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Irish Independent
Irish Independent
Dan White

Donohoe may be looking to kill digital levy as price for Irish tax obedience

Paschal Donohoe’s stance of splendid isolation from most of the rest of the world on higher corporate tax rates isn’t sustainable. With pressure mounting he will have to agree to a minimum 15pc company tax rate sooner rather than later.

This weekend Ireland stands virtually alone in the world. While 132 countries and tax jurisdictions have signed up to the OECD’s proposals for a 15pc minimum corporate tax rate, Ireland has sided with such paragons of global rectitude and transparency as Hungary, Nigeria, Kenya and Barbados in refusing adhere to the new global order.

With the United States, the UK, Germany, France, even Alexander Lukashenko’s Belarus and Vladimir Putin’s Russia, all having signed on the dotted line, our Finance Minister Paschal Donohoe is one of only a handful of holdouts.

Last Thursday Donohoe dug his heels in, telling RTÉ Radio’s Morning Ireland programme that: “We are not in that [the OECD] agreement”. The Minister went on to say he was still “making the case for 12.5pc”.

The pressure on Ireland to get on board with a minimum 15pc tax rate has been ratcheting up ever since the G7 leaders agreed to the proposal at their meeting in Cornwall at the beginning of last month. Then, in case we in Ireland hadn’t already got the message, the G20 finance ministers also came out in support of a 15pc rate eight days ago.

Meanwhile US Treasury Secretary Janet Yellen has been busy. She met with Donohoe and other EU finance ministers in Brussels on Monday. Afterwards both sides had honeyed words for each other but the message to Ireland was clear: get with the programme.

Don’t be deceived by Yellen: while her public persona may be that of a genteel elderly aunt, you don’t get to the top of the US financial policy-making apparatus, first as Barack Obama’s head of the Fed and now Joe Biden’s Treasury Secretary, without being as hard as nails. She has means of persuasion available to her that Donohoe doesn’t even want to think about.

So why is Donohoe seemingly so determined to stick it out in the naughty corner?

Ireland’s reliance on corporation tax revenue, more than 80pc of which comes from tax-sensitive US multinationals is part of the reason. In 2019, the last full year before the pandemic, we raked almost €11bn in corporation tax, getting on for a fifth of total tax revenue.

Since then, while Covid-19 has clobbered revenue from other streams, with total tax revenues falling by almost 4pc in 2020, corporation tax revenue has powered ahead, increasing by a further 9pc to €11.8bn last year.

This year is also looking good. While most corporation tax is paid in November, the IDA published its first-half figures last week. These showed inward investment has almost recovered to pre-pandemic levels with 142 new foreign direct investment projects with a combined employment potential of more than 12,500 jobs being won in the first six months of 2021. Total employment at IDA-supported companies stood at 257,000 at the end of 2020.

“The first half was very strong. We are back to the levels of growth seen between 2015 and 2019. FDI [foreign direct investment] in Ireland has been extraordinarily resilient. Total FDI fell by one third last year. Ireland increased its market share of FDI in 2020”, says IDA chief executive Martin Shanahan.

With the IMF estimating that Ireland could lose up to half of its corporate tax revenue in a worst-case scenario under the new OECD rules, Donohoe wouldn’t be doing his job if he didn’t fight tooth and nail to protect those revenues and jobs. However, as Kenny Rogers once sang: ‘you’ve got to know when to hold ‘em, know when to fold ‘em’.

As someone who was a high-flyer with consumer goods giant Procter & Gamble before entering public life, Donohoe is several cuts above most of his fellow politicians. Despite Thursday’s outburst, he doesn’t need to be told that dying in a ditch, as part of a doomed struggle to prevent an increase in our company tax rate from 12.5pc to 15pc, doesn’t make a whole lot of sense.

So what’s his exit strategy? While the US and the larger EU countries are united in their determination to increase the minimum company tax rate to 15pc, they differ on the EU’s proposed digital levy which would impose a 0.3pc tax on the online sales of companies with a turnover in excess of €50m in the bloc.

Washington is bitterly opposed to the digital levy, which it feels unfairly targets the US tech giants such as Google, Facebook and Amazon. It has threatened retaliatory tariffs against European imports if the levy goes ahead. While Ireland and the US are on opposite sides of the company tax debate, this country is also opposed to a digital levy and helped scupper a previous EU proposal in 2018.

Last week the EU delayed the publication of detailed digital levy proposals, which had been due this month, until at least October. Is it possible to see the first outlines of a deal, where Ireland agrees to raise its company tax rate to 15pc in return for the EU binning the digital levy?

While an increase in our company tax rate to 15pc won’t do Ireland any favours, it mightn’t be the end of the world. It will come at the same time as the Biden administration is hoping to increase the US to 28pc. With exchequers everywhere under pressure to increase taxes in the wake of the pandemic it might be a good idea not to write off the IDA just yet.

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