What was Driving Minister Donohoe's strange behaviour against Tax Reform and Multilateralism?

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Paul Sweeney15/07/2021

Paschal Donohoe is known as a serious, intellectual and committed centre-right politician who has supported international trade, globalisation and multilateralism (the system trying to  govern both). As Finance Minister he has regularly written thoughtful reviews of books on the economy, even appearing at times to both understand and support Mariana Mazzucato's progressive view of the role of the state and innovation.

More and more citizens had become aware of how little multinational corporations (MNCs) have been paying in taxes. Some companies have been paying as little as 0.1% on vast profits, by using transfer price-fixing across nations. This has been going on for decades especially with the growth of turbo-charged globalisation where companies operate in many jurisdictions making vast profits by their ownership of technology.

Governments stood idly but or worse, fought "tax wars" to win FDI. Finally, there is now the possibility of agreement on extracting a minimum tax of just 15% on these companies. It has been a long process to get 131 states to sign up.

But Ireland Rejects the multilateral deal of 131 countries to tax the profits MNCs

In spite of the long complexity of such an important deal with so many states committing, Mr Donohoe has rejected the agreement of 131 state to adopt a minimum tax rate of 15% on the profits of MNCs.

Irish Times columnist Fintan O'Toole put Mr Donohoe's rejection of international cooperation well - saying "The Government seems determined to show the world that Ireland is a rogue state."  He continues "It is refusing to join 130 countries (now 131) which signed up to the Organisation for Economic Co-operation and Development’s (OECD) plan to limit tax dodging by multinational corporations, including a global minimum corporation tax rate of 15 per cent." Ireland is one of nine countries which refused to sign up, joining with "the European Union’s actual rogue state, Hungary, and two of the tax pirates of the Caribbean, Barbados, and Saint Vincent and the Grenadines,"

O'Toole calls its action "both immoral and stupid. Immoral because it marks Ireland as a willing enabler of a system of tax avoidance that robs other states of public resources and generates disastrous levels of inequality both between and within countries. Stupid because it is doomed to fail."

A few days later the Irish Times carried a faint rebuttal of O'Toole's criticism from the media's favourite go to expert for a favourable pro-government quote on Ireland's stance on corporate taxation, Fergal O'Rourke, head of one of Ireland largest and most profitable tax avoidance accounting firms, PWC. He praised the government for doing the right thing after patronising O'Toole. He argues that Ireland has changed "massively" on company taxation over the past years which it it had to do because of international pressure, but its reform was hardly "massive".

O'Rourke is the person who got the credit (blame) for the invention of the "Double Dutch Double Irish Sandwich" tax avoidance scheme in an interview with Bloomberg in October 2013. This major tax avoidance scheme, now finally abolished after a deliberately protracted delay by the Irish government, has cost it and other EU state hundreds of millions in lost taxes. Thus its existence for too long meant years of public service cutbacks and austerity in many states.

Ireland's International Reputation is being shredded.

The Government is consciously further undermining Ireland's already bad international reputation on tax but also its superb reputation on international cooperation ie multilateralism. And this reputation recently won us the coveted seat of the UN Security Council. More importantly we need support now, when the NI Protocol is under fire from the UK and we need maintain the strong the EU support that we enjoyed to date on this and Brexit.

Minister Donohoe's anti-EU tax reform action is even more remarkable when he is the President of the Eurogroup of Finance Ministers. Seeking to undermine the EU's long awaited efforts to get multilateral cooperation at EU level is doing no good for both Minister Donohoe and Ireland's reputation. He will not be Minister for Finance forever but Ireland will long need the support of  the Euro states and the other EU governments. Ireland needs this support now because the Northern Ireland Protocol is under active siege by the UK's unreliable PM Johnstone and his EU advisor Baron David Frost.

