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Ireland joins the OECD inclusive framework agreement on Pillar One and Pillar Two

On 7 October 2021, the Minister for Finance, Paschal Donohoe issued a statement on the decision for Ireland to enter the OECD International Tax Agreement on Pillars One and Two.

According to the Minister, the focus over recent weeks has been to secure the necessary changes to provide certainty and stability and to ensure that strategic interests are protected. Prior to the Ministers address the position adopted by the Irish Government was that Ireland was not in a position to sign up to the interim agreement in July 2021, as important issues remained to be addressed, in particular the minimum effective tax rate proposed of “at least 15%”.

Following a period of engagement with the OECD and international partners, the revised agreement removes the words “at least” in the draft text. According to the Minister, the agreement will impact on 56 Irish multinational companies that employ approximately 100,000 workers, and 1,500 foreign owned multinational companies that employ approximately 400,000 workers.

In terms of impact for Irish taxpayers, the agreement will allow for the retention of the 12.5% rate of tax for businesses with annual turnovers less than €750million. Accordingly, there should be no increased corporation tax rate for 160,000 businesses representing 1.8million employees.

The Minister recognised the potential cost of the agreement as being very difficult to predict and noted the estimated cost of up to €2billion annually. However, this should be balanced against the greater risks of continued business uncertainty and the associated negative impact on Ireland’s attractiveness as a location for investment. The Minister also acknowledged that critical technical discussions will continue over the coming months in line with the framework of the political agreement. He further acknowledged that there remain sensitive issues for Ireland including in respect to the method of reallocation under Pillar 1, as well as detailed technical provisions under Pillar 2 but that being in the agreement allows us to shape and influence those discussions. We would concur.

While further details are outlined in full later in this alert, some of the key features of the revised agreement are noted as follows:

  • In scope businesses under Pillar One’s “Amount A” will reallocate 25% of their residual profit above a 10% profit level to market countries;
  • The global minimum effective tax rate for Pillar Two is 15%;
  • The Subject to Tax rule rate is 9%;
  • Implementation for both Pillars One and Two remains at 2023 (with the Undertaxed Payments Rule to be implemented shortly after in 2024);
  • New digital services taxes are to be curtailed, and existing ones will be repealed in due course;
  • Pillar Two model legislation to be available by the end of November 2021;
  • Pillar One treaty changes via a multilateral instrument are to be ready in early 2022;

We would see the above timelines as ambitious. Speaking after the announcement from the Inclusive Framework on 8 October, Minister Donohoe welcomed the agreement noting the benefits that will accrue from this agreement,

‘The agreement reached this evening at the Inclusive Framework demonstrates the importance of working together to achieve positive outcomes for the world. This landmark agreement will address global tax challenges of digitalisation and provide the certainty and stability that large business and Government need.’

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