Your crash course in... What the new OECD tax proposals could mean for Ireland

AFTER MONTHS OF negotiations, the Organisation for Economic Co-Operation and Development (OECD) today unveiled its new proposal that could lead to major changes in how large multinationals are taxed. 

The Paris-based body published a consultation on the proposed rules, which are aimed at ensuring multinationals – including digital giants such as Google and Facebook – “pay tax wherever they have significant consumer-facing activities and generate their profits”. 

Ireland’s corporation tax regime will come under scrutiny again, as the country has for years used its low-corporate tax rate, of 12.5%, as part of a package to successfully court tech heavyweights to set up their European homes here. 

What is being proposed? 

For the past few years the OECD has been working on ways to reform global tax through its Beps project – Beps standing for base erosion and profit shifting – with digital multinationals firmly in its sights. 

Today it released a consultation document with a broad outline of what it is proposing, which sets out to update rules dating back to the 1920s that have allowed tech giants to move profits around the world to lessen their tax bills.

The OECD wants to make the rules fit for 21st century purpose and a key part of its plan is that companies should pay tax to the countries where their business activity is taking place.  

The body has based the rules on the premise that in a digital age companies may be headquartered in one country but engaging with customers based in another – thanks to the digital frameworks they have in place – and these countries are entitled to taxation rights too.

It would mean some tax rights could be reallocated to countries, even if a company does not have a physical presence on its soil, although the portion that it could tax is still up for discussion. 

“In a digital age, the allocation of taxing rights can no longer be exclusively circumscribed by reference to physical presence,” the OECD said.

The rules don’t just target big tech, they would also affect brands and makers products such as luxury goods.  

An agreement in principle from each of the G20 countries by the end of January is needed for the OECD to get working on the finer details.

What are the implications for Ireland? 

If the body gets the go-ahead, the Irish tax take could suffer. 

The country’s low-rate of corporation tax at 12.5% has been used as an incentive to attract foreign direct investment from multinational companies, with a long list of technology companies setting up their European headquarters here in recent years. 

Minister of Finance Paschal Donohoe said last month that whatever emerges from discussions at the OECD could be “disruptive” and the road ahead could be “bumpy” – during a speech at which Pascal Saint-Amans, head of tax policy at the OECD, was in attendance.  

The new proposals come just a day after the Department of Finance published a paper, along with other Budget 2020 documents, which highlighted some of potential issues that Ireland could face if there was massive shock to corporation tax. 

The document showed that last year Ireland’s corporate tax takings generated €10.4 billion for the Exchequer, which represented more than 18% of total tax receipts. 

While, around 45% of all receipts were generated by just 10 companies – some of whom will be targeted with the OECDs proposals. 

The proposal could be good news for some, as the US, China, UK, Germany, France, Italy and developing economies could all benefit. 

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