Sunday 16 December 2018

No sentimental journey for Trump aide

Irish-American Kevin Hassett is ready for tough talking on tax in Dublin, writes Group Business Editor Dearbhail McDonald

Kevin Hassett says he expects the trade deficit between the US and Ireland to decline
Kevin Hassett says he expects the trade deficit between the US and Ireland to decline

According to Irish genealogy, a person bearing the surname O hAiseadha (Hassett) is a descendant of Aisidh, a name reputed to mean 'discord' or 'strife'.

But one tribesman, Kevin Hassett, Chairman of the White House Council of Economic Advisors (CEA), insists that the message he is bringing to Ireland - ahead of a formal visit by US President Donald Trump to Dublin and Doonbeg in November - is one of unbridled economic peace.

One of President Trump's top economic emissaries, Hassett - a regular pundit on Fox Business and other TV networks - is a former economic adviser to a series of high-profile political campaigns. They include the 2000 and 2008 presidential campaigns of the recently deceased US Senator John McCain as well as George W Bush's presidential campaign in 2004.

Hassett, whose appointment as the White House's chief economist was hailed as a major bipartisan win, travels to Dublin this week.

He will address senior policymakers including An Taoiseach Leo Varadkar, as well as top executives from the United States and Ireland, at a major summit at the US Ambassador's residence.

The delegates attending 'Racing toward a Trillion: The Future of US-Irish Business' will debate US-Ireland economic ties as America's economy booms.

The US economy is soaring despite threats of trade and tariff wars with China, Canada and the European Union, amongst others, and despite seemingly endless political controversies involving Trump, one of the most polarising presidents in living memory.

Hassett, who traces his roots to Limerick and Tipperary, is coming home. But he's not sentimental about the prospect and he relishes the task of paving the way for President Trump.

"I'm not one of these genealogy-obsessed Americans, but I definitely grew up in an Irish-American household," says Hassett (56), who claims that Ireland has "nothing to fear" from the largest overhaul of the US tax system in 30 years.

The $1.5trn (€1.2trn) tax cut package reforms, the details of which have yet to be teased out fully, reduced America's corporation tax rate from 35pc to 21pc - above Ireland's 'red-line' rate of 12.5pc but a huge drop nonetheless.

The gargantuan Tax Cuts and Jobs Acts (TCJA) treats foreign profits that have not yet been repatriated to the US as repatriated (and taxes them at a lower rate) and introduced a modified territorial regime which allows 100pc deduction for dividends paid to US corporate shareholders by foreign-owned subsidiaries.

To tackle anti-avoidance, the TCJA effectively requires US multinationals to pay a minimum average 13.125pc rate of foreign tax on overseas assets to avoid a 10pc US tax on those foreign profits. This measure, dubbed GILTI (global intangible low-taxed income), is targeted at profits attributable to intangible assets.

One measure that is causing some angst on this side of the Atlantic and elsewhere is a new measure known as Beat (Base Erosion and Anti-Abuse Tax) which is intended to limit multinationals' ability to minimise their US tax liabilities.

Until the law changed, foreign companies could understate their US earnings by loading up their US subsidiaries with debt owed to the non-US parents. Under the new measure, however, US companies' American-based operations will be taxed on a "modified" income which will make costs paid to their foreign entities - such as inflated management fees to a sister subsidiary in a high-tax jurisdiction, service payments and royalties - non-deductable.

The tax rate on this modified income will rise from 5pc this year to a familiar sounding 12.5pc by 2025. The new Beat provisions have been described by a recent IMF working paper as "notably more aggressive" than those agreed under the OECD's Base Erosion and Profit Shifting (Beps) instrument.

Finance Minister Paschal Donohoe, who published Ireland's Corporation Tax Roadmap last week, insists our competitive tax offering won't be affected by President Trump's tax reforms.

But the Government's own anti-boom-and-bust watchdog, the Irish Fiscal Advisory Council, also warned last week that an adverse shock to the Irish economy from Brexit, changes to the international tax environment or Trump's protectionist trade policies is now inevitable.

The US legislation is incredibly complex, but Trump's trade agenda is uncompromisingly clear - to reduce outward investment from the US and move production and jobs back home.

