IN RESPONDING to President Barack Obama’s proposals for radical changes in tax rules on American companies operating abroad, Irish people need to remember we are caught in the middle of a major issue in US domestic politics. Mr Obama was mandated by his election victory to tackle this question, which in 2004 meant that such companies paid only $16 billion of US tax on $700 billion of foreign active earnings – an effective US tax rate of 2.3 per cent. In the following year, the combined net profits of US corporations in Ireland declared to US authorities was $48 billion, compared to $8.58 billion in 1997, between which years the new Irish corporation tax rate of 12.5 per cent was gradually introduced.
Such imbalances explain why Mr Obama referred on Monday to “a broken tax system, written by well- connected lobbyists on behalf of well-heeled interests and individuals”. He is determined to put that right by targeting offshore tax havens, altering rules which give companies great leeway in deciding where their subsidiaries will be taxed, and tightening rules on foreign tax credits that avoid paying US tax on some earnings. There is considerable relief here that he is not proposing to prevent deferral of US tax on profits earned in Ireland. And Congress, not the White House, will make the final decisions.
A gargantuan lobbying exercise is in prospect, not only by affected companies but by states such as Ireland which have adopted low corporate taxation to stimulate economic development. We are mentioned along with Bermuda and the Netherlands as accounting for nearly one-third of all foreign profits reported by US corporations in 2003. While it is true that tax havens rather than industrial locations like Ireland are the main focus of these reforms, in reality the two are entangled, since many major US companies here have their headquarters in the Cayman Islands or Bermuda. Mr Obama and the US Congress will have to balance the international competitiveness of these companies with their social responsibility to help fund US public services. The tone of his announcement makes it clear he wants to see a much higher tax return from US multinationals.
This is a strategic issue for Irish policy, but it would be wrong to exaggerate its likely effects. Other competing states will be equally affected. A distinction should be made between the hundreds of US companies based here largely because of available educated labour, infrastructure, comparative costs or English language skills as well as low corporation tax, compared to those here more opportunistically simply to avail of beneficial transfer pricing arrangements. The period of ultra-low corporation taxation associated with globalisation during the later Clinton and Bush administrations has come to an end with this deep recession and a readjustment is now under way. It is well within the resources and networking ability of the Irish State, working with other interests, to mitigate the effects of these reforms. A more balanced US corporation tax regime would be a more sustainable one in the long run.