KPMG partners Anna Scally (pictured) and Cillian Barry explain what’s involved in the OECD’s new international taxation framework and its impact on the Corporation Tax regime in Ireland.

On 7 October, the Minister for Finance announced that Ireland had agreed to sign up to the OECD Base Erosion and Profit-Shifting (BEPS) 2.0 plan, having secured agreement on a number of important issues for Ireland, including:

* a commitment that the minimum effective rate of tax imposed on the profits of multinational groups under the agreement would be limited to 15%, as opposed to ‘at least 15%’, which had been included in the July 2021 draft, to which Ireland did not sign up; and

* a commitment by the European Commission that Ireland would not be challenged in retaining its 12.5% rate for corporate taxpayers not within the scope of BEPS 2.0 (the vast majority of corporate taxpayers in Ireland).

As noted by the minister in his Budget speech, “Due to our efforts, the minimum effective rate was set at 15% for large multinational companies. It could have been far higher. It could have been more uncertain. We avoided those risks.”

As part of the implementation of the BEPS 2.0 plan, Ireland will increase its Corporation Tax rate to achieve a 15% effective rate for multinational groups within the scope of Pillar Two – those with turnover in excess of €750 million.

In Association with

Ireland has also agreed to the Pillar One proposals, which reallocate taxing rights to market jurisdictions for in-scope multinational groups. The OECD aims for these changes to be implemented by 2023.

BEPS 2.0

On 8 October, the OECD announced high-level details of the agreement – now reached by some 136 countries – on BEPS 2.0. Only four members chose not to sign up to the current proposals: Kenya, Nigeria, Pakistan and Sri Lanka.

A key question remains as to what extent proposed reforms to the US tax regime can be enacted and would be sufficiently comparable to the agreement reached under BEPS 2.0. In particular, whether the US will be able to implement Pillar One and how its Global Intangible Low-Taxed Income (GILTI) regime may coexist with the Pillar Two proposals are fundamental issues.

The answers to these questions may well determine whether or not the OECD BEPS 2.0 agreement will be implemented globally, as implementation of BEPS 2.0 without the US fully on board may be difficult.

Impact For Ireland

The Economic and Fiscal Outlook document, released by the Department of Finance with the Budget, estimates the Exchequer impact of BEPS 2.0 to be €2 billion per year from 2025. Although, as noted by the minister, estimating the impact for Ireland at this stage is “extremely challenging”.

It is important to note that in-scope businesses operating in Ireland would have been subject to any agreed minimum rate, regardless of whether Ireland had signed up to BEPS 2.0. As such, securing a minimum effective rate of 15% for large in-scope groups only, and retaining the 12.5% rate for smaller taxpayers, is a positive result.

As noted by the minister in his speech, “As a small open economy that depends on rules and order in global tax and trade, an agreement was in our interests.”

The 15% rate is expected to apply to roughly 1,500 businesses in Ireland, primarily foreign-owned groups. While the threshold for Pillar One remains at turnover of €20 billion and profitability above 10%, it is expected to apply to a very small number of businesses operating in Ireland. However, it is expected that the profits of certain foreign-headquartered groups with Irish operations may be reallocated from Ireland to market jurisdictions.

As important to Ireland’s competitiveness as the 12.5% rate, if not more, is the certainty and stability that the Irish regime has offered over many years. In this context, it must be commended that this was not a Budget of surprises.

Ireland did not rush into any agreement with the OECD in July, but rather chose to reserve its position in favour of consulting openly and extensively with stakeholders and allowing businesses to have their voices heard. The government negotiated to ensure that the interests of Ireland and of businesses operating therein would be accommodated within the agreement.

This agreement is expected to be for the long term. It will preserve the integrity of our Corporation Tax regime and provide businesses with the certainty and long-term stability that Ireland has offered in the past, well into the future.

As noted by the minister in his speech, “[Ireland] will remain an attractive location for investment, and we will continue to play to our strengths, centred on a highly educated and dynamic workforce that has consistently delivered innovation and profitability over many decades to businesses that have made Ireland their home.”

In that context, it will be critically important that Ireland continues to focus on all aspects of competitiveness, to ensure that domestic tax and non-tax policies continue to remain fit for purpose and Ireland remains attractive to international business.

Some key elements of the announcement by the OECD on 8 October are set out below.

Pillar One

* Pillar One will apply to the largest and most profitable 100 multinational groups in the world – those with revenues in excess of €20 billion (reducing to €10 billion after seven years) and profitability of at least 10%.

* All sectors are in the scope, with the exclusion of extractives and regulated financial services.

* Some 25% of the residual profits (profits exceeding 10% of revenue) will be reallocated to market jurisdictions (known as Amount A)

* All unilateral Digital Services Taxes and similar measures (current and future) are to be withdrawn by participating jurisdictions, with a moratorium to apply to the introduction of such measures until 31 December 2023 or Pillar One coming into effect, whichever is earlier.

Pillar Two

* The minimum effective tax rate applying to the profits of multinational groups on a jurisdiction-by-jurisdiction basis has been agreed at 15%. This applies to the Income Inclusion Rule (IIR) and Undertaxed Payments Rule (UTPR) – together, the Global Anti-Base Erosion (GloBE) Rules.

* While there is an acknowledgement that mechanisms to address timing differences will be included, it remains to be seen to what extent these will be taken into account within the rules.

* A substance-based carve-out has been agreed, which will exclude an amount of income from the effective tax rate calculation determined as a deemed return on the carrying value of tangible assets (of 8%) and payroll (of 10%). These deemed returns will be tapered down over 10 years, to 5%.

* There will be an exclusion from the GloBE rules for certain groups for up to five years, during the initial phase of their international activity.

* A de minimis exclusion will apply to groups for which revenue in a jurisdiction is less than €10 million and profits are less than €1 million. Further safe harbours are also being contemplated, in the interests of simplification.

* All sectors are in scope, with the exception of certain funds, governmental entities, certain non-profit organisations, and international shipping.

* The Subject to Tax Rule (STTR) is a treaty-based rule allowing source jurisdictions to impose taxes on certain related party payments not subject to a minimum nominal rate. The rate has been agreed at 9%, i.e. it would apply to in-scope payments where the headline rate imposed on the recipient is less than 9%.

Looking Ahead

* It is expected that the OECD will publish detailed model rules reflecting what has been agreed in respect of Pillar Two in November 2021.

* Two multilateral instruments are expected in 2022: to implement Amount A of Pillar One in early 2022; and to implement the STTR in mid-2022.

* The BEPS 2.0 agreement envisages that most of the rules will be implemented throughout the course of 2022, to apply from 1 January 2023.

* The UTPR will not apply before 2024, as further work will be required on the technical aspects of how it is implemented.

* It is also expected that the EU will seek to reflect what has been agreed by the OECD through implementing directives during the course of 2022.

* It is expected that the outcome of the proposed reforms to the US tax system will be known by the end of this year.