will result in a redistribution of tax revenues away from Ireland, the Government accept that the international tax system needs to be updated to address the digital economy and have therefore supported this proposal.

The second proposal, Pillar Two, applies a minimum effective tax rate to profits earned by groups with a turnover of €750m or more.  The proposal endorsed by 134 members of the Inclusive Framework back in July contemplated a rate of at least 15% applying to the profits of these large in-scope corporates.  Ireland reserved its position at the time and there has been much debate and discussion about the merits of doing this.  We firmly agreed with the decision.   While it was never likely that Ireland could persuade all 134 members to change their mind and reduce the rate to 12.5%, it enabled Ireland to work with other countries that also wanted to keep the minimum rate at a relatively low level to negotiate the rate to 15%, the lowest that would be acceptable and this has been achieved. 

A commitment to retain the 12.5% for out of scope companies was also obtained, thereby keeping 99% of companies operating here outside of these new rules.  This is a very big win and will give more certainty and stability to the future of our tax regime going forward.  

Not losing out

It should be noted that those large in-scope companies do not lose out by Ireland agreeing to Pillar Two.  Pillar Two sets out a range of ways in which the profits of these multinationals would be taxed at the minimum rate.  The simplest way is for all countries to have an effective rate of at least 15%, so irrespective of where the income is earned, the profits would not be taxed at a rate below 15%.  However as setting a tax rate is a sovereign right, countries cannot be compelled to change their rates.  Therefore, where countries retain effective rates lower than 15%, Pillar Two in the first instance recommends that foreign parent companies collect additional tax on those undertaxed profits to bring the taxation on those profits to an effective 15% rate.   Alternatively, Pillar Two provides for other countries to limit tax deductions or withhold tax on payments made by companies in those countries to the affected companies.  So irrespective of whether Ireland signed up to Pillar Two, these large corporates would be paying this tax anyway given the level of support for the deal.  By signing up to the deal, Ireland at least benefits from the additional tax revenue.  

Quantifying effects

It is difficult to quantify the net effect of both Pillar One and Pillar Two on corporation tax receipts and it will ultimately depend on exactly how the reallocation of profits to market jurisdictions under Pillar One and the effective tax rate under Pillar Two are calculated. The Government estimate that it could result in a reduction in corporation tax of up to €2bn.  We certainly hope that it won’t cost that much and time will ultimately tell.  Keeping Ireland attractive to business and workers and supporting a growing economy will help manage down this cost.    

In my view, the changes should keep us attractive as a location for investment.  15% is still an attractive rate and comparatively more so given some of the bigger economies like the US and UK are raising their corporate tax rates.  When you include all of the many other benefits of investing in Ireland, the case remains compelling.  The support Ireland showed for the sector underscores the commitment the Government has to business and will help attract foreign investment well into the future.

This article originally appeared in the Business Post Budget 2022 magazine in association with KPMG, and is reproduced here with their kind permission.

Get in touch

The pace of change is challenging leaders like never before. To find out more about how KPMG perspectives and fresh thinking can help you focus on what’s next for your business or organisation, please get in touch with Tom Woods, Head of Tax & Legal. We’d be delighted to hear from you. 

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