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Home >News >World >Low taxes brought Ireland prosperity. A global tax deal now threatens it.

For years, Ireland has prospered from rock-bottom tax rates that have drawn some of the biggest U.S. companies to set up large operations on its shores.

Now, an effort led by the U.S. to stop tax-avoidance schemes is threatening Dublin, as Washington seeks an international agreement setting a minimum tax rate for big multinational corporations, and reallocating the right to tax some profits to countries where goods and services are sold, rather than where they are made.

Over the past two decades, multinational businesses have flocked to Ireland, drawn by a corporate tax rate of just 12.5%. Most of the U.S. digital giants use the country as their European headquarters. Nine of the world’s largest pharmaceutical companies have significant operations in the country, often making drugs that are sold to the U.S.

Ireland’s low tax rate has helped attract many of the new breed of footloose digital giants that don’t need to be close to consumers to sell to them, and can register their intellectual property—from which their profits derive—just about anywhere.

Now, the U.S. is leading a charge to set a minimum tax rate of 15% on corporate profits, a plan that gained fresh support from the Group of Seven countries meeting in the U.K. this weekend.

Ireland’s government fears that the G-7’s plan for overhauling the international tax system would leave it with a big hole in its budget, and make it less attractive to the many U.S. businesses whose decision to locate in the country has transformed its economic fortunes over recent decades.

But there are signs it is preparing to acquiesce to an overhaul that is strongly supported by most of its major allies, and not least its most important friend, the U.S. Other small countries with low tax rates face similar pressures as years of negotiations steered by the Organization for Economic Cooperation and Development enter a make-or-break phase, with a possible agreement this summer.

“Change is coming," said Thomas Byrne, Ireland’s minister for Europe, in a television interview Thursday. “We’re committed to working with the OECD and see where it goes."

Should the G-7 reforms take effect, other, poorer countries would be barred from following Ireland’s path to greater prosperity. The country used low taxes to attract foreign businesses that brought new technology and better jobs, as well as the funds needed to significantly raise education levels.

“The tax rate in itself was very attractive for a number of years," said Mr. Byrne. “But what’s happened is a lot of those companies that came after the tax stayed for the educated workforce and the pro-business policies."

The G-7 proposal would see Ireland lose a substantial chunk of its revenues from taxing company profits. The Irish government estimates its annual revenues from corporate taxes would be 2 billion euros lower in 2025 than if existing rules still applied, but the independent budget watchdog thinks lost revenue is likely to be around 3.5 billion euros, equivalent to $4.24 billion.

However, the scale of the economic damage would be much more significant if some of the larger U.S. companies decide to leave Ireland. The Irish Fiscal Advisory Council, the country’s equivalent to the U.S. Congressional Budget Office, estimates that the departure of half of the 10 largest U.S. companies would cost the government 3 billion euros in tax revenues, and the loss of more than 10,000 jobs.

But Sebastian Barnes, IFAC’s chairman, said it is difficult to be very sure how negative the impact of the tax changes might turn out to be.

The government gets about twice as much of its tax revenues from companies as do most rich countries, or about a fifth of the total in 2020.

The tax rules the G-7 members want to change were designed in the 1920s for a global economy in which only a small number of businesses had operations—usually factories—in more than one country. Automobile manufacturers were among the leading international businesses, typically building plants in countries with a large number of potential customers.

Ireland didn’t attract much interest then from international businesses. Its home market was too small, and it lacked resources such as coal, oil and iron. It was also geographically marginal to Europe at a time when transport costs were high.

But by the time Ireland cut its corporate tax rate to 12.5% in 1999, there were a growing number of international businesses that didn’t need the raw materials Ireland lacked, and for which proximity to customers was unimportant.

Over recent decades, multinational businesses have grown in size and complexity. Their profits are more readily attributed to pieces of intellectual property that can be moved from one country to another with little difficulty, and their services can be sold in a country without the kind of physical presence embodied in a factory. That has allowed Ireland to attract big companies such as Facebook Inc., Google and Apple Inc.

But economists who track tax avoidance say its low tax rate has allowed businesses to avoid making tax payments to any government. According to Thomas Tørsløv at the University of Copenhagen, and Ludvig Wier and Gabriel Zucman at the University of California, Berkeley, of the $616 billion in profits that were shifted to low-tax countries in 2015, $100 billion was moved to Ireland. That made it the largest destination for shifted profits, ahead of Singapore, the Netherlands, Caribbean tax havens, and Switzerland.

Ireland’s government says it wants to hold on to its 12.5% tax rate, and that the freedom of small countries to offer low taxes is essential to attracting foreign investment by compensating for some of its less appealing features.

“I believe that small countries, and Ireland is one of them, need to be able to use tax policy as a legitimate lever to compensate for advantages of scale, location, resources, industrial heritage and the real, material and persistent advantage enjoyed by larger countries," said Paschal Donohoe, Ireland’s finance minister, in an April speech.

The disappointment over the U.S. move was such that in April, when Treasury Secretary Janet Yellen first outlined the plan, Mr. Donohoe found himself defending President Biden on one of his country’s most popular radio news shows.

“He’s not coming for anyone," Mr. Donohoe said. “He’s not coming for Ireland."

But it isn’t clear whether formally holding on to the 12.5% rate would matter under the Biden administration’s proposals.

The U.S. changes would punish companies that operate in the U.S. and that also benefit from the tax rates below the new global minimum tax. If approved by Congress, the new U.S. system would deny deductions when companies make internal payments to low-tax countries, and that change would effectively tax them. That could be a particular hit for Irish-headquartered companies, many of which have large U.S. operations or are managed from the U.S.


This story has been published from a wire agency feed without modifications to the text

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