So how much of a threat do recent changes to the US corporate tax regime and America's testy relationship with the European Union - Trump and Jean-Claude Juncker, the European Commission president, just about averted an all out trade war in July - pose to the Irish economy?

How will it play out for Ireland as the US and Europe engage in wars over a planned digital services tax, privacy disputes, state-aid rows and anti-trust brawls that have seen Google hit with almost €7bn in fines by the European Commission, the same body that ordered Apple to pay €13bn back to the Irish Government?

Is Ireland regarded by this White House as a 'tax haven' or as a strategic ally and a vital entree to Europe? And just what does Trump's trade agenda mean for Ireland?

First, the good news.

The business relationship between Ireland and the US has transformed exponentially in recent years and, according to Hassett, Ireland is going to benefit from a soaring US economy.

"When the US economy is growing north of 4pc, that is very good for the Irish economy," says Hassett. "Ireland and the US, our economies are so tightly linked that the booming US economy is going to have more a dominant economic effect on Ireland, than the other stuff we are talking about."

Ireland and the US enjoy deep cultural and historical ties, not least because of America's intrinsic role in helping to secure, and sustain, peace in Northern Ireland.

Today, they enjoy bilateral trade in goods and services of some €100bn a year and the value of the two-way relationship has doubled in the past decade to more than $700bn (€602.5bn).

More than 700 US companies have operations in Ireland, directly employing 155,000 people here - and that's before the critical multiplier effect.

But it's increasingly a two-way street, with 800 Irish-owned companies operating across all 50 US states, employing more than 100,000 people there.

Last year alone, the value of trade between the US and Ireland exceeded $59bn (€50.7bn).

And the value of Ireland's foreign direct investment (FDI) was calculated at over $85bn (€73.15bn), according to the United States Bureau of Economic Analysis, making Ireland, with a population of less than five million, the ninth-largest supporter of FDI to the US economy with an estimated population of more than 327 million people.

Viewed through these headline statistics alone, a $1trn relationship between Ireland and the US seems more than a realistic milestone to achieve.

But the stats tell only part of the story.

They do not paper over the cracks of the distorting effect on Ireland's GDP by the sheer weight of US involvement in the Irish economy, where 51 of our top 100 largest corporate tax-paying companies are American - just 10 are Irish.

About 40pc of receipts from Irish corporation tax, a record €8.2bn last year, came from just 10 firms. This leaves Ireland, which adopted a new measure, modified gross national income (GNI*), to filter out the distorting noise associated with multinationals, vulnerable to changes in the international tax environment.

Nor can the 'special friendship' conceal the potential pitfalls that lie beneath a relationship that is no longer taken for granted by either side.

President Trump has, at times, adopted a hostile stance towards Ireland where his beloved Doonbeg golf course is located. Trump has repeatedly targeted Ireland's "chronic" surplus with the US, and he singled out Ireland in the run-up to the passing of the TCJA last year.

In October, he told reporters in the White House: "I hear that Ireland is going to be reducing its corporate rates down to 8pc from 12pc."

This prompted a rebuke in the Dail by Varadkar who insisted overall trade flows are balanced and dismissed Trump's claim Ireland would reduce its corporate tax rate to 8pc as "fake news".

Hassett has also namechecked Ireland in the not so distant past, telling the influential Marketplace radio host Kai Ryssdal last November that US companies were moving their activities offshore to tax havens, mentioning Ireland in the next breath. "About 11pc of the workers in Ireland are employed by US multinationals who are moving all the profits there and increasing demand for labour there but not here," Hassett told Ryssdal, adding that American CEOs would think twice about locating in Ireland if Trump's reforms (now laws) were passed.

Hassett also complained that US tax law, as it then stood, allowed US multinationals as to move their income "willy nilly" to Ireland, complaining of bloated profits in Irish subsidiaries of US firms that "turned up" as a big increase in imports.

"There's a recent study that suggests that more than half the [Irish] trade deficit is attributable to this transfer pricing trick," he railed.

Hassett's remarks to Marketplace, were, in fairness, made as part of a fevered debate in advance of the TCJA, which remains the single biggest win of Trump's presidency to date.

