The latest tax plans from the US administration suggest one thing clearly. It is that the greatest threat to Ireland in terms of corporate tax changes comes not from the United States but from this side of the Atlantic. Tax proposals emanating from Brussels appear to carry much more danger for us than those coming from Washington, even if it remains unclear in either case what change will actually be agreed and implemented.
The proposals published on Thursday by House Republicans in the US include a cut in the headline rate of US corporation tax to 20 per cent, from 35 per cent now. The high existing rate of US corporation tax – one of the highest in the industrialised world – is blamed for encouraging US firms to invest overseas when they expand into offshore markets, rather than serving these new markets from the US.
The lower rate, if implemented, would encourage firms to invest more in the US and a bit less overseas. While this might trim the flow of investment by US multinationals overseas, it is unlikely to lead to a major reduction, as companies continue to spread their investments to serve international market.
Peter Vale, tax partner at Grant Thornton, pointed out that the headline Irish rate at 12.5 per cent would remain significantly below the new US rate of 20 per cent. Meanwhile the addition of state taxes would increase the actual headline rate for many US firms closer to 25 per cent.
Levy
Vale added that the detail of what emerges will be closely watched by US multinationals with major operations here. The US is changing to a largely territorial system of company tax – focused on collecting profits booked in the US – but will also levy firms in the US who do not pay a minimum rate abroad.
How these rules are constructed will have an impact on the tax affairs of US companies here, including those who have recently moved major intellectual property assets to Ireland. In acting to disincentivise companies to locate operations in tax havens, the rules could be of some benefit to Ireland, Vale said.
Among the measures proposed are a special incentive rate of 12 per cent to encourage companies to repatriate to the US funds held offshore at the moment. In some cases these funds will have been moved through Irish subsidiaries as part of an international chain which left much of the money subject to very little tax to date.
The US plan is far from done and dusted. Despite leaving the top rate for income taxpayers unchanged at just under 40 per cent, it is already being attacked for benefiting the rich and as yet it is unclear whether it will clear Congress and if so what compromises will be made. However, some of the earlier proposals to target specifically firms importing goods into the US and favour exporters – which could have significantly affected the flow of outward investment from the US – have been shelved. This is welcome from an Irish viewpoint.
So while the US plans could change the dial a little for some multinational planners, the bigger threat would appear to come from EU proposals. A plan to introduce a common corporate tax base – which could later lead to centrally collected taxes – is being advanced.
And a separate plan to levy digital companies on sales in big markets has also been proposed by the big EU countries, led by France, It is far from clear whether either of these proposals will fly, but by fundamentally altering the way corporations are taxed they offer far more threat to the Irish exchequer – and to future investment flows – that do the latest proposals emerging from Washington.
