Tax Updates in Ireland: OECD Pillar 2

AGN EMEA Tax Committee News

What is the impact of the Organisation for Economic Co-operation and Development (OECD) Pillar 2 on companies operating in Ireland?

Ireland has implemented Pillar 2 of the OECD agreement on taxation into Irish Law. Pillar 2 effectively creates a minimum tax rate of 15% for certain groups with turnover in excess of €750 million.

Compliance and Complexity Under OECD Pillar 2

The current 12.5% corporation tax rate will remain in place for most companies in Ireland with certain groups having to pay a top-up-tax of 2.5%. This top-up-tax is called a Qualified Domestic Top-up Tax (QDTT). The QDTT is paid directly to the Irish exchequer and is initially due for periods commencing 1 January 2024. The first payments will not be made until 2026.

The rules are complex and will require significant investment by such companies to both understand the scope and application of these new provisions.

Short-Term Effects of OECD Pillar 2

In the short term, the Pillar 2 provisions could lead to additional tax being collected by the Irish exchequer. Close to 1,600 entities in Ireland are estimated to potentially fall within this tax and be liable to the QDTT.

If a group entity is liable to a QDTT in a jurisdiction such as Ireland, the top-up taxes due outside Ireland are expected to be reduced to zero. These safe harbour rules should protect the Irish tax base and result in greater taxes being collected in Ireland in the short term.

Between 2024 and 2026, if one of the following tests is met, the entity/entities in a given jurisdiction qualify for the safe harbour, and the top-up tax for that jurisdiction will be deemed to be zero for the period:

• De minimis test: The group’s Country-by-Country Report (“CbCR”) revenue in the tested jurisdiction is less than €10 million, and the group’s CbCR profit (or loss) before tax is less than €1 million.
  
• Simplified ETR test: The tested jurisdiction has an Effective Tax Rate (ETR) that is more than the transition rate for the fiscal year (15% in 2023 and 2024, 16% in 2025, and 17% in 2026).
  
• Routine profits test: The group’s CbCR profit (or loss) before tax in the tested jurisdiction is equal to or less than the Substance-Based Income Exclusion (“SBIE”) amount. The SBIE amount is computed based on the payroll costs and tangible assets in the jurisdiction.

QDTT Credits and Global Tax Rules

It is also worth noting that any QDTT paid in Ireland should be allowed as a credit against the Income Inclusion Rule (IIR) tax or Undertaxed Payments Rule (UTPR) tax liabilities that are due in other jurisdictions by the group, providing additional protection to the Irish tax base of these multinational groups.

In brief, the IIR rules require the ultimate parent entity in the group to determine if its constituent entities have paid the minimum 15% tax in each jurisdiction and pay the additional taxes in its jurisdiction to meet the minimum 15% tax. The UPR rule taxes groups that are not residents of a jurisdiction that has adopted the Pillar 2 rules and applies to groups not paying the minimum 15% tax. The UPR rule will require an increase in tax at the subsidiary level.

Short-Term Benefits and Long-Term Risks

In the short term, most economic commentators believe that these new provisions will lead to additional tax being collected in Ireland.

In the longer term, the taxes collected will depend on the economic presence of groups in Ireland and how they organize their structures going forward. The impact of the proposed Pillar 1 changes, which will reallocate some taxing rights based on market jurisdictions, may ultimately have an adverse effect on the tax base in Ireland and could, in the longer term, reduce the taxes collected from multinationals in Ireland.

Brought to you by the AGN EMEA Tax Committee

If you have any questions in relation to this article, please get in touch with Paul Dillon.

Paul Dillon
Tax Partner
Strata Financial

Email: paul.dillon@stratafinancial.ie
Phone: (+353 1) 668 2404
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