TIF FEB UI

Written by: DAFI IZZA RAZZAQ & VALDIS CHRISTYANTO BELTSAZAR

For decades, multinational enterprises have increasingly exploited gaps in international tax rules and moved their profits to low-tax jurisdictions countries commonly known as tax havens, to reduce their corporate tax liabilities. This practice is known as Base Erosion and Profit Shifting (BEPS), this has led to significant revenue losses for many countries due to the loss of potential tax income from these multinational enterprises exploiting this tax avoidance practice. One of the most well-known tax avoidance strategies is the "Double Irish" agreement, a strategy that was widely used by U.S. based technology multinational companies.

The Double Irish Strategy

This method involved routing the profits through two Irish subsidiaries, one of which is a tax resident in a low or no tax jurisdiction country such as Bermuda, and the other one a tax resident in Ireland. This strategy allowed multinational companies to significantly reduce their effective tax rates, and save them tens of billions of dollars in taxes over several years, resulting in massive base erosion of tax revenues in higher tax jurisdictions.

Ireland, which had been renowned for its low 12.5% corporate tax rate, was the hub for multinationals and was at the center of this tax avoidance plan, it was a hub for U.S. tech giants such as Apple, Meta and Google. This led to economic growth in Ireland but at the cost of global condemnation by the world for enabling tax avoidance. When concerns about profit shifting and tax erosion grew, the OECD and G20 launched the Base Erosion and Profit Shifting Project (BEPS), which led to BEPS 2.0 and created a two-pillar solution to address and counteract the digitalization of the economy and profit shifting.

BEPS 2.0 and Global Minimum Tax

BEPS 2.0 Pillar 2 introduced a 15% global minimum corporate tax rate for large multinational companies with revenues exceeding €750 million a year. The goal was to stop these multinational companies from avoiding taxes by shifting their profits to countries with lower to no taxes, like they did using the Double Irish agreement. This global minimum tax rule will now remove the benefits of routing profits through tax haven countries such as Ireland and Bermuda, which allowed multinational companies to significantly lower their tax bills.

For Ireland, this marks the end of its time as a tax haven, the country is expected to lose billions of corporate tax revenues as it can no longer offer artificially low tax rates to attract multinational companies. For multinational corporations such as the U.S. tech giants using tax avoidance strategies, this will result in higher global tax bills and less room for tax planning using off-shore vehicles. Simultaneously, in their home nations such as the U.S., they may benefit to some extent as there will be more profits taxed closer to where the business activity is actually taking place so that they are able to recapture and regain lost tax revenue.

Impact on Ireland and Global Tax Policy

The implementation of BEPS 2.0 and its global minimum tax is expected to reduce Ireland's attractiveness as a tax haven. Ireland's low corporate tax rate once made it a favourable center for tax avoidance strategies such as the Double Irish, but with the arrival of BEPS 2.0 Pillar 2, such strategies are now much less effective, as the global minimum tax now removes the benefits of artificially low effective tax rates. The Irish Department of Finance has projected an annual loss of approximately €2 billion in corporate tax revenue due to the global minimum tax (Irish Department of Finance, 2023). Profits that were taxed lowly in Ireland will now be either taxed higher domestically or be subject to top-up taxes in other jurisdictions.

Conclusion

The introduction of the 15% global minimum tax under BEPS 2.0 Pillar 2 should be seen as a turning point in international tax reform, especially for countries like Ireland that had relied on low-tax strategies to attract investment in the past. Even though the Double Irish is no more, its broader implications continue to shape global tax policy. This is a turning point for developing countries such as Indonesia, an opportunity to conform to international standards, attract ethical investment, and securing our fair share of the global tax revenue.

References

OECD. (2023). Tax challenges arising from the digitalisation of the economy – Global Anti-Base Erosion Model Rules (Pillar Two). OECD Publishing. https://www.oecd.org/tax/beps/

Irish Department of Finance. (2023). Budget 2023 – Economic and tax strategy report. https://www.gov.ie/en/publication/

OECD/G20 Inclusive Framework. (2021). Statement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy. https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-july-2021.htm