Our increased growth expectations of 14.9% for this year are largely due to activities with limited domestic connections, including exports by multinationals with large amounts of intellectual property, particularly in the high-tech foreign-owned sectors such as pharmaceuticals and IT. Given the importance of such multinationals to Ireland’s GDP, the underlying economy’s output growth is projected to be significantly lower at around 5% for the year, broadly in line with that of the euro area.
Ireland drops opposition to global corporate tax treaty
Ireland’s favorable corporate tax regime has been a major driver for businesses to relocate to the country. After lengthy negotiations, the government dropped its opposition to the second pillar of the OECD global corporate tax treaty after assuring that the current tax rate of 12.5% can be maintained for companies with annual sales of less than EUR 750 million. The first pillar of the agreement, which would move some tax rights away from business-based countries to customer-based countries, has already received widespread support despite the likely lower tax revenues for the Irish government.
Following initial proposals for a corporation tax rate of at least 21%, the additional concession that the lower 15% rate will only be applied to the largest companies mitigates some of the risks to the Irish economic growth model.
The EUR 750 million threshold affects approximately 1,560 large Irish and overseas companies with approximately 500,000 employees and less than 1% of Irish resident companies.
The deal would allow Ireland to keep its tax rate of 12.5% for most businesses, which should help limit the damage to the country’s international competitiveness. However, the introduction of reforms to redistribute taxation rights should make Ireland less attractive to multinational companies, especially those wishing to move for purely tax reasons.
Clearly, Ireland’s attractiveness to multinational companies is not solely due to its corporate tax system
The country benefits from several important factors that make it an attractive location for international business. This includes the English language, a well-trained workforce, a supportive business environment, unrestricted access to the EU single market and a convenient time zone.
Multinational corporations are vital to Ireland’s tax revenue. Sectors dominated by these companies contributed more than 40% of the government’s tax revenue from VAT, personal income and corporate taxes in 2020. In particular, the strength of corporate and income tax revenues helped prop up government finances during the pandemic.
The overall impact of global tax changes on Ireland’s tax collection has likely been limited
Global corporate tax changes may dampen Ireland’s strong economic growth in the coming years, but the overall impact of global tax changes on Ireland’s tax revenue is likely to be limited.
The Irish government previously estimated that the OECD proposals on the first pillar would raise around 2 billion could largely offset the first pillar.
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Eiko Sievert is Director of Ratings for Sovereign and Public Sector at Scope Ratings GmbH.