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Paul Krugman wrote an opinion piece in the New York Times last week titled ‘Biden, Yellen and the War on Leprechauns’. If such an offensive stereotype had appeared in a UK newspaper, the ambassador would have been involved. The article was about President Biden’s corporate tax plan which could spell the end for Ireland’s 12.5% rate.

I strongly believe that Ireland’s economy is strong enough now to withstand Biden’s proposals. As Fergal O’Rourke of PWC pointed out, the changes that are proposed would have been a major problem 20 years ago. Not so much now.

Despite his Irishness, Biden has posed a serious question for Ireland’s industrial model. Biden needs to fund a spending programme directed at winning back middle America for the Democrats. Raising the corporate tax rate to 28% from 21% would raise $2 trillion in 15 years and this is pillar two of the plan. It also involves raising the appropriately named GILTI tax (global intangible low-taxed income) from 10.5% on profits overseas on things like intellectual property.

It is this latter rate that will present a problem for Ireland.

This isn’t the first time a US President has tried to get corporate tax reform to bring jobs and investment back to America. As Churchill said, the Americans can be relied upon to do the right thing but only after exhausting all other possible alternatives.

Pillar one will require Multi-national Companies (MNCs) to pay levies to National Governments based on their sales activity. In other words, although there are lots of Facebook users in Germany, the company pays most of its company tax in Ireland.

This would avoid the US tax increase being undercut by other tax rates. In return for surrendering its taxing rights, the US would expect countries to drop their proposals for digital taxes (UK, France and Italy).

From an electoral point of view, this is a better source of revenue for Biden compared to inheritance or wealth tax.

The same move to higher corporate tax is happening in the UK with an increase proposed by Rishi Sunak from 19% to 25% by 2023.

Biden’s communication on his proposals specifically namechecked Ireland among 6 other ‘tax havens’ as sheltering 61% of US companies’ foreign profits. This is completely inaccurate. Tax havens do not employ people and charge almost no tax.

Ireland has consistently hitched its wagon to the OECD BEPS process which is regularly derailed thus maintaining the status quo (cynics would say that’s why Ireland supports it).

The current global corporate tax system is ‘unfair, opaque and out-dated’ according to DeAnne Julius writing in the FT. The introduction of the OECD model would reduce Irish Corporate tax revenue by €2 billion per annum.

The Irish Government has said that it is ‘constructively engaging in these discussions”. Italy, France and the Netherlands have already expressed support.

Ireland should prepare for adjustments to the corporate tax rate. The GILTI rate and how it’s applied will be a matter for discussion between the US and Ireland. Bearing in mind that alterations at this level will mean very little for the US but quite a lot for Ireland, there could be some wriggle room here to mitigate the damage.

It is not expected that the Biden proposal for a 21% minimum rate will be achieved with some suggesting 17% is more likely. He has a very thin majority in Congress. The average rate across the OECD is 23%. If Biden’s proposals succeed, it would be the biggest global tax reform in decades.

One thing is for certain; tax lawyers will not be idle in looking for ways around any new arrangements.

All eyes will be on the G20 meetings in July and October.

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