The reason for his behaviour may be perhaps because Minister Donohoe is hoping that the Biden's tax reforms will be blocked by reactionary Republicans and fail to get agreement. So he is waiting for the US to make a decision on its position and hoping the Democrats will fail. Thus he is telling the bosses of the biggest tax-avoiding Irish-based MNCs that he is doing his best for them (but what about equity for Ireland?) and if and when Biden is successful in going for tax reform, he will  then tell them he did his best for them! This view was well articulated by Arthur Beesley recently in the Irish Times.

But the momentum for tax reform could be lost in Washington because such a tax agreement must secure support in the Senate. The Democrats have control of the Senate but by the smallest of margins. The new tax agreement is unlikely to be passed as one bill.  It is likely to be addressed in two separate parts. The agreement on a global minimum tax of 15 per cent, known as Pillar 2, will require changes in US domestic tax legislation. Giving countries new rights to tax large companies based on where they generate revenue, called Pillar 1, is likely to be dealt with as a separate bill, because it change Washington’s agreements with other countries. This means the US must alter existing treaties or even create new treaties. Sadly Ireland is siding with Republicans against tax corporate reform.


How Reforming are these G7, OECD and EU Tax Reforms?

The proposed G7 tax deal addresses problems of taxing international profits of Multinationals. These arise from the right of states to tax on the basis of the residence of corporate entities. That was clear when value added arose from the production of physical goods. But when value arises from intangible services and intellectual property, it facilitates the industrial scale tax avoidance that we are witnessing.

France’s official Council of Economic Analysis (CAE) puts this at $130bn. At typical rates, that amounts to $20-30bn worth of annual tax revenue. The proposed minimum tax, could raise corporate tax revenues by €6bn-€15bn for each of France, Germany and the US, according to the CAE.

In spite pf the very high revenues generated by US Big Tech firms on European markets they pay little tax and sometimes none. The drive to tax US MNCs comes from our fellow EU states who are indignant at these derisory rates of tax paid which in part is facilitated by Ireland. These EU state have unilaterally passed sales-based digital services taxes, and it was this action that gave the political momentum to the G7 global talks because the US opposed these moves for reform. This is important because 40 per cent of global foreign direct “investment” is structured to achieve lower taxes rather than for actual business investment reasons.

The proposed minimum rate regime leaves incentives to shift profits to low-tax jurisdictions so it is strange Ireland is still complaining. Governments have missed an opportunity to simplify the rules, and thus are allowing the accountants and legal firms in the big tax avoidance industry to invent clever, new techniques to continue to flourish by stealing taxes from sovereign states which should go to pay for public services.  Instead we will face more austerity after the Pandemic.

Conclusion.

In my previous blog on this subject I argued, as I and a few others have done for decades, that Ireland is not as dependent on the low tax regime for its economic well-being in the way governments, much of the media, state institutions and the influential tax avoidance industry and academic acolytes have long argued. There is not one silver bullet - low taxes, but Ireland's economic development has been more complex with many factors playing a part, of which tax was but one. I argued that undue emphasis on the 12.5% rate was unsustainable as it was not in our governments' control. When it is realised, as has finally been happening, that the game is up, there will be slow changes in the "official line", then faster changes and then ultimately there will even be denial that anyone even claimed that tax was the "cornerstone of Irish Industrial policy".

Martin Shanahan the astute CEO of IDA Ireland is already leading the change saying "The Republic of Ireland will continue to secure foreign direct investment (FDI) even if plans on global tax reform come to fruition." Then, on the very same day, Minister Donohoe, after a clearly frank chat with US Treasury Chief Janet Yellen, softens his voice a little, admits Ireland may yet sign up to the reforms, saying that " “It is in the interests of stability, and in the interests of the principles that we talked about today with Secretary Yellen that agreement is reached, and I’m going to play my part, to see if Ireland can be part of it and if we can support it later on in the year.”

Posted in: Banking and financeCorporate governanceFiscal policyTaxation

Paul Sweeney     @paulsweeneyman

paul-sweeney

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.


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