Ireland has dropped its cornerstone low-tax policy of the past 18 years, which helped persuade some of the world’s biggest companies, including Google and Facebook, to site their European headquarters in Dublin.
The decision comes after months of wrangling over the fine print of an Organisation for Economic Co-operation and Development (OECD) agreement to operate a 15% tax rate in more than 140 countries around the globe.
Ireland was initially one of nine countries to refuse to join the scheme, but on Thursday afternoon its cabinet signed off on a deal before a wider OECD announcement expected on Friday at 6pm.
It brings an end to the country’s 12.5% tax rate that has applied since 1 January 2003, which has frustrated critics in other EU countries and the UK where higher corporate tax rates have applied.
However, sources close to Ireland’s government said they were not concerned about the flight of multinationals, as the biggest blow to its low-tax regime came in 2015, when, under pressure from the EU, tax avoidance schemes known as the “double Irish” were outlawed.
Under this scheme multinationals paid as little as 1-2% tax of their revenue, a fraction of the 12.5% headline tax rate in Ireland and the 35% in the US.
The new arrangements, which will be limited to companies earning more than €750m globally a year, will come into force in 2023 and cost the Irish exchequer between between €800m and €2bn a year, according to government estimates.
The Irish government said the deal would be “gold plated” with assurances, sought and received, from the EU that it would not seek to increase the tax rate further down the line.
The government said 56 Irish multinationals employing 100,000 staff and 1,500 foreign multinationals employing 400,000 will be impacted.
“This is the right decision,” said the country’s finance minister, Paschal Donohoe. “I’m absolute convinced that our interests are better serviced within the agreement.
Donohoe confirmed Dublin had succeeded in getting the phrase “at least” out of a July draft pledge for a tax of “at least 15%”, which had raised concerns that further rate rises might be in the pipeline.
He also confirmed the European Commission directive that implements the OECD agreement “will be faithful to that agreement and not go beyond that consensus” and that Ireland could continue to apply a 12.5% tax rate for companies that generate less than €750m a year globally.
Donohoe said Ireland needed to continue to provide “predictability” to business and had it not signed up it would have lost “influence with respect to critical decisions that will take place in the coming months”.
Ireland had attracted an estimated 1,000 multinationals in the tech, finance and pharma sectors on the back of its corporate tax policy; the companies included Pfizer, Intel, Yahoo, LinkedIn, TikTok, Apple, IBM, and Twitter.
Such is these multinationals’ importance to the Irish economy that figures from Ireland’s revenue commissioners released in May showed that just 100 companies accounted for almost 80% of the tax revenue.
The figures excluded those sectors closed due to the lockdown, including hospitality and travel, but showed Ireland’s reliance on the multinationals for employment and income tax.
About 32% of all jobs in the Irish Republic in 2020 were in multinationals, and those employees contributed 49% of all employment taxes compared with 27% and 44% respectively in 2019.
Ireland’s decision to sign up to the OECD rate marks the end of years of pressure from the EU and UK over the low tax rate.