Hassett's tone has softened considerably on his ancestral homeland. Does Hassett, a tax policy specialist and author, still regard Ireland as a tax haven?

"I think 'haven' is a loaded word," says the married father-of-two carefully, before resuming his trademark upbeat tone.

"I think Ireland has a super-attractive tax climate and has played an historically important role for multinationals over the last couple of decades.

"Ireland's status as an entree into the European market and its attractive tax environment, combined with the US tax code, made it easy for US firms to defer taxes if they located the taxes in Ireland. It made it so that American firms could compete in Europe. And US firms would probably have had a hard time competing in Europe if it wasn't for the presence of Ireland."

Hassett says Ireland was of "significant" historic economic importance to US companies precisely because America's tax code was "so ill-conceived". And he insists that Ireland will remain an important entree for American companies into Europe long after rules, including updated transfer pricing guidelines, take effect.

Indeed, it is changes to transfer-pricing rules - the pricing of transactions between connected companies and is a major issue facing multinational companies across the globe - that Hassett says will reduce the trade deficit.

Last year, Ireland was identified by the White House as one of a group of countries running an "unfair" trade surplus with the US, registering a $36bn surplus in 2016 - largely driven exports to the US from multinational pharmaceutical companies - Ireland's largest export sector to the US.

"The President is right to emphasise the trade deficit, as a summary statistic of how trade deals are treating our countries," says Hassett, who predicts the US-Ireland deficit will decline significantly over the coming years.

"The big story of the Irish trade deficit is related to transfer pricing and tax harmonisation," he says, adding that there is not a lot of more room in the tax space anymore.

"There is a special case in Ireland that makes it quite a bit different to the rest of the EU," he says. "And its status as an attractive tax climate has inflated the trade deficit because of transfer-pricing issues that are no longer so powerful.

"My expectation is that the trade deficit over the next few years with Ireland will decline because a big chunk of it - attributable to transfer pricing - will mean that US multinationals will no longer be such a sensible plan for them.

"The benefit of locating tax profits in Ireland has declined sharply for US multinationals and that should reduce the trade deficit with Ireland significantly."

One of the many concerns for Ireland Inc is that the new US reforms will make it more attractive for multinationals to move all or part of their operations back home to America.

There was an unwelcome shudder earlier this month, when US internet domain registry business Afilias moved its headquarters out of Dublin and back to the US. The move by Afilias, headquartered here since 2001, comes on the back of a warning earlier this year by IDA boss Martin Shanahan that Trump's tax changes were causing businesses to rethink plans to invest in Ireland.

Hassett says that the sweeping reform of the US tax system won't result in an exodus of multinational jobs and investment from Ireland to the US and will, in fact, increase trade between the two countries. "I don't think we should think of it [Trump's trade agenda] as sucking factories out of Ireland," says Hassett.

"We aren't going to see, especially in these booming times when capacity constraints are starting to bind us, plants shutting down left and right around the world and re-opening in the US.

"What we are going to see is the next new thing is going to be located in the US, that's going to be the dominant effect."

Hassett says that it strikes him as "extremely unlikely" that Irish people seeking to understand Trump's trade agenda - we've been relatively unscathed so far on the tariff front in the EU-US trade dispute - should worry about factories closing here. "What we are trying to do, moving forward, is make the US a very attractive location for manufacturing which it wasn't when President Trump took office."

Hassett predicts a new world order where American regions will have to compete with Ireland (and vice versa) for new capital investment and location of plants, particularly in the pharma industry which Trump wants to bring back home.

"The US has become a much more attractive location for that next plant, that next device," he says. "Ireland is still an attractive location for the next plant and our municipalities will have to compete with Ireland for the location of plants that were previously located in Ireland by multinationals that have got really good at expanding economic activity in Ireland.

"Part of the huge expansion of US multinationals in Ireland is because they have a permanent footprint and a permanent partnership between our countries."

The Irish Government insists that the level of US investment here cannot be attributed to corporate tax policy alone and believes the US-Ireland relationship will thrive as Ireland remains - with its talent pool, infrastructure, innovation and its R&D plaudits - a competitive and attractive EU location to invest in and do business from. Hassett, who lauds Ireland's investment in human capital and who is confident that Canada will follow in Mexico's footsteps in the renegotiation of Nafta, agrees.

