US PRESIDENT Barack Obama has proposed sweeping changes to tax rules for American companies operating in Ireland but stopped short of calling for a complete repeal of overseas tax benefits.
US multinationals would still be able to defer paying US tax on profits earned in Ireland but would no longer be able to claim tax deductions in America for expenses related to their Irish operations.
There was a cautious reaction here to Mr Obama’s proposals, which relate to Ireland and other low-tax countries.
A spokesman for the Department of Finance said: “We will be studying the proposals in detail to consider their impact on Ireland.”
A source close to the department said its initial view was that Mr Obama’s proposed measures will target offshore tax havens rather than countries like Ireland that offer low corporate tax rates but have transparent tax treaties with the US.
Mr Obama also wants to overhaul “check the box” rules that give companies great leeway in deciding where their subsidiaries should be taxed. The administration believes the rules, which were introduced in 1997, have encouraged US companies to take further advantage of low-tax regimes overseas.
A third proposal would tighten rules on the use of foreign tax credits to avoid paying US tax on some earnings.
“One of the strengths of our economy is the global reach of our businesses,” the president said as he announced the proposals at the White House yesterday.
“And I want to see our companies remain the most competitive in the world. But the way to make sure that happens is not to reward our companies for moving jobs off our shores or transferring profits to overseas tax havens.”
Feargal O’Rourke, an international tax partner with PricewaterhouseCoopers in Dublin, said: “The good news is that their primary focus is on tax havens, which we are not. There is no abolition of deferral . That’s the really good news.”
In a briefing note accompanying yesterday’s announcement, the White House identified Ireland as one of three small countries, along with Bermuda and the Netherlands, accounting for nearly one-third of all foreign profits reported by US corporations in 2003.
“The bad news is that we were name-checked as a place where US foreign profits tend to reside,” Mr O’Rourke added. “It’s not nice to be name-checked by the leader of the free world.”
The Irish Government has lobbied the Obama administration energetically in recent weeks in an effort to avert changes in the rules governing tax deferral. It is understood that the IDA has deployed a senior executive to the Irish Embassy in Washington as a point person to monitor and engage with this issue.
Yesterday’s proposals are less severe than the worst-case scenario for Ireland – a complete repeal of the right to defer paying US taxes on overseas earnings – and the new rules on expense deductions include an exception for research spending.
The proposals would, however, reduce the tax advantage for US corporations investing in Ireland and the US Chamber of Commerce yesterday condemned them as an unacceptable burden on American firms.
“When you limit deferral, you limit the ability of US companies to compete, you impede growth in the US economy, and you cause the loss of jobs,” the chamber’s chief economist Marty Regalia said in a statement.
“Tax increases that hurt US companies’ global competitiveness hurts US workers here at home. A huge tax hike on US employers is not the way to stimulate our economy.”
Unlike other countries, the US demands that its citizens and corporations pay US tax on all their worldwide earnings. Corporations can, however, defer paying US tax on foreign earnings until those profits are repatriated. The top US corporate tax rate is 35 per cent, compared to Ireland’s 12.5 per cent, giving US multinationals a lucrative incentive to invest in Ireland.
In 2004, US multinationals paid $16 billion of US tax on $700 billion of foreign active earnings – an effective US tax rate of about 2.3 per cent.
Mr Obama said the changes would raise more than $210 billion in extra revenue over the next 10 years. This would help to pay for a middle-class tax cut and for a permanent tax credit for research and development investment, he said.
“It will take time to undo the damage of distorted provisions that were slipped into our tax code by lobbyists and special interests, but with the steps I’m announcing today we are beginning to crack down on Americans who are bending or breaking the rules, and we’re helping to ensure that all Americans are contributing their fair share,” he said.
Yesterday’s proposals must be approved by Congress and will not come into effect until 2011.