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The G7 deal will force tax havens like Ireland to rethink their economy

Google's offices in the Grand Canal Docks area of Dublin
Cathal McNaughton/Reuters
Google’s offices in the Grand Canal Docks area of Dublin.
  • Samanth Subramanian
By Samanth Subramanian

Looking into the Future of Capitalism

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On Saturday, the G7 group of nations announced an unprecedented agreement on a minimum global corporate tax, to make the world’s biggest multinationals pay a corporate tax rate of at least 15%. Now the tax proposal—pushed assiduously by president Joe Biden—will seek the endorsement of the G20 group of nations, whose finance ministers are scheduled to meet in Venice in July.

At which point Ireland, as a member of the European Union, will have its chance to lobby furiously against the proposal—one that, if implemented in full, will compel Ireland into a profound rethink of its economic strategy.

Since the 1990s, Ireland has held fast to a low corporate tax rate of 12.5%—lower than most other developed economies. The rate is intended to encourage multinationals to invest in the country. A range of tax mechanisms also allow companies in Ireland to reallocate their profits to zero-tax territories like Bermuda and thus avoid paying corporate tax altogether.

This proved particularly useful to companies as borders dissolved in the digital age. Customers in France could pay a company for its products, and the company could book that revenue in Ireland, insisting that it was serving its products online from there. A tech giant could develop a product in the US and transfer the intellectual property to its subsidiary in Ireland; that subsidiary could “lease” the IP to the firm’s other subsidiaries elsewhere in the world, collect the royalty fees in Dublin, and reallocate them to Bermuda, paying very little tax in the process. “That’s where the real profits come from: leasing the IP,” said Eric Toder, the co-director of the Urban-Brookings Tax Policy Center in Washington DC.

How Ireland became the world’s leading tax haven

Ireland’s permissiveness has made it the biggest tax haven in the world for footloose companies, according to the economist Gabriel Zucman. Of the $616 billion in corporate profits shifted to tax havens in 2015, Zucman and his colleagues found, Ireland accounted for $106 billion.

Many manufacturers, such as Pfizer, exploit Ireland’s tax regime, but the firms that do so most prominently are in the tech sector. In 2020, for instance, Microsoft’s Irish subsidiary made $315 billion in profits, but this money was reallocated to a company resident in Bermuda, so no corporate tax had to be paid on it. Using the same clause—called the “double Irish” arrangement—Google moved $75 billion in profits out of Ireland in 2019. (The “double Irish” arrangement ended last year, under EU pressure, but other incentives work in similar ways.)

In this way, companies are collectively able to escape paying tens of billions of dollars every year in tax. The US, in particular, loses out on a large share of this revenue, since many of the companies exploiting these lax rules are American. A Treasury Department calculation reckons the US would raise around $500 billion in revenue over a decade by closing these profit-shifting avenues.

The G7 tax agreement’s impact on Ireland

The two pillars of the G7 tax plan are designed to recover some of this avoided tax. One measure permits a country to tax any large multinational that makes profits off its residents; the company can’t claim that its profits are actually accruing to a subsidiary in another country. The second measure ensures that even if, say, a British company books its profits in Ireland and pays a 12.5% corporate tax rate there, the UK can still levy the remaining 2.5% to bring the firm’s effective tax rate to the agreed-upon 15%. With these pillars, the OECD estimates, countries can raise at least $50-80 billion a year in tax revenues.

Ireland, which rejects its “tax haven” label, perhaps has some reason to feel aggrieved. It isn’t an out-and-out zero-tax shelter like Bermuda, and it has arguably wielded its tax regulations for genuine competitive advantage: to draw to its shores companies that might otherwise never have arrived, bringing jobs and money with them. States in the US vie for business in much the same way within the federal system. Ironically, one of the US states that positions itself as a tax shelter is Delaware—the state that Biden calls home.

“Most people here in Ireland say the 12.5% rate is a good thing,” said James Stewart, a Dublin-based tax expert who is a member of the EU’s Platform for Tax Good Governance. Stewart himself has the opposite view, although he acknowledged that people were drawn to the jobs and revenue generated by multinationals in Ireland. Nearly 180,000 people work for US firms in Ireland, Stewart said. Just 10 companies, including giants like Apple and Intel, paid around $7.2 billion in corporate taxes in 2020—half of Ireland’s corporate tax revenue in the year.

Without tax incentives, Irish policymakers might justifiably argue, it’s difficult for small, sparsely populated nations with no long history of industry or innovation to be competitive. And with the global minimum corporate tax in place, wealthy countries such as the US, which are already home to the biggest companies, will only cement their positions in the economic hierarchy of nations.

A race to the bottom

But tax havens have prompted what George Dibb describes as an overall “race to the bottom,”  in which everybody—even the Irelands of the world—loses in the long run. Dibb, who heads the Centre for Economic Justice at the Institute for Public Policy Research, a progressive think tank in London, said that a higher effective tax rate will trigger the reverse: a race to the top, in which countries compete on other amenities they can provide. “This includes broadband, or infrastructure, or skilled employees, and these are all things that benefit citizens of those countries,” Dibb said. “It’s much better for countries to compete on those terms.”

Irish policymakers might worry that, if countries were to implement the G7 tax proposal stringently, multinationals would leave Ireland, not seeing any special reason to stay on there. Stewart admits that many of these companies are “highly mobile,” but he thinks it unlikely to that they’ll leave. He points to the American Chamber of Commerce-Ireland’s statement that companies want to remain in the country, “whatever the eventual outcome of tax deliberations in the US.”

New companies may not relocate to Ireland in a hurry, of course. But Stewart said that the country now had a chance to develop “a more balanced industrial strategy, such as in Denmark, say.” A tax-driven industrial policy, he said, “is relatively easy. You don’t have to do much thinking. But getting innovation locally, getting the education system working well—that’s difficult. That has escaped Ireland to a large extent, and it’ll have to start now.”

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