BEPS 2.0 – How It Affects Ireland
On October 8, 2021, around 136 countries signed off on a major international tax agreement that will see the reallocation of taxing rights on the profits of certain large multinational companies and the introduction of a minimum global corporate tax rate.
An introduction to the agreement
The agreement represents the culmination of years of work by the OECD and the 140 members of the BEPS Inclusive Framework, intended to ensure that large digital companies pay tax commensurate with the level of sales they enjoy and that aggressive tax competition between nations is curbed. This work has been undertaken in two workstreams, known as "pillars".
Pillar One will reallocate some taxing rights over certain multinationals from their home countries to the markets where they have business activities and earn profits, regardless of whether they have a physical presence there. This measure targets companies with global sales above EUR20bn and profitability above 10 percent, with 25 percent of profit above the 10 percent threshold to be reallocated to market jurisdictions. This is expected to result in the shifting of USD125bn of taxing rights to market jurisdictions each year.
Pillar Two introduces an effective global minimum tax rate of 15 percent, which will apply to companies with revenue above EUR750m. It is estimated this measure will generate an additional USD150bn in annual tax revenues for governments.
Implications for Ireland
It is difficult to predict at this early stage how these reforms will play out in practice. However, Pillar Two in particular has potential ramifications for Ireland given that its low 12.5 percent corporate tax rate has been a major driver of inward investment and economic growth in recent years. Hence, the Irish Government was initially reluctant to sign up to the minimum corporate tax aspect of the deal.
However, in return for its support for the new reforms, the Government has managed to extract a concession at the negotiating table that will ensure that the minimum tax is set at 15 percent precisely, instead of a rate of "at least" 15 percent. But an important point to note is that while Irish acceptance of the minimum tax appears to be a significant break from previous corporate tax policy, its introduction will leave the overwhelming majority of businesses in Ireland unaffected.
According to the Government, the 15 percent rate will catch just 56 Irish multinationals, as well as around 1,500 foreign-owned multinationals based in Ireland. More than 160,000 businesses in Ireland have turnover below EUR750,000 and these will continue to be taxed at 12.5 percent.
Another positive to take from this development is that for the relatively small number of companies in Ireland that are affected by the minimum tax, the agreement has at least removed some uncertainty over the future international tax landscape following years of negotiations.
This agreement represents yet another major achievement in international tax cooperation.
With regards to Pillar One, development of a multilateral convention is underway, and this is expected to be signed in 2022 ready for implementation in 2023.
Model rules for the minimum corporate tax will also be drawn up in 2022 for implementation in 2023.