Most companies in Ireland are already factoring in some increase in effective tax rates and the reform will have an impact on how companies structure themselves. The framework needs certainty and full agreement at OECD levels and IBEC is following these developments closely. Although it’s too early to make significant long-term decisions and anticipate what the implications are for Ireland’s tax regime, the trend is clear: there is a momentum behind global tax coordination and minimum corporation tax rates.
From a treasury’s perspective, the biggest impact will be cash flow management. When a tax liability arises, companies must comply and make payment within statutory deadlines that can’t be delayed. Therefore, treasury must have cash on hand. This means compliance issues could arise where multinational companies have tax liabilities in jurisdictions where they currently don’t have a physical presence or pay taxes.
Historically, companies have based their investment decisions on a range of factors including taxation matters. With increased tax costs, this consideration has become more important. The rules will also be complex: even calculating if a company is above or below the proposed minimum rate will be complicated. The challenge lies at the tax administration level and there may be a struggle in dealing with this piece of new global legislation.
As of 1st July 2021, 130 countries have backed global tax rules that will affect the largest multinational corporations in the world, on top of a 15% global minimum corporate tax. These updates, expected to take effect by 2023, will mean sweeping changes across the global taxation landscape.
View from the US
President Biden’s Green Book (the administration’s fiscal year 2022 revenue proposals released in May), included a proposal to tax the largest 120 companies at 15% of their book income. The approximately 120 companies subjected to the minimum tax are those with net income over US$2bn. It is unclear how this provision will work or how it will be implemented if the OECD agrees to a compromise to eliminate digital service taxes imposed on US multinationals. The US is against unilateral digital services taxes imposed by other countries and continues to support tariffs in response to digital taxes.
The Green Book also included provisions that are affected by switching to the OECD global minimum tax if approved. It suggests an increase to the Global Intangible Low Tax Income (GILTI) rate to 21% and proposes a new provision known as SHIELD (Stopping Harmful Inversions and Ending Low-tax Developments). Both penalise entities within a related party structure that have an income tax rate below 21%.
The US wants a global minimum tax to avoid higher taxes on US parented multinationals. Biden’s proposal includes a 28% federal US corporation tax rate. The added state income taxes and the combined effective US tax rate sums up to 30%, while the OECD suggests a global tax of 15%. This means that US companies can still cut their taxes in half if they move earnings outside the US.
We expect the proposed tax changes to encourage more mergers and acquisitions for companies to align their structures with the benefits of having earnings outside of the US. We may also see the largest 120 multinational enterprises spin off parts of their business to fall below the US$2bn net income threshold.