Tax plan may undermine US investment in Ireland

US PRESIDENT Barack Obama has proposed changes to the American corporation tax regime that could work against the attractiveness of Ireland for foreign direct investment.

Mr Obama has proposed the imposition of a minimum tax on US companies’ foreign earnings as part of an effort to reduce incentives in the international tax system for US companies to shift income and investment overseas.

However, the proposals released yesterday did not state what the minimum tax rate should be. Changes to the corporation tax regime have become a political issue in the US but no changes are expected until well into next year, at the earliest.

The corporation tax rate in the US is 35 per cent, one of the highest rates in the developed world. Ireland’s low rate of 12.5 per cent has played a key role in attracting US companies to set up substantial operations here.

At present, US subsidiaries based in Ireland do not have to pay the difference between Irish corporation tax rate and the US rate, as long as they don’t repatriate their after-tax profits.

US treasury secretary Timothy Geithner outlined Mr Obama’s proposed reforms on corporation tax yesterday in Washington.

“The president believes we should strengthen the international tax system,” he said. “Today’s global economy provides strong incentives for companies to shift investment and profits to countries with low tax rates. We want to reduce the opportunities the tax code now provides to shift income and investment outside the United States.”

Mr Geithner said the administration was proposing a new minimum tax on foreign earnings, stronger safeguards on transfer pricing abuses, and replacing tax deductions US companies can get for relocating overseas with tax credits for expenses for companies that move operations back to the US.

The Obama administration wants to abolish a range of loopholes as part of a move to expand the US tax base, using the additional revenue to fund a cut in the corporation tax rate to 28 per cent.

A framework document released by Mr Geithner said Mr Obama wanted to reduce incentives and opportunities to shift income and assets overseas.

“For example . . . US companies may use accounting rules or aggressive transfer pricing to shift profit offshore. This is particularly true in the case of profits associated with intangible assets (assets like intellectual property).”

A spokesman for the American Chamber of Commerce in Ireland said it would not be able to comment on the proposals until it had an opportunity to consider them.

He said there were currently more than 600 US companies operating in Ireland and that Ireland was attractive to these companies for a multitude of reasons.

“These include our well-publicised competitive and transparent taxation regime, a young, well-educated workforce, and our close ties to Europe.”

He said it was important that Ireland maintained its multifaceted attractiveness to foreign companies to enable the country to retain and grow investment.

A US economist and tax expert who recently gave evidence to the ways and means committee in the US House of Representatives, Martin Sullivan, told The Irish Times last night that Ireland had benefited more than any other country from the fact that US corporations don’t pay US tax unless they repatriate their profits.

“So Obama’s proposals to significantly curtail those benefits are a serious threat to the Irish economy.”

He said the threat was not just from the Democrats. Tax reform proposals by some leading Republicans contain similar anti-abuse rules.

However, he said it was still an open question in the debate in the US as to whether low tax income from active businesses, such as exist in Ireland, should be caught in the net. Most legislators, he said, “would prefer limiting the tax hit to low-tax income where there is no measurable real business activity (as in Bermuda and the Cayman Islands).”