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Tax havens? Why can this country benefit from OECD reforms?

2024-03-15 14:12:11Kosova&Bota SHKRUAR NGA REDAKSIA VOX

Tax havens? Why can this country benefit from OECD reforms?

Stretching along Dublin's River Liffey is a vast expanse of glass office buildings. Sometimes referred to as 'Silicon Docklands', the nickname indicates the neighborhood's status as a corporate magnet. Famous Big Tech firms have long flocked to Ireland, lured by the country's low corporate tax rate.

Since 1997, the official rate has been kept at 12.5%, although this changed in January with the arrival of a long-awaited reform. Along with around 140 other countries, Ireland introduced a minimum tax rate of 15% on multinational profits, a policy driven by the Organization for Economic Co-operation and Development (OECD).

"The aim was to try to reduce the distortions in investment decisions that were occurring as a result of the competition to lower tax rates between countries," explained Manal Corwin, Director of the Center for Tax Policy and Administration at the OECD. Not only were firms making investment choices disproportionately based on tax costs, but states were being forced to lower rates to compete for that investment, she said.

Before the recent developments, Ireland had long avoided efforts to harmonize international tax rules, as it was benefiting substantially from the existing system. As investment in Ireland has historically been supported by the country's generous tax system, some fear that the 15% floor could damage the country's economy although many experts would dispute this prediction.

To a large extent, Ireland is protected by safety in numbers, as the decision to raise the corporation tax rate is not purely domestic. In addition, experts point out that the nation offers other incentives to investors beyond its tax policies. For other commentators, the main flaw of the OECD reforms is that they are not sufficiently watertight.

Globally, the OECD estimates that the global minimum tax would generate an additional $155 to $192 billion a year in corporate tax revenue. In euros, this amounts to between €142 billion and €176 billion, with significant benefits expected for investment centers such as Ireland. If the Emerald Isle does and does manage to impose an effective tax rate of 15%, the country will see a significant influx of money, given the high number of multinationals already on its soil.

The Irish Department of Finance predicts that its income from corporation tax will reach €24.5 billion in 2024, an annual increase of around 2.5%. Recognizing the volatility of these revenues, the government announced last year that it would send the extra money to sovereign wealth funds, meaning state-owned investments.

Many Irish people will no doubt be hoping for an immediate increase in spending, perhaps to shore up the country's healthcare system or tackle Ireland's growing housing crisis. For now, the government says some of that revenue should be saved for a rainy day, providing a cushion for future shocks.

It is important that "permanent fiscal commitments are not made on the basis of transitory revenues," Irish finance minister Michael McGrath said in January, adding that public services would see "sustainable" investment.


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