The US has announced sweeping changes to its domestic tax laws, including a minimum ‘global’ corporate tax rate for American multinationals. And it wants the rest of the world to follow suit.
The US wants to raise its headline corporate income tax rate from 21pc to 28pc, bring in a 21pc ‘global minimum tax’ for its own multinationals (up from 10.5pc currently) and change how that tax is calculated (per country, instead of globally). It also wants other countries to agree on a similar minimum rate (21pc) for the biggest corporations, in talks led by the Organisation for Economic Cooperation and Development (OECD).
Why is the US doing this?
The new administration is seeking extra revenues to pay for a $2trn jobs and investment plan that President Joe Biden announced last week, and believes the 21pc global minimum tax alone could more than pay for it.
President Biden’s main aim is to reverse a Trump-era corporate tax cut that saw the rate fall from 35pc to 21pc and which introduced two controversial incentives for big companies to shift assets and profits abroad, and thereby reduce the taxes paid at home.
Who is the US targeting in its tax plan?
The US is targeting large companies that generate “excess profits”, which amounts to between 100 and 200. Ireland is home to 650 US companies, including all the big US multinationals, and is a tax haven, according to a US Treasury document published this week.
What is the difference between the US and OECD plans?
The OECD has been trying to work out a fairer way to tax tech giants based on a two-pillar approach: allocating where profits should be booked (pillar 1) and what minimum rate should be paid (pillar 2). The US made a proposal this week suggesting profits be allocated by sales and taxed at 21pc, not just for tech companies, but for all large corporates.
“They want to turn it on a jurisdictional basis, on a country-by-country basis, and that’s something absolutely fundamental,” said the OECD’s tax director, Pascal Saint-Amans. “Doing so, they want the rest of the world to go ahead, to put an end to the race to the bottom. That’s the baseline and they’re very strong on that.”
Who supports this plan?
All the big OECD members: Germany, Italy, France and Spain, all of whom also happen to have taxes on big tech companies. The OECD’s Pascal Saint-Amans says the US proposal can “reboot” the stalled OECD talks. “They have come up with something very innovative, which makes sense a lot of sense, which is to say, ‘Let’s share better the taxing rights on the winners of globalisation.’ And it’s based on objective criteria, rather than activities.”
Will it affect Ireland's corporate tax rate?
Not directly. The US government will collect the taxes from US companies, so it will essentially be a top-up to what companies pay here. However, the OECD plan, although voluntary, could put political pressure on the Government to change its tax rate.
But it’s still unclear who will be paying which taxes, says Gerard Walsh, Partner at consulting firm Grant Thornton. “Are companies are going to work harder to not to be an American company, once they get to a certain scale? Is Stripe an Irish company or a US company? It’s probably a US company because of where the investment is coming from, but we’d probably like to have an argument about that.”
What will it cost Ireland?
It’s difficult to say, as both the US and OECD proposals have to be discussed and agreed, in the US Congress and among the 139 negotiating countries, respectively.
The Government has estimated the OECD moves could cost €2bn over a number of years, which the Central Bank says has been fully factored in to the national finances. Ibec believes the figure is an underestimate, as it doesn’t cost out a global minimum tax. The NTMA told investors this week that the OECD’s pillar 1 plans on profit allocation could chip away at 5pc-15pc of Ireland’s corporate tax base, based on estimates it had seen.
The bigger cost will be to Ireland’s business model, according to Goodbody analyst Dermot O’Leary. “The further the global minimum tax rate moves away from Ireland’s headline corporation tax rate of 12.5pc, the less incentive the low rate offers. Other features, such as access to the large EU market, are also vitally important and will become even more so as these new rules are rolled out. A renewed focus on these other attributes, particularly in the areas of human and physical capital is now required.”
Grant Thornton's Gerard Walsh said multinationals will not simply jump ship. “There are still global markets here. It’s not only a tax argument. You can’t suddenly acquire three decades of experience in pharmaceutical or technology production, or high-value added financial accounting services expertise.”
