Paris - Ireland has decided to join an international effort to impose a global minimum tax rate on multinational corporations that Dublin had previously opposed.
Here are key questions regarding the reform and Ireland's concerns:
- How did we get here? -
In 2017, the Organisation for Economic Cooperation and Development (OECD) was tasked by the G20 group of industrialised and emerging economies to fight what is known as domestic tax base erosion and profit shifting (BEPS).
In other the words, how multinational companies take advantage of different countries' tax systems to limit the amount of tax they pay, also known as tax optimisation.
The talks got a boost earlier this year when the administration of US President Joe Biden backed a global minimum tax rate of at least 15 percent to put an end to a "race to the bottom" between nations.
The coronavirus pandemic has also added urgency to the reforms as countries need new sources of revenue to pay for huge stimulus programmes that were deployed during last year's global recession.
On July 1, the OECD announced that 130 countries agreed to a tax rate of "at least" 15 percent. A handful of other countries have since joined it.
Ireland signs up to global tax reform agreement
- Two pillar reform -
The proposed reform is comprised of two pillars to deter companies from establishing bases in countries with low taxes to maximise profits earned elsewhere.
Pillar one would give countries a share of the taxes on profits earned there, though the tax would still be collected where the company has its fiscal base.
Multinationals operate in many countries -- oil giant BP is present in 85, for example -- but usually pay taxes on profits only in their tax home.
This provision would initially apply only to the top 100 or so companies, before expanding after seven years.
Pillar two is a global minimum corporate tax rate of "at least" 15 percent to stop competition between countries over who can offer companies the lowest rate.
The OECD says a global minimum corporate tax rate of 15 percent could add $150 billion to government coffers annually.
- Why was Ireland opposed? -
Ireland has attracted the likes of Apple, Google and Facebook to its shores thanks to a 12.5 percent tax rate, lower than in the United States and most other European Union countries.
The country was reluctant to join the global tax movement because the proposed deal talked about a rate of "at least" 15 percent, which Dublin feared could leave the door open to raising it.
Finance minister Paschal Donohoe said Ireland would raise its corporate tax rate from 12.5 to 15 percent for multinationals with more than 750 million euros ($867 million) in annual sales.
Thursday's change of position means Ireland becomes the 135th country to join the pact.
- What now? -
Ireland's approval removes a key stumbling block, but the tax still faces a long road to becoming a reality.
The OECD is holding talks Friday that could lead to agreements on the finer details of the reform.
G20 leaders are expected to sign off on the deal when they meet in Rome in late October.
But it does not end there.
The legislatures of each signatory will then have to approve the reform, with the OECD hoping that the new tax regime could be in place by 2023.