Ireland has been forced to abandon its low tax business model in the face of pressure from Joe Biden, putting the country's status as a haven for global companies at risk.
The sacrosanct 12.5pc tax rate has been the cornerstone of the Irish economy for almost two decades, and helped attract some of the world’s biggest corporations, such as Facebook and Google, to set up their European headquarters in the country.
The decision removes a major hurdle for a global minimum tax rate of 15pc which has been championed by the US and will reshape the landscape for multinationals.
Ireland’s new tax rate will affect more than 1,500 companies, which employ around 500,000 people, and will raise questions about whether the country can continue to attract major international tech giants to its shores.
The decision to cave to international pressure comes after weeks of wrangling over the wording of Joe Biden’s global deal on corporation tax. In July, Ireland was one of nine countries to reject the agreement, as it sought to maintain its low tax rate in a move that angered the Biden administration and fellow EU member states.
The refusal to back the shake-up was viewed as a snub to Mr Biden who has stressed his fondness for Ireland and highlighted familial ties to the Republic.
Ireland now joins 140 countries in agreeing to the effective 15pc rate on large multinationals ahead of a meeting of the Organisation for Economic Co-operation and Development (OECD) on Friday.
Paschal Donohoe, Ireland’s finance minister, said Dublin managed to get the OECD to scrap the phrase “at least” from its July draft pledge for a tax of “at least 15pc”, making it more palatable for Irish ministers.
The 15pc rate will only apply to companies with an annual turnover of more than €750m (£636m). Smaller firms will still pay the 12.5pc rate, Mr Donohoe said.
He said: “This agreement is a balance between our tax competitiveness and our broader place in the world.” He added that the move “will ensure that Ireland is part of the solution in respect to the future international tax framework.”
The move will cost the country around €2bn in lost revenue in the coming years.
Ireland's low tax rate has been in place since 2003 and was at the forefront of the country’s strategy of attracting international investment during its so-called “Celtic Tiger” boom in the 2000s and again during its recovery from the 2008 financial crisis.
The decision to ditch its cherished tax rate represents a sudden shift away from one of the country’s cornerstone economic policies.
In 2016, Brian Hayes, a senior Irish MEP from the governing Fine Gael party, warned that Ireland should follow the UK out of the EU if its 12.5pc rate became threatened.
At the time, he said: "That is the absolute red line issue. If any attempt is made to cajole us, as far as I'm concerned, we're out the door.”
Mr Donohoe said the historic move is the “right decision”, adding that it is “sensible and pragmatic” and has been “made in the interests of our country”.
The new global minimum tax rate is expected to come into effect from 2023, Mr Donohoe added. Financial services businesses and those in the extractive industries are excluded from the deal.