YESTERDAY, THE WHITE House outlined its proposal for what the administration is calling the biggest tax cut in US history.
Citing a need to simplify the tax code and provide tax relief, the proposal calls for a 15% business tax rate and a reduction of individual rates.
Tax reform has been a long time coming in the US and while the goals president Trump released yesterday provide some measure of clarity as to the direction he’s headed, key questions remain.
Here are our answers to the top questions we’re being asked:
What was announced yesterday?
The business changes announced yesterday were:
- Reduce the federal rate from 35% to 15%
- Change the US tax system from a worldwide system to a territorial system. This would mean the US will only tax income arising in the US, but it is likely there will be provisions about income earned overseas
- A one-time tax on all profits held offshore by US companies or their subsidiaries. It is estimated that the US has $2.6 trillion in overseas retained earnings. A one-off 10% tax could raise $260 billion for for the country
- Eliminate tax breaks for ‘special interests’. However, there was no detail on what this might mean.
So what does this mean for Ireland?
A lower business tax rate should help to make the US more competitive. However, it is important to remember that the US typically also applies additional state taxes of up to 5%.
Even if the corporate rate is reduced to 15%, it would result in a combined federal/state tax rate of 15% – 20%, still significantly higher than the Irish rate of 12.5%.
While a rate reduction may result in US companies taking decisions to invest overseas more cautiously, we don’t expect it to impact materially on existing investment in Ireland.
US companies investing overseas will also be reluctant to invest in a country with a corporate tax rate higher than 15% as they would incur incremental foreign taxes for which they may not get credit in the US.
Given our 12.5% corporate tax rate and other favourable tax and business attributes, a 15% US tax rate may actually enhance Ireland’s competitive position for new US foreign direct investment.
A lower US tax rate should also be positive for Irish companies with operations in the US, as it will allow them to retain significantly more of their US profits for reinvestment or repatriation.
Finally, the White House believes that reductions in personal taxes will trigger significant growth in the US. If realised, this will be positive for both US companies and Irish companies with US operations.
Mandatory deemed repatriation
The proposed one-time 10% tax on overseas profits or ‘mandatory deemed repatriation’ is also unlikely to have a significant impact on US investment into Ireland.
We had a version of this before in 2005 and, outside of short-term cash realignment and repatriation planning, it had little material impact on the substantive Irish operations of US groups.
Border adjustment tax
Importantly, yesterday’s announcement contained no reference to the Republican-proposed ‘border adjustment tax’.
This is good news for Ireland as it would likely have a more significant impact on Ireland, and possibly world trade, than any of the other elements of the proposed tax reforms.
What comes next?
All we have at the moment is broad principles. No draft legislation or economic data supporting the reform plans have yet been released. We also don’t have a definite timeframe for the provision of more detailed proposals.
It may be challenging to garner support for these proposals, given their impact on the federal budget, in the US House of Representatives and Senate, so you should expect lots of discussion and debates over the next few months and beyond.
Ultimately, the general consensus seems to be that agreement on what changes are likely to be implemented is still quite a distance away and that the legislative process to approve any tax changes is more likely to run into 2018.
The House of Representatives is expected to issue more detailed reform proposals over the coming weeks. These proposals could differ significantly from what was proposed yesterday.
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