Ireland agrees to sign up to OECD Inclusive Framework political agreement on the OECD two-pillar approach

Ireland will sign up to the OECD Inclusive Framework political agreement on the two-pillar approach, following approval by the Irish Cabinet. The move was announced by the Irish Finance Minister, Paschal Donohoe, describing it as "a difficult and complex decision but… the right one". It came on the eve of the OECD Inclusive Framework meeting concerning the two-pillar measures and the ambitious timeframe for implementation. 

The Irish decision follows acceptance at OECD level of Ireland's insistence on clarity on the minimum effective tax rate under the proposed Pillar 2 measure. That rate has now been set at 15%, allaying Ireland's concerns with the previous OECD position of a minimum tax rate of "at least 15%". That could have facilitated a higher rate ultimately being settled on, something that was being pushed by some influential countries. Comfort at EU level has also been obtained. In his lengthy published statement announcing the decision, the Irish Finance Minister confirmed recent Irish media reports that Ireland has received assurances from the EU Commission that, when it comes to transposing the OECD agreement into member state national law, the Commission will not seek to "gold plate" the OECD agreed position by seeking to go beyond the international consensus.

Ireland's holding out on signing the political agreement reached in July and its continued negotiation since then around ensuring certainty on the minimum effective rate now appears to be well justified. Indeed, predictability and certainty for the Irish government, business and investors is a key theme in the Minister's published statement. Additional reasons given for the change in the Irish position include the importance of staying in line with key international accords, particularly one likely to have the support of around 140 countries, and the need for Ireland to continue to have influence in respect of the critical upcoming discussions around the implementation of the proposed measures. The Minister considered that "not joining an agreement will result not just in reputational risks, but also economic and fiscal risks" for Ireland. Those have now been avoided.

While Ireland has agreed to the 15% minimum rate, the announcement expressly states that Ireland will retain its long standing statutory 12.5% corporation tax rate for businesses with annual revenues of less than €750m. So for a huge swathe of companies operating in Ireland (the statement references 160,000, employing 1.8m) there should be no change, in that the 12.5% rate will continue to apply. Importantly, Minister Donohue stated that he has received assurances from the EU Commission that "maintaining the headline 12.5% corporation tax for businesses out of scope of the OECD agreement does not present any difficulties".

Signing up to the OECD Inclusive Framework agreement should result in a new 15% rate, which the Minister indicated should apply "to 56 Irish multinationals employing approximately 100,000 people, and 1,500 foreign owned MNEs based in Ireland employing approximately 400,000 people". There is also an expected cost to Ireland of up to €2bn annually when the two pillars are implemented. While a substantial cost to Ireland, it was considered that there would have been a far higher cost to it if it failed to join the OECD consensus, in terms of reputation, uncertainty and attractiveness as a prime FDI location.

While the details of the OECD two-pillar measures and their implementation remains to be determined and agreed, other positive changes to the Irish tax code remain a possibility. The Minister referred to the simplification of the Irish tax code, which would be a welcome development. The Irish statutory rate of corporation tax for non-trading income is currently 25% and capital gains are currently taxed at 33%. The 15% minimum rate may cause those rates to be reviewed.

For more information on this please contact Philip McQueston or any member of A&L Goodbody's Tax team.

Date published: 8 October 2021