Ireland Inc may be a big loser in race for the White House
Promises of deep and radical changes to the US corporate tax regime pose a significant threat to investment in Ireland
Published 08/05/2016 | 02:30
Ten long weeks of government formation have produced an enormous list of concessions on public spending. The Independent deputies must feel they have been negotiating with the Make-a-Wish Foundation. A rough costing (remarkably there is none in the documents that have been released) puts the bill at €3bn in annual cost and leaves the State's finances ever more exposed to whatever problems are coming down the track. The problems in Europe, including the risk of Brexit and the continuing travails of the common currency, are not the only ones. The biggest threat to long-term recovery in Ireland could be coming from the west.
The next US president will be either Hillary Clinton or Donald Trump. If you fancy a wager Clinton is heavy odds-on: bet €5 and you would win only about €2. Trump is around 9 to 4 against. You can have any price you like about the other possibilities. The odds are saying that Clinton is the likely winner, a Trump victory is possible while the other nomination-seekers in the Democratic and Republican parties have no chance left.
Ireland's industrial strategy has been built for decades around inward direct investment and the core attraction is a low tax rate on corporate profits. The nominal rate in the US works out at 39pc (combining federal and state impositions), but averages around 25pc in many European countries and just 12.5pc in Ireland.
Most of the multinational companies that have chosen to locate here are US corporations and the leakage of both jobs and tax revenues to foreign jurisdictions, including Ireland, has become a headline issue in American politics. There are also investigations into Ireland's corporate tax policies under way at the European Commission while the Paris-based OECD, the club of the world's more developed countries, is promoting an international agreement which could affect Ireland too.
At this stage it looks as if the bigger threat to Irish policy will come from the US rather than Europe. Irish policy has not been particularly successful in attracting companies here from Britain or continental Europe. But US companies, not all of them manufacturers, employ 140,000 people according to the US-Ireland Chamber of Commerce. Whatever happens at European level, unilateral action by the United States would affect adversely the attractions of Ireland for new investment from the US and the survival prospects of companies already here.
The US corporation tax rate is one of the highest in the world. But many US corporations never have to pay tax at the 39pc rate. There is an arrangement which permits them to defer tax liability on foreign earnings until the proceeds are repatriated to the US. In practice this postponement can be forever and there are other legal and accounting devices which the companies can exploit. Some big and profitable multinationals pay very little tax in the US and enjoy low worldwide tax bills too.
An estimated two trillion dollars is now parked overseas, beyond the reach of the US taxman, while over 80 of the US's 100 biggest companies have subsidiaries in countries regarded either as tax havens or as low-tax jurisdictions. Fifteen US corporations were keeping at least €5bn abroad at the end of 2014.
Two perceptions have become ingrained in the American political debate in recent years. The first is that US corporations are exporting jobs; the second that the US Treasury is being short-changed by corporate tax avoidance. The first contention is disputed but the second is beyond argument. Some US corporations report large profits in low-tax countries where they have little serious economic activity. Others have managed to route profits through jurisdictions which have no corporate taxes at all and even through corporate legal structures which have no tax residence anywhere. Treaties designed to avoid double-taxation, where a company could end up paying tax twice on the same profits in both the home parent and the foreign subsidiary, have been cleverly deployed to reduce tax liability to very low levels.
American politicians tend to blame shifty foreigners for this state of affairs but the ultimate source of the problems is the US tax code itself, particularly the deferral arrangement for non-repatriated profits. In the current political climate there could be changes on the way, whoever wins the presidency in November. Both Clinton and Trump, almost certain to be the candidates, have been making commitments to unilateral action (the US does not do painstaking consultation with affected parties) and the die could be cast over the next few months as the campaign intensifies. There has already been action from the outgoing Obama administration to stop so-called inversions, a manoeuvre which removes the corporate tax residency from the US altogether.
Here are some quotes from the Clinton campaign document called 'Make it in America':
n "Crack down on companies shipping jobs and earnings overseas - and create incentives for companies to bring back jobs to the US."
n "Claw back the special tax breaks that corporations received for locating research and production here at home if they ship jobs overseas, and use the proceeds to invest in America."
n "End abusive inversions and impose an 'exit tax' on companies that leave America to lower their tax burden."
n "Coordinate government efforts within the US and overseas to recruit and ease the path for companies to bring back jobs to the US."
In addition to his exciting plans for a trade war with China and a wall along the Mexican border, Donald Trump also has his eye on corporate taxes:
"No business of any size, from a Fortune 500 to a mom-and-pop shop to a freelancer living job to job, will pay more than 15pc of their business income in taxes. This lower rate makes corporate inversions unnecessary by making America's tax rate one of the best in the world."
The next Trump policy is admirably clear and specific:
"A one-time deemed repatriation of corporate cash held overseas at a significantly discounted 10pc tax rate, followed by an end to the deferral of taxes on corporate income earned abroad."
Whoever wins in November will quite likely enter office already committed to unilateral changes to the American tax code sufficient to eliminate, or at least to reduce sharply, the attractions of Ireland to US multinationals. This would constitute the biggest challenge to Irish industrial policy in a generation. Add in Brexit and there are bigger issues to engage the new Government than water charges and the rules about turf-cutting.
It has long been a staple of official rhetoric about inward investment that the favourable tax regime is but one of many factors that make Ireland an attractive location for US companies. The public is regularly reassured that Ireland is a gateway to the European market, is an English-speaking country and has a well-trained workforce. None of these attributes is unique: every country in the European Union offers trade access, English has become the business language everywhere and it is notable how many US companies in Ireland rely on the recruitment of employees from across Europe.
If you sincerely believe that the favourable tax regime is not the critical factor in attracting US multinationals here, your hypothesis is about to be tested.