Culture clashes

Oct 02, 2017

Sunday Business Post, 1 October 2017
Ireland’s most important source of foreign direct investment, the US, has put forward proposals to reduce tax on companies.  A week previously, Ireland’s most important market, the EU, put forward proposals to increase tax on companies.  Can the Irish domestic system with its exposure to EU markets and US investors survive in its current form?  What is a small island on the periphery of Europe to do?  I’m beginning to think that the difference in attitudes to the taxation of companies on either side of the Atlantic has as much to do with culture as it has to do with economics or politics. 

In the EU, the citizen is seen first and foremost as a consumer.  The citizen consumer must be able to move freely between countries, and be able to choose freely between products and services supplied by companies competing on equal terms.  In the US however, the citizen is seen first and foremost as a worker.  The citizen worker must be able to secure well-paid employment close to home, working for thriