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What’s next for the 15% rate of corporation tax?

Tom Maguire discusses the rate of corporation tax in his Business Post column

We can all recall when the G20/OECD inclusive framework agreed a 15% global minimum level of taxation for multinational groups last year. This is generally referred to as OECD Pillar 2. Just before we were all set to go on our Christmas break the European Commission proposed its draft directive to implement these rules consistently across EU member states. This came within days of a year which ended with Corporation tax receipts of €15.3 billion being recorded (€3.5 billion, almost 30%, higher than 2020) and which, according to the Department of Finance, reflects the strength of exports last year.

We’ll get into the science of Pillar 2 below but what has to happen before this science becomes a reality? EU member states will need to unanimously agree the text and adopt the directive. It’s understood that the French Presidency of the Council of the EU is aiming for an agreement by June 2022 and ideally even earlier with a view to the directive applying from 1 January next year. So the clock is ticking.

Now for the science bit. Under the directive, the effective tax rate for a corporate group in a country is calculated as certain corporate taxes expressed as a percentage of the profit and loss attributable to constituent entities of the multinational group for that country. This is done after certain adjustments are made. If that effective rate is less than 15% then the parent company of the multinational group picks up the difference in its country subject to Ts and Cs but there’s more on that one below. You have to remember this is a 72 page directive but that’s the general gist.

The Pillar 2 principles are based on the implementation of two domestic tax rules being the income inclusion rule (IIR) and when the IIR doesn’t apply or the “when all else fails decree” of the undertaxed payments rule (UTPR). Together they’re known as the Global Anti-Base Erosion (GloBE) rules. There is also a “subject to tax rule” (STTR) which is a tax treaty-based law allowing countries to impose tax on certain related party payments that are subject to tax in the recipient country’s hands at a rate below a minimum adjusted tax rate. However, in line with scope of the OECD inclusive framework model rules issued on 20 December 2021, the draft directive only implements the GloBE rules with the treaty provision required to give effect to the STTR to come later.

The draft directive generally follows the OECD model rules. However, it makes some tweaks to adhere to the fundamental freedoms which are enshrined in the EU treaty and to avoid risks of discrimination between cross-border and domestic situations. The main adjustment is that the draft directive extends the scope of the GloBE rules to large-scale purely domestic groups, i.e. in our case Irish based companies of an all Irish based group. That doesn’t mean an end to the 12.5% rate for those groups because we had received assurances on that from the EU last year. The draft directive would apply only to entities located in the EU that are members of multinational groups or large-scale domestic groups that meet the annual threshold of at least €750 million of consolidated revenue in at least two of the four preceding years.

If your group is outside of that threshold, then the 12.5% rate can continue to apply to your group’s trading profits. As the Department of Finance’s press release said at the time of the OECD agreement on the new International Tax Framework “Ireland’s long-standing corporation tax rate of 12.5% will continue to apply to the vast majority of our businesses who provide the lion’s share of employment in Ireland”.

In line with the OECD inclusive framework model rules, not all entities are within the draft directive’s crosshairs. Government entities, certain International organisations; non-profit organisations, pension funds, investment entities and real estate investment vehicles that are the ultimate parent company of a group are some examples of the excluded entities.

As I said earlier, the parent company of the multinational group picks up the difference with the effective 15% for members of its group in its country subject to Ts and Cs. However, the draft directive provides that an EU member state may opt to apply the top up tax domestically to constituent entities located in its territory. This election allows the top up tax to be charged and collected in the country in which the low level of taxation occurred. This is instead of collecting all the additional tax at the level of the ultimate parent entity in a different country. In that way, a country is not leaving tax money on the table by allowing another country to benefit because of its tax rate.

While the OECD will peer review the national transposition of the GloBE rules, the proposed directive contains provisions to determine the equivalence of laws of certain non-EU countries to the IIR and sets out a number of conditions which need to be fulfilled for granting equivalence.

Readers will know that I’ve written a bit about the EU’s anti-tax avoidance directive (ATAD) in this column. That had a provision which required us to bring about controlled foreign company (CFC) rules and we did that. The gist of the CFC rule and the IIR are similar in that they both require a domestic company to metaphorically reach out to other companies and pull those related entities’ profits back home for tax purposes. That doesn’t mean that we’ll have a “double up” on tax because of the introduction of the new-fangled IIR, mais non, mes amis! In practice, the ATAD CFC rules would apply first and any additional taxes paid by a parent company under a CFC regime in a given year would be taken into consideration in the GloBE rules. Consequently, the ATAD CFC rules will not be amended for the time being.

There’s a lot to be done to make the conversion from a 70-ish page proposal for a directive into domestic law but in the end, we should see an effective 15% rate of corporation here for certain corporate groups. This is a much better position than the previous legislative suggestion of a rate of “at least” 15% that could have been imposed here such that increases to the minimum rate could have been made across the EU. That should bring some certainty to Pillar 2 corporation tax rates into our future.

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