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Ireland: Stronger Headline GDP Growth in 2021, Global Tax Deal May Impact Future Growth

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Our increased growth expectations of 14.9% for this year are largely due to activities with limited domestic links including exports by multinational enterprises with large amounts of intellectual property, particularly in the foreign-owned high-tech sectors such as pharmaceuticals and IT. Reflecting the importance of such multinational enterprises for Ireland’s headline GDP, output growth of the underlying economy is expected to be significantly lower at around 5% for the year, broadly in line with that of the euro area.

Ireland drops opposition to global corporate tax deal

Ireland’s favourable corporate tax regime has been an important driver for firms to relocate their operations to the country. Following lengthy negotiations, the government dropped opposition to the second pillar of the OECD global corporate tax deal after securing reassurances that the current 12.5% tax rate can be maintained for companies with annual revenues of less than EUR 750m. The first pillar of the deal, which would re-allocate some taxing rights away from countries where companies are based, towards countries where customers are located, already had broad support despite the likely lower tax intake for the Irish government.

After initial proposals of a minimum 21% corporate tax rate, the additional concession, that the lower 15% rate will only be applied to the largest companies, cushions some of the risks to Ireland’s economic growth model.

The EUR 750m threshold affects around 1,560 large Irish and foreign-owned corporates employing approximately 500,000 staff, and accounting for less than 1% of corporates located in Ireland.

The agreement would allow Ireland to maintain its 12.5% tax rate for most corporates, which should help to limit damage to the country’s international competitiveness. However, the introduction of reforms concerning the re-allocation of taxing rights is likely to reduce Ireland’s attractiveness for multinational companies but mainly for those looking to relocate purely for tax reasons.

Ireland’s attractiveness for multinational firms is clearly not based only on its corporate tax regime

The country benefits from several important factors that make it an attractive location for international business. These include the English language, its well-educated workforce, a supportive business environment, full access to the EU single market, and a favourable time zone.

Multinational corporates are critical for Ireland’s tax revenues. Sectors that are dominated by these firms contributed more than 40% of the government’s tax revenues from VAT, income, and corporate taxes in 2020. Particularly the strength of corporate and income tax revenues helped to sustain government finances over the pandemic.

The overall impact of global tax changes on Ireland’s tax collections likely contained

The global corporate tax changes may somewhat temper the strong economic growth in Ireland in the coming years, but the overall impact of the global tax changes on Ireland’s tax revenues is likely to be contained.

The Irish government previously estimated that it might lose around EUR 2bn (0.9% of estimated 2021 modified GNI – an indicator of the underlying output of Ireland’s globalised economy – or around 2% of total budget revenues) from OECD pillar one proposals. At the same time, agreement concerning the higher tax rate on large multinationals under the second pillar will result in increased revenues, which might, according to some estimates, largely offset any losses incurred from the first pillar.

For a look at all of today’s economic events, check out our economic calendar.

Eiko Sievert is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.

This article was originally posted on FX Empire