5 new corporate tax challenges facing Ireland

Despite the relatively friendly facade, Donald Trump's White House meeting with Micheál Martin signalled a potential change in US-Ireland foreign direct investment (FDI) relations, presenting a threat to Ireland’s economic model.

However, the tax element of the US-Ireland FDI relationship has never been a certain one. It has been sustained through active management by Ireland, ensuring ongoing complementarity of Irish and US tax rules and by a failure by dissenters within the US to weaken corporate influence over US politics.

Ireland’s tax regime has faced a series of challenges over the past 70 years. The first set of challenges came from the European Community, which culminated in the ending of Ireland’s 10% manufacturing corporate tax rate as it was deemed in breach of state aid rules. Yet, to the surprise of the European Community, Ireland showed its ability to change and comply, while simultaneously maintaining its advantage by adopting the now infamous 12.5% rate applicable to all companies from 2003.

The second major challenge arose in the 2010s from criticism of tax avoidance strategy used by US companies to game the relationship between tax residency rules in Ireland and the US. These strategies are now well known as the 'double Irish Dutch sandwich' and the Apple ‘stateless’ structure. Ireland had already responded to discontent by adjusting its tax residency rules in the late 1990s, but simultaneously left the loophole that US companies would not be affected.

Once the global media made the Double Irish visible, and the US Senate hauled Apple in to be cross-examined, Ireland was forced to act to end both structures. Again, though, Ireland had a new game waiting in the wings, this time offering important capital allowances on intangible investments, a game which Apple immediately switched to, causing the embarrassing spike in Ireland’s GDP by over 26% in 2015.

A further challenge was through the campaign for the global minimum tax. Again, Ireland benefited from a lack of seriousness in the Biden administration to implement a significantly higher rate, with Ireland, finally and in a highly choreographed way, agreeing to the new 15% rate for certain firms.

Clearly, Ireland has played the tax games skilfully, facing down embarrassment, judging when a tax game was becoming untenable and ensuring that a new game lay in wait as a replacement. Will this skill sustain Ireland’s strategy into the future and should it? Here are five new challenges to be dealt with.

Failure of global tax system exposed by the Apple case

The Apple judgement by the European Court of Justice illustrates the consequences of the failure of global tax reforms. The ridiculous situation whereby Ireland was awarded over €13 billion which clearly has not been generated in Ireland is a testimony to this. Ireland continues to collect such unearned tax through the current tax game driven by the placement of corporate intellectual property assets in Ireland by a small number of firms. This is drawing increasing attention to Ireland.

The US tax bill

Trump 1.0 saw significant tax reforms including ending the ability of firms to defer tax payments due to the US indefinitely, while other ‘carrots’ and ‘sticks’ were introduced to impose greater taxation. The results of this were mixed, perhaps, not surprisingly, as Trump has little interest in imposing higher taxes on large US firms.

The subsequent Biden administration, however, did set out to impose greater taxation on these firms and wanted to use industrial subsidies to encourage onshoring. This indicates that whether the intention is to impose tax more heavily or not, both sides of US politics want corporate foreign activities and profits re-shored, much of which are currently taxable in Ireland.

Trump 2.0 could really change things

Trump 2.0 is a very specific and different kettle of fish. He has indicated that he is not happy with the profit shifting activities of US firms via Ireland and other countries. Having abandoned OECD global tax reforms, he does not intend to work this out multi-laterally. This is not a real threat to Ireland, as Ireland’s current tax game has continued through years of partially stalled OECD reforms anyway. Trump’s threat to punish states implementing ‘extraterritorial taxes’ via the new global minimum tax poses a threat to all EU member states.

However, the real threat to Ireland’s tax games is that Trump may seek to equalise or come close to the low levels of taxation achieved by US firms currently using Ireland for that purpose. He is the first US president to so frankly acknowledge that this is happening largely as a result of the failure of the US to prevent it. Trump radically changed the US tax code in 2017, amidst consternation in the US, and he could do so again.

The potential loss of Ireland’s ‘onshore’ partner

Ireland’s tax games only work when the US plays ball. The US and Ireland, through their specific forms of tax politics have created an onshore-offshore world. The loss of its ‘onshore’ partner would leave Ireland’s tax games in tatters. Without the disproportionate corporate tax receipts, Ireland will need to undertake a long called for rebalancing of its national tax system.

Ireland’s relations with the EU, UN and OECD

Other important though less powerful poles than the US in global tax politics are the EU, OECD and UN. Ireland opposes proposals for greater tax cooperation within the EU while Global South states have moved to create a more democratic tax reform process through the UN. Notably, Ireland favours the leadership of the OECD over that of the UN. Ireland’s dismissal of such multi-polar concerns might sustain the US-Ireland onshore-offshore world in this new phase, but its strategy is clearly at odds with the norms of tax justice both at home and abroad. It also reduces goodwill towards Ireland at a time when it needs every friend it can find.

This piece originally appeared on RTÉ Brainstorm.