The Organization for Economic Co-operation and Development (OECD) two-pillar tax reform plan is essentially a huge puzzle. Agreement on a single element, the 15 percent rate, is welcome, but many other elements need to be developed, agreed upon and linked together before the bigger picture becomes clear.
Yes, the recent agreement brings elements of certainty for Ireland. The global minimum effective tax rate will be capped at a maximum of 15%, the EU will not seek to increase this rate by adorning the bloc’s legislation, and Ireland will be able to keep 12.5% for, generally speaking , the national economy and small multinationals.
But make no mistake: the deal didn’t spell out how all of the pieces of this multifaceted puzzle fit together, let alone what all the pieces will look like. The big picture remains far from clear and the certainty seems far away.
What comes next is the real question. While the rate is important – and we wholeheartedly commend the efforts of Finance Minister Paschal Donohoe to secure that rate as part of the larger deal – we have to remember that how you calculate the benefits that will ultimately be equally important is subject to the 15 percent rate.
The key word to remember with the rate is that it is an “effective” rate, not an overall or statutory rate. This means that the tax burden divided by taxable profits must be at least 15 percent.
The calculation of taxable profits will be different under the second pillar (the part of the OECD agreement that deals with the overall minimum effective corporate tax rate) from the normal method of calculating taxable profits in Ireland. The details of the calculation of the second pillar tax base have not yet been fully determined but, based on what we hear, the necessary adjustments will be complicated.
Missing piece of the puzzle
The calculation of the new taxable profits (or the base) is a missing piece of the puzzle. Details on how this will be done are expected to be announced in November. Given the technical nature of this part of the plan, don’t expect this ad to make the headlines in the same way as the rate.
Complex, legalistic (and for most non-taxing, boring) tax rules don’t grab the headlines in the way countries that haggle over numbers do. But it is absolutely essential that this next technical stage of the discussions runs smoothly and that companies have a set of rules that can be applied in practice and without undue burdens.
It is only once the technical rules are agreed that the big picture comes into play.
Another major piece of the puzzle is how the United States will seek to introduce the rules domestically. Much will depend on what is agreed upon in terms of proposed US tax reforms, their scope, and what they can get Congress to buy into.
A key point that needs to be clarified is whether the US Global Intangible Low Tax Income (GILTI) rules, which impose a minimum tax rate on the foreign profits of multinational corporations headquartered in the United States, will be treated as a scheme equivalent to the second pillar.
Treating GILTI as an equivalent regime would eliminate the need to apply additional additional taxes in Ireland or another intermediate location under Pillar Two rules for multinationals headquartered in the United States. If GILTI is not treated as equivalent, the political commitment of the United States to the second pillar risks weakening considerably.
Prepare for more conflict
Regarding the first pillar (the part of the OECD agreement that aims to redistribute tax to markets), we anticipate that the fight for the repeal of unilateral tax measures, mainly taxes on digital services , is far from over – especially with regard to an EU – a large-scale digital tax, details of which will be announced soon.
The first pillar of the OECD plan has not made much noise in recent weeks.
However, it also requires a series of decisions to be made, including who ultimately pays for the first pillar. Ireland could find itself in a difficult situation if Irish entities end up bearing the brunt of the Pillar 1 payment on behalf of multinational groups.
This will inevitably lead to an increase in international tax disputes between Irish and global tax authorities. While an effort has been made in the agreement to prevent these disputes from arising in the first place, reallocating profits according to a mathematical formula, without a clear guiding principle, will exhaust the resources of the tax authorities in dealing with complex disputes and will add time and monetary cost to businesses in applying the rules.
While we welcome the clarification of both the effective rate of 15% and the maintained rate of 12.5%, the impact of the new OECD rules on our economy and on the business community is far from over. be sure, and we shouldn’t be complacent about anything that remains subject to change.
We have a long and challenging road to reach the holy grail of a certain tax system that allows Ireland to provide a competitive and top-notch investment location for businesses.
We can do it. But without more clarity and agreement on the key pieces of this puzzle, tax security remains out of reach.
Susan Kilty is Tax Manager at PwC Ireland
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