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The introduction of a minimum global corporate tax rate could - in an “extreme scenario” - wipe out half of Ireland’s €11.8 billion corporate tax base, the International Monetary Fund (IMF) has warned.
In its latest post-programme review of the Irish economy, the Washington-based fund assesses the impact of global tax changes on Ireland’s budgetary position.
In a worst-case scenario - involving the top 10 largest corporation tax contributors leaving Ireland on foot of a new global minimum rate -receipts could fall by as much as 50 per cent, the IMF said.
On the basis of last year’s receipts, this equates to a decline of nearly €6 billion.
“This is a tail-risk scenario and that we do not anticipate that it will happen,” Khaled Sakr, head of the IMF mission to Ireland, said.
Changes
He also said the changes would be mitigated by Ireland’s “non-tax comparative advantages” such as its skilled labour force, favourable business climate and strong trading ties with the US, UK and the EU.
The US has proposed a minimum rate of 21 per cent on the international earnings of US companies, which is significantly above the 12.5 per cent Irish rate.
The fear is that a minimum rate could undermine Ireland’s attractiveness for investors.
At a recent event on tax here, Pascal Saint-Amans, who heads the OECD’s tax department, indicated that a “strong” minimum tax proposal was necessary for agreement at OECD level, though he did not mention a rate.
The Department of Finance believes corporation tax receipts will be roughly €2 billion lower by 2025 on foot of the proposed changes, though Minister for Finance Paschal Donohoe has hinted the impact could be bigger.
In its review, the IMF said the Irish Government needs to raise more taxes to invest in education, training and affordable housing and childcare once recovery from the pandemic has taken hold.
The fund said “sustained growth” in the Irish economy would “require more investment in the social and physical infrastructures”.
Debt
These “expenditure needs”, as well as population ageing and high debt levels, call for additional public revenue, which would require a broadening of the tax base once the current crisis subsides, it said.
To this end, it welcomed the Government’s establishment of a Commission on Taxation and Welfare, which will consider how best the taxation and welfare systems can support economic activity and promote increased employment.
At a Fine Gael parliamentary party meeting on Wednesday evening, Tánaiste Leo Varadkar is said to have ruled out any hikes to income tax over the coming years.
While carbon taxes would rise and the local property tax would be revised, he said, the Government should not “concede” to increases to income taxes.
In its assessment, the IMF said the pandemic has had “a highly asymmetric” impact on the Irish economy.
While the multinational enterprises (MNEs) continue to grow strongly, the more labour intensive domestic sector has been hit hard, contracting 10 per cent in 2020 with unemployment reaching 30 per cent in the first wave of the virus.
It praised the Government for a “swift and comprehensive policy response”, which it said had been effective in mitigating the crisis impact and protecting households and firms.
However, it warned that a “two-speed recovery” remains likely, and there is a need to minimize medium-term scarring and reduce income disparity.
It forecast GDP growth of 4.6 per cent this year with domestic activities partly recovering from a sharp decline “as containment measures are gradually eased and adaptability to remote working continues to increase”.
Risks to the outlook are three-pronged and include uncertainties surrounding the pandemic, execution of post-Brexit trade arrangements, and likely changes in international taxation.