AMID THE CIRCUS that is the Donald Trump presidential campaign, it can be easy to forget that this man could soon have the power to make a very real impact on Ireland.
While he again gained attention for a number of gaffes earlier this week, including his apparent plea for gun owners to rise up against rival Hillary Clinton, the Republican presidential nominee was also in the news for that rarest of things: talking about policy.
The brash billionaire unveiled his 15-strong ‘economic panel’ – which included a handful of economists alongside several high-profile business figures like famed venture capitalist Wilbur Ross - as he outlined the financial steps he would take as president.
Many commentators expect Clinton to emerge victorious in the battle for the White House and point out that even if Trump were to triumph, he would still have to get his plans through the US congress – not an easy task if one of the houses is controlled by the Democrats.
However, as the recent Brexit vote has proved, predictions have a habit of being proven wrong. So what impact would Trump’s proposals – most specifically his plan to dramatically cut the corporate tax rate – have on Ireland?
Tax and investment
The document published by Trump’s campaign states that ”America will compete with the world and win by cutting the corporate tax rate to 15%, taking our rate from one of the worst to one of the best”.
The country’s high corporate tax rate, which tops out at around 35%, has long been a point of contention among businesses, many of which have moved some of their operations or their headquarters to lower-tax countries.
Ireland has benefited hugely from this, with US companies employing about 140,000 people in the country.
A report from the Irish-American Chamber of Commerce published last year found that US direct investment in Ireland amounted to $277 billion (€248 billion at today’s rates) over the past two decades, more than was put into Brazil, Russia, India and China combined.
Of course, a multitude of reasons have been cited for Ireland’s popularity to US companies – besides its tax rate. The country has a stream of well-educated graduates leaving colleges every year, it is one of the only nations in the EU with English as its first language and the entire tax system has been praised for its simplicity – an attractive feature for businesses.
However, the 12.5% rate has undoubtedly played a starring role in getting wealthy US companies to sit up, take notice and open their wallets.
Economist Seamus Coffey says the Irish tax regime works well in the context of the current US system – but if that system were to chance it may leave American companies less inclined to move significant structures here.
“There may be an issue as to where companies put their global headquarters, and tax is obviously a factor,” he says.
“With a headquarters comes a greater sense of connection with a country. If Google’s global headquarters wasn’t here would they have thousands of staff here?”
Expansion and reinvestment
Goodbody economist Dermot O’Leary says if the US brought in a 15% rate, there would be a risk of existing operations being relocated – but he adds that future expansion is more likely to be where Ireland will lose out.
“Foreign direct investment is extremely sensitive to changes in corporate tax rates and that applies to what other countries do too,” he said.
“I don’t think that you would see an immediate impact investment, but you may see less investment in terms of flow.”
Recent research from economic think-tank the ESRI found that Ireland was more dependent on low taxes to lure firms from outside the EU than any other country in the European trade bloc.
PwC tax partner Enda Faughnan agrees that a reduction in the US tax rate would unlikely have a major impact overnight but could be felt further down the line if companies decide against reinvesting in their operations here.
“The rate in the UK is coming down to 17%, which five years ago would have been unheard of for a country with a large domestic economy where there is a large corporate tax take; (so a US rate of 15%) would be a hell of a drop, but it is not inconceivable,” he says.
“It could have an impact over time because of the ongoing investment that multinationals make, which sustains their operations in countries like ours. That rate might remove some of the incentive to reinvest here.”
He adds that if the US were to push ahead with such a dramatic rate cut, Ireland would likely not reduce its own corporate tax rate further and would instead look to emphasise its other positive qualities, such as EU membership.
“There has been a reluctance to move the 12.5% rate up or down because it is seen as such a brand,” he says.
“There are all kinds of different reasons why a company would invest here. Our access to the EU, our infrastructure and our workforce would have to be emphasised more, but there is no doubt that the 12.5% is a big feature and if that is diminished then our overall offering would be diminished.”
Irish tax take
Coffey also points out that Ireland may lose out on some corporate tax cash if companies stop moving their patents here.
As previously highlighted by Fora, it is likely that many multinational companies are moving their intellectual properties to Ireland.
Although this was likely one of the factors that contributed to Ireland’s skewed GDP figures, it was also likely a contributor to the country’s bumper corporate tax haul, which topped €3 billion in the first half of the year.
The shift has come amid an international crackdown on tax avoidance. Although much of the movement was done in the last year, it had been expected that this trend would continue, probably resulting in Ireland’s corporate tax take growing further.
Asked if the US introducing a 15% rate would curb some of this growth Coffey says:
“There is no doubt about that. The changes will only really apply to new patents moving; once you have moved it to Ireland it isn’t as straightforward to move it out so the implications would be for new assets and intellectual properties.”
Finally, slashing the US tax rate may also put the brakes on so-called ‘inversion’ deals.
An inversion involves a company moving its legal domicile to a lower-tax nation by merging with or taking over an overseas business but retaining the bulk of its operations in its higher-taxed country of origin.
The offshore partner then “owns” the company’s earnings for tax purposes, but can still keep using the money as part of its US operations mostly – or completely – tax free.
These deals have become a huge issue in the US after some of the country’s largest companies, such as pharmaceutical giant Medtronic, which is now the fifth-biggest business in Ireland by turnover and the largest corporate taxpayer, moving their international headquarters to the Republic.
Ireland often stands to gain little in jobs or direct investment from such deals. While some companies, such as Medtronic, have sizeable operations here, many do not and just use their Irish companies as vehicles for shifting money around.
That is one of the factors also believed to have contributed to the country’s recent, inflated GDP numbers, which will likely result in Ireland paying an extra €280 million to the EU.
It is widely agreed that the most common reason why many US companies ‘invert’ is to escape their home country’s 35% rate. However, if that rate was to be brought virtually in line with Ireland’s, it would likely help stem the flow.
Coffey points out that at the moment, many US companies are holding large amounts of their profits offshore as they stand to be taxed at the US rate if the money is brought back to the country.
However, until the cash is brought back, or ‘repatriated’, the cash piles built up are difficult for companies to use. If the US rate is reduced to 15%, it is less likely that companies will go to the trouble of trying to avoid the lower rate.
“Companies that face the 35% rate on their worldwide profits often don’t repatriate their profits to the US. They are restricted in what they can do and are left with a big ball of money abroad,” Coffey says.
“I can’t see the rate falling to 15%, I think there’s little chance it would get through congress; if it was put to 15% it would hugely reduce the incentive to invert.”