Stronger aggregate GDP growth in 2021, global tax deal could impact future growth
Our forecast for increased growth of 14.9% for this year is largely due to activities with limited national ties, including exports from multinational companies with large amounts of intellectual property, especially in high-tech sectors. with foreign capital such as pharmaceuticals and IT. Reflecting the importance of these multinational companies to Ireland’s overall GDP, output growth for the underlying economy is expected to be significantly less than around 5% for the year, broadly in line with that of the area. euro.
Ireland drops opposition to global business tax deal
Ireland’s favorable tax regime has been a major driver for companies to relocate their activities to the country. After lengthy negotiations, the government dropped opposition to the second pillar of the OECD’s global corporate tax agreement after ensuring that the current tax rate of 12.5% can be maintained for companies with an annual turnover of less than 750 million euros. The first pillar of the deal, which would reallocate some taxing rights from countries where companies are based to countries where customers are located, was already enjoying broad support despite the likely drop in tax levies for the Irish government.
After the initial proposals for a minimum corporate tax rate of 21%, the additional concession, that the lower 15% rate will only be applied to larger companies, dampens some of the risks to the economic growth model from Ireland.
The 750 million euro threshold affects around 1,560 large Irish and foreign companies employing around 500,000 people and representing less than 1% of businesses located in Ireland.
The deal would allow Ireland to maintain its 12.5% tax rate for most businesses, which should help limit damage to the country’s international competitiveness. However, the introduction of reforms concerning the reallocation of taxing rights is likely to reduce the attractiveness of Ireland for multinational companies but especially for those which seek to relocate for purely fiscal reasons.
Ireland’s attractiveness to multinational companies is clearly not based solely on its corporate tax regime
The country benefits from several important factors that make it an attractive location for international business. These include the English language, its well-trained workforce, a favorable business environment, full access to the EU single market and a favorable time zone.
Multinational companies are essential for Ireland’s tax revenues. Sectors dominated by these companies contributed more than 40% of government tax revenues from VAT, income taxes and corporate taxes in 2020. In particular, the strength of tax revenues on corporations and income helped support public finances during the pandemic.
The overall impact of global tax changes on Ireland’s tax revenue has likely contained
Global corporate tax changes may temper Ireland’s strong economic growth somewhat in the years to come, but the overall impact of global tax changes on Ireland’s tax revenues will probably be contained.
The Irish government had previously estimated that it could lose around € 2 billion (0.9% of estimated 2021 modified GNI – an indicator of the underlying output of Ireland’s globalized economy – or around 2 % of total budget revenue) of the OECD’s first pillar proposals. At the same time, the agreement on the higher tax rate for large multinationals under the second pillar will lead to an increase in income, which, according to some estimates, could more than compensate for the losses suffered under the first pillar.
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Eiko Sievert is Director of Sovereign and Public Sector Rating at Scope Ratings GmbH.