G7 tax-reform poses a risk to Ireland's high-growth economic model
The G7 agreement to clamp down on global tax avoidance by multinational corporations (MNCs) aims to ensure that a larger share of corporation taxation is paid in countries where they operate. This included G7 backing for a global minimum corporation tax rate of at least 15%. This agreement may form the basis for a global deal.
The 15% minimum rate is nearer Ireland's prevailing 12.5% rate than an original US proposal of 21% was, but still represents a gap. However, the tax rate is only one factor that investors consider when deciding where to put their money. Ireland is no exception.
Ireland holds multiple factors attractive to international business, among them the English language, a well-educated workforce, membership of the EU single market and favourable business conditions.
As long as the tax 'topup' does not widen significantly beyond current expectations, it is unlikely that most MNCs opt out of Ireland. The G7 agreement is only the starting point for future discussion at the G20 before any final deal is struck, likely to contain exemptions to ensure as many countries sign up as possible.
The full domestic impact of global tax reform will also hinge upon Ireland's policy response, which may involve new measures to attract foreign capital and support local businesses. This could include advancing innovation backing such as campus incubators that abet firms with access to venture capital.
Any increase of the tax rate is nonetheless important, considering Ireland's dependence on pharmaceutical, computer services and other MNCs sectors, visible in the economy's resilience amid the Covid19 crisis. Ireland's 3.4% GDP growth was the highest in the EU in 2020 as MNCs benefitted from pandemic-associated trends such as more remote working and demand for immunological drugs.
However, Ireland's underlying economy measured by real modified domestic demand - contracted 5.4% amid comparatively stringent lockdown, more akin to a 6.7% aggregate drop of euro-area aggregate GDP. The pharmaceutical and technology MNCs' performance during this crisis may also carry into a postCovid age, with these companies potentially benefitting longer term from structural economic changes.
Changes in global tax rules could put some of the government's tax take at risk, ranging from 0.6-1% of GDP, or 1.1-1.8% of modified GNI in 2018, according to the IMF. The
Irish government estimates that it might lose EUR 2bn (0.9% of estimated 2021 modified GNI) of corporation tax receipts longer term due to OECD proposals related to changes in the geographical domicile of corporate taxation.
Ireland's small, open economy and the size and complexity of its financial and corporate sectors leave it vulnerable to shifts in international regulation around cross-border trade and investment.
Scope upgraded Ireland's credit ratings one notch to AA- on 21 May, with the Outlook revised to Stable. Scope expects GDP growth of 9% in 2021 (revised sharply up from 5%) - supported by pent-up demand, strong monetary and fiscal policy support, and recoveries in Ireland's main trading partners - followed by 4% growth in 2022. For a look at all of today's economic events, check out our economic calendar.