BEPS 2.0 – Implications for Ireland
On the 8th of October 2021, 136 countries put pen to paper to a major international tax agreement. This agreement (BEPS) will see the reallocation of taxing rights on the profits of certain large multinational companies. It will also see the introduction of a minimum global corporate tax rate.
BEPS 2.0 Introduction.
The agreement is the result of years of work and negotiations by the OECD and the 140 members of the BEPS Inclusive Framework. The agreement intends to ensure that large digital companies pay tax commensurate with the levels of sales they enjoy while also curbing the aggressive tax competitions between nations. Two workstreams, known as “pillars”, were undertaken for this work.
Pillar One will see the reallocation of some taxing rights over certain multinationals from their home countries to the markets where that have business activities and earn profits, irrespective if they have a physical presence there or not. This aspect targets companies that have global sales above €20bn and profitability above 10%, with 25% of the profit above the 10% threshold to be reallocated to market jurisdictions. An expected $125bn of taxing rights is to be shifted to market jurisdictions each year.
Pillar Two introduces an effective global minimum corporate tax rate of 15% applicable to companies with revenues exceeding €750m. Estimations show that this measure will generate an additional $150bn in annual tax revenues for governments.
Implications for Ireland.
It’s too early to predict how these reforms will play out in practice. That being said, Pillar Two does pose potentially large ramifications for Ireland given that its low 12.5% corporate tax rate has been the main driver of foreign direct investment, inward investment and economic growth over the years. It was clear to see why Ireland was initially reluctant to sign up to the minimum corporate tax aspect of the deal.
In return for its support of the new reforms, the Irish government has managed to extract a concession that will ensure that the minimum tax is set at 15% precisely, instead of a rate of “at least” 15%. It’s important to note that while the Irish Government acceptance of the minimum tax appears to be a major move from its previous corporate tax policy. Its introduction will leave the vast majority of businesses unaffected in Ireland.
The Irish Government stated that the 15% rate will catch just 56 Irish multinationals along with around 1,500 foreign-owned multinationals residing in Ireland. Over 160,000 businesses in Ireland have a turnover below €750,000 and these will continue to be taxed at 12.5%.
A positive development from this agreement is that only a small number of companies in Ireland will be affected by the minimum tax. Also, the agreement has removed some uncertainty, after years of negotiations, about the future of the international tax landscape.
The agreement signifies another major milestone in international tax cooperation. Regarding Pillar One, the development of a multilateral convention is already underway and is expected to be signed in 2022 for implementation in 2023.
Minimum corporate tax model rules will also be drawn up in 2022 for implementation in 2023.