But how does this White House feel about the future of the EU-US relationship and the fate of US companies in Europe? And will Ireland, the EMEA HQ for so many US tech giants, get caught in the inevitable geo-political crossfire?

Three years ago the Court of Justice of the European Union (CJEU) struck down the Safe Harbour framework used by about 4,500 companies to transfer personal data from Europe to the United States. The case commenced its controversial journey in the High Court in Dublin.

The same court is about to rule again on the validity of data transfers under Safe Harbour's successor, known as Privacy Shield. That case also began life in an Irish courtroom.

The European Commission has levied almost €20bn against Google and Apple in recent years, with the Apple tax ruling under appeal by both the tech giant and the Irish State which last week restated its opposition to EU proposals for a digital tax.

Streaming services such as Netflix and Amazon will soon have to ensure that at least 30pc of their content is local, ie European-made, bought or make contributions in lieu to national film funds.

America's media power (and influence) is truly global. But Europe's new General Data Protection Regulation (GDPR) regime has led to up to a third of US media outlets suspending their services in Europe. US tech companies - four of whom recently issued a last-ditch appeal to the Trump administration to protect key products from being included on a list of $200bn in fresh tariffs on Chinese imports - want to see a de-escalation of conflict between the EU and the US. Hassett says the administration is keeping a close eye on the treatment of US companies by European regulators and warns that the White House will react if it believes American companies are being unduly targeted, citing the treatment of American companies in China. "We certainly want to make sure that Europe is moving in that [China] direction," he says. "Sometimes one wonders whether, if US firms are really successful, if the success itself doesn't make them a target."

For one of Trump's most vocal economic envoys, Hassett is somewhat cautious when I ask him about the Trump administration's views on Brexit and its implications for Ireland.

Trump - who took aim at British Prime Minister Theresa May's Brexit plans last July, and mistakenly labelled Ireland as part of the UK - said a deal with the EU would "probably kill" a deal between the UK and the US.

Hassett hasn't always been so coy on Brexit, co-authoring an article for Foreign Affairs in July 2016 on Brexit and economic competition weeks after the divisive poll. In 'The Good News About the Leave Vote', Hassett and his co-author Glenn Hubbard argued Brexit could be a significant positive both for the UK and Europe.

Now, Hassett says that the White House is "hopeful" that Brexit works out.

"We are looking forward to a positive outcome for all. We don't want to intrude on difficult negotiations, especially for the people of Ireland with the whole Border issue and everything to resolve".

Kevin Hassett is an intriguing warm-up act for the visit to Ireland by President Trump which could yet, in the manner of Varadkar's landmark speech to Pope Francis, re-shape this longstanding alliance.

Last Friday, Varadkar reiterated the "very strong" economic, cultural and family links between the US and Ireland. "We want to maintain them and deepen them," he said, adding that he relationship between Ireland and the US is much more important than any particular president or any particular Taoiseach.

"But there are also areas where there's an enormous divergence now on the position between the position of Irish Government and the European Union and America on issues like free trade, for example, on issues like migration, on issues like climate change.

"And I certainly won't be behind the door in robustly saying to President Trump what I think and the Irish people think about those things."

Honest friends will tell you important truths, pleasant and otherwise. Hassett, who comes bearing peace (for now, at least), is more than up to that task.

CURRICULUM VITAE

Name: Kevin Allen Hassett

Age: 56

Position: Chairman of the White House Council of Economic Advisors - chief economist to the White House

Lives: Washington, DC

Family: Married to Kristie, they have two sons, John and Jamie

Education: Bachelor's degree from Swarthmore College; PhD in economics from the University of Pennsylvania

Previous experience: Prior to becoming chairman of the CEA, Hassett was an economist at the American Enterprise Institute; a senior economist at the Board of Governors of the Federal Reserve System and a consultant to the US Treasury Department

Irish roots: Hassett grew up in an Irish-American household in Greenfield, Massachusetts and has traced his Irish roots to Limerick and Tipperary

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