There was some relief in EU capitals, including Dublin, when Donald Trump held off announcing new tariffs on imports in his inauguration speech as this could have hit Irish exporters to the US market. But it was short lived, as Trump has now signalled that he is taking aggressive measures on the other key issue of economic concern to Ireland – corporate taxation.
The new president has signed an executive order effectively pulling the US out of the Organisation for Economic Co-operation and Development (OECD) corporate tax agreement and making threats about the taxation of US multinationals. As the country which is home to the international headquarters of many big US firms, Ireland will be right in the middle of the action as this story plays out.
The outgoing Government had hoped that it had put the controversy over Irish corporate tax to bed when it signed up to a global agreement negotiated under the aegis of the OECD, involving an increase in the corporate tax rate charged on big multinationals to 15 per cent. Trump has not only pulled the US out of this deal, he has warned that he will act if any other countries take measures which disproportionately affect US companies.
The most obvious issue which Trump could target is a provision in the OECD deal which says that countries where multinational subsidiaries are based must act in certain circumstances to collect more tax if these companies do not pay the minimum 15 per cent on their overall profits due to rules in their own home jurisdiction. This is intended as a backstop to ensure that the minimum 15 per cent rate applies as a tax rate on their profits . In certain circumstances this would oblige the Irish tax authorities to apply a top-up tax on US companies here.
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This undertaxed profits rule (UTPR) – due to come into force next year – has already been controversial in the US and Trump has now implied that he will retaliate if it applies. US tax legislation gives him sweeping powers to do so, allowing him to double the tax charged on companies or individuals from the country seen to discriminate against the US.
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“This is the ‘big stick’ of US retaliation to measures they feel undermine US sovereignty to set their own taxes,” according to Gerard Brady, head of national policy and chief economist at IBEC, the business group. “The next step is an investigation by the US Treasury, the Department of Commerce and the Trade Representative into which countries are imposing discriminatory of extraterritorial taxes.”
And there are other potential flashpoints too – for example the way the big US digital service firms will be taxed in Europe if, as seems certain, the OECD compromise on this issue is now abandoned. Meanwhile, senior figures in the Trump administration have already highlighted Ireland as benefiting disproportionately from the financial planning of US firms and tax changes could be directed to deal with this.
While the precise implications of Trump’s latest move for Ireland are unclear, the next government faces tricky issues of economic diplomacy in dealing with this. How will the EU respond? It could extend the start date of the UTPR beyond 2026, says Brady, give US companies some kind of exemption or drop it entirely, though this would undermine the OECD deal. Or the EU could chose to retaliate through tax measures of its own, though, says Brady, “this would have significant negative consequences for the EU-US relationship and for economies, such as Ireland, caught in the middle.” Changes to the UTPR would require alterations to an EU directive – requiring unanimity – and in Irish tax law.
This new threat of a tax war adds to concerns about promises of the US administration to impose tariffs, or import taxes, hitting EU exports, possibly triggering a trade war. Trump held off new tariffs in his inauguration speech but indicated they are on the way when he promised that “instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens”.
He suggested “massive” amounts could be raised by this policy and promised a new External Revenue Agency to collect the proceeds. But instead of moving immediately to impose tariffs as he had indicated he would, he instead said that federal agencies would examine trading practices being used by other countries.
This could pave the way for tariffs by providing a rationale for Trump to move ahead – and give him some legal cover to do so without Congressional approval.
What happens next is important for Ireland. Trump had suggested tariffs of 10 to 20 per cent on imports from countries around the world, a potentially big issue for companies exporting from Ireland to the US, including US pharma subsidiaries here and domestic firms in areas like food and engineering. Tariffs on this scale would price a lot of them out of the US market, or lead to a big fall in profitability.
Some move on tariffs by Trump looks inevitable, though its shape remains unclear after the inauguration speech and the initial executive orders. This may reflect some uncertainty, with reports that his senior cabinet and advisers favour different approaches.
In the background is Trump’s wider agenda of attracting investment back to the US from abroad. It is clear now that he is going to act and there are big issues in play for Ireland, which relies heavily on US investment and the resulting tax revenues.
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