US tax changes: Ireland Inc must adapt to compete

Trump faces challenge to get Congressional approval to reshape corporate tax system

 

President Donald Trump’s proposals to change the shape of the US corporate tax system are far-reaching though, as ever with the new administration, it is unclear exactly what he will be able to achieve. Cutting the rate of corporate tax from 35 per cent to 15 per cent would be a major boost for US businesses, while big multinationals could also avail of a planned incentive to repatriate cash held outside the US.

It remains to be seen how much of this agenda can be completed. As with much of Trump’s policy agenda, the details announced on Wednesday were sketchy. Significant political challenges lie ahead for the president in getting Congressional approval despite Republican backing for lower taxes.

Central to the discussions will be the impact on the US budget deficit. Trump’s treasury secretary, Steven Mnuchin, has said the tax cuts will boost growth and that this, in turn, will increase taxes. But self-financing tax cuts are risky prospects at the best of times.The threat to the US budget position is real and could scupper the plans or, at least, mean there is insufficient political support to have them introduced permanently. Under US budget law, this could lead to a 10-year limit on any cuts announced which would be a messy compromise.

One of the key issues in the talks is that a new import tax – the so-called Border Adjustment Tax – planned by House Republicans would have part-funded the planned cuts. However, there has been strong opposition to this from parts of US industry, even if exporters support the concept. The proposal is not off the table but is to be the subject of further discussions. The Government here will hope it is ditched, as it would hamper exports from Ireland to the US and provide a powerful incentive for US companies to serve world markets from their home base.

The key parts of the plan now proposed – centred on the cut in the corporation tax rate and a change to the way companies are taxed in the US – would also have implications for us. The reforms would reduce the push which US companies have to establish subsidiaries overseas for tax reasons, and thus potentially slow the future flow of foreign direct investment (FDI) to Ireland from the US.

But tax is not the only reason for FDI. US companies would continue to move overseas and Ireland would remain an attractive location for many. The key message, and it is not a new one, is that tax is set to become a less important factor in attracting inward investment, a trend also driven by the OECD-led process of international tax reform. This puts the emphasis on other areas of competitiveness – education, infrastructure, technology, costs and so on. It is here, and not in the world of tax, where the battle for future FDI will be fought.

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