Ireland needs a trade strategy to avoid getting Trumped
Trump’s ‘America first’ trade and tax policy will have major implications for Ireland
If Trump reduces corporate tax, Ireland’s ability to attract FDI from US companies such as Intel could be under threat.
Whether we like him or not is irrelevant – his approach and stated tax and trade positions, which include lowering the federal corporate tax rate from 35 per cent to 15 per cent and to pursue an “America first” trade policy, could have a significant impact on our small open economy.
We do not know whether Trump will do in office all the things he said he would do during the campaign. But he will serve four years as president at a minimum. Ireland needs to work with him, his administration and friends of Ireland in Washington.
However, most critical now is for us to take a fresh look at our market position and foreign direct investment (FDI) strategy to ensure they will continue to work well for us in the changed US political landscape.
There are a number of options open to us including lowering our corporate tax rate of 12.5 per cent, seeking a more flexible application of EU fiscal rules which currently limit capital investment in infrastructure, and increasing our efforts to support the re-emerging indigenous sector.
We must also focus on non-tax factors such as political and economic stability, our regulatory regime, labour availability, operating costs and market access in order to retain our FDI companies.
Trump proposes lowering the US federal corporate tax rate from 35 per cent to 15 per cent and provide a deemed repatriation of corporate profits held offshore at a onetime rate of 10 per cent (payable over 10 years).
Firms engaged in manufacturing in the US may elect to expense capital investment and lose deductibility of corporate interest expense.
Under Trump’s stated corporate tax regime, US corporate tax would in future apply to a US-headquartered multinational corporation’s (MNC) worldwide income, with a credit given for taxes paid in other countries. This would end the current law’s deferral of tax on these profits until repatriated.
Aligned to the above, he intends to pursue an “America first” trade policy.
The underlying assumption is that his changes would bring a much higher level of annual economic growth, thus creating a larger economy, and that this would “pay” for the dramatic reduction in the corporate tax rate.
From an Irish perspective, the concern is that large reductions in the US corporate tax rate and the repeal of deferral would reduce the incentive for companies to locate activities outside the US, including in Ireland.
In particular, business functions that do not need to be close to a key market location will now be more likely carried out in the US than elsewhere.
As tax will no longer be one of the key drivers of decisions as to where to locate, the focus of US businesses in future will be more on political environment, economic stability, regulatory regime, labour availability, operating costs, market access and so on. In essence, non-tax factors will determine the location of business activities.
Ireland needs to review its FDI strategy to ensure it is fit for purpose in this new paradigm. Our 12.5 per cent transparent tax regime would no longer be a unique selling point. The force of attraction back to “home office” driven by a new US tax regime will negatively impact Ireland in terms of its FDI base of companies in the medium term.
Hence, in the short term, we need to hone our market and brand proposition to adjust it to the new reality.
An opportunity lies with regard to activities located in countries where the corporate tax rate is in excess of 15 per cent, eg France and Germany. Given that US MNCs would pay tax at 15 per cent on their worldwide income, they may become very focused on avoiding foreign taxes in excess of this rate.
This could result in the relocation of non-local market critical functions in an EU context from countries such as Germany and France to say, Ireland. Obviously, such an evolution is only effective if the Common Consolidated Corporate Tax Base does not become a reality.
For 2017 total capital spending is to be €4.5 billion spread relatively thinly across areas, with roughly 25 per cent allocated to the Department of Transport, Tourism and Sport, and 13 per cent allocated to education and housing respectively.
The overall capital spending budget is set to grow to €6 billion by 2019 – to about 10 per cent of overall expenditure from about 7.5 per cent in 2016.
Whilst this increase is welcome given the Brexit and now US “headwinds”, we need to achieve more flexibility from Brussels to allow greater capital investment in the productive capacity of the economy.
Location is ultimately about real people and their families. Unless the housing, education and personal taxation “package” is made fit for purpose, we are at risk of our FDI base eroding, leading to negative growth over time.
Finally, we need to redouble our efforts to support the re-emerging indigenous sector to ensure our economy has a better balance over the medium term.
Pádraig Cronin is vice-chairman and partner at Deloitte.