The battle to win US investment is about to get tougher

Cliff Taylor: Trump’s proposal of a 20% rate could slow the amount of overseas investment

Cliff Taylor: However as the only English-speaking country in the EU post-Brexit, with a large number of established American companies, we still have a strong enough hand to play.

Cliff Taylor: However as the only English-speaking country in the EU post-Brexit, with a large number of established American companies, we still have a strong enough hand to play.

 

For years Ireland’s corporate tax regime has been one of the factors attracting US investment here. So when a new US president outlines plans for change, it is important for Ireland – and particularly when the stated goal is to keep investment and jobs in the US. President Trump’s tax plan – if it is enacted – will not lead to a flood of US companies leaving Ireland, but it is yet further evidence that, in future, tax will be a less important factor in attracting new investment here.

Overall the Trump plan, if it gets through Congress, may slow the flow of US investment into Europe and other overseas locations. However as the only English-speaking country in the EU post-Brexit, with a large number of established American companies, we still have a strong enough hand to play in competing for those who are looking for an overseas base.

There will be relief here that some original parts of the Trump plan, which could have provided a bigger blow to US foreign investment, appear to have been shelved. And it is also important to note that the plan, running to just nine pages, left many questions unanswered, particularly on how it would all be payed for. The final shape of what will become law thus remains unclear.

Reduction

When President Trump came to office, he signalled that he wanted to cut the corporate tax rate in the US from 35 per cent to 15 per cent. The target has now been amended to 20 per cent, still a significant reduction. The goal is to boost profitability and US growth and also to encourage US firms to invest more at home and less abroad.

The existing regime pushes US firms to invest overseas to serve international markets, as – broadly – they are allowed to avoid paying relatively high levels of US corporate tax on profits which are not returned to America. This has led big US players to hold massive amounts of cash offshore – the current total is estimated at $2.6 trillion. Part of Trump’s plan is to offer a once-off low tax rate to encourage firms to repatriate some of this cash to the US, though the plan did not say what the rate would be.

So how will we measure up if the Trump plan passes into law? Ireland’s 12.5 per cent tax rate on corporate profits still looks attractive by comparison with the proposed new US rate – and there is more clear blue water than there would have been if the US rate was cut to 15 per cent.

Of course the tax considerations of an investment decision go a lot wider than just the rate. For years US companies have used complex structures to move profits earned outside the US to offshore tax havens. Mr Trump wants to change the system which allowed this to happen and which has encouraged big US players to build up billions in earnings held offshore.

Ireland has been a link in the global chain, with profits often moved through the European headquarters of big US companies based in Ireland and onwards to tax havens. The controversial double Irish tax regime – now being phased out – specifically facilitated this. This particular form of aggressive tax planning will be no more if Trump’s proposals become law, as it will change the system on which the US collects corporate tax from one taxing worldwide profits to one taxing profits earned in the US, even if here the detail of what was announced is somewhat confusing.

Focus

“Moving from a worldwide to a territorial basis of taxation shifts the focus to income earned within the country and it can neutralise some cross border tax avoidance devices,” according to Brian Keegan, head of tax at Chartered Accountants Ireland. The change will be significant in terms of how the big companies pay their tax. But in also suggesting that some worldwide profits will remain subject to US tax, the Trump announcement is unclear. Tax is all about detail and a lot is lacking in what was announced.

Ireland’s offer to overseas investors has evolved over the years.Originally based on a combination of low tax, grants and an English-speaking location, it is now more multi-faceted. There is now a strong group of existing US companies here and, in many sectors, the availability of skilled employees and a developed infrastructure and support base.

The attraction of foreign direct investment – and the spin-offs – have been central to our economic policy and the game will get tougher in the years ahead.There are more than 700 US companies employing 150,000 people directly who are a central plank to our economy. The top 10 alone pay 40 per cent of all corporation tax. There is a lot at stake here for Ireland.

For Donald Trump, the agreement with Congress Republicans is a big step forward towards delivering on promised tax reform, but there is still an awfully long way to go.

Cuts in corporate and personal taxes are forecast to cost $5 trillion over ten years, but the cuts in special tax allowances and deductions, intended to fund around half the cost, have still to be outlined, never mind negotiated. There is still plenty of room for rows and delays. The administration wants to have it all agreed by the end of the year, but this is far from a done deal.

Part of the Trump strategy is to give a boost to US growth, even if his predictions that the US growth rate can more than double to 6 per cent per annum have been greeted with incredulity.

In Trump’s zero sum game view of the world, more growth in the US would mean less elsewhere. Ireland’s hope is that even if attracting future US business may become a bit tougher, we can still win a decent share of what is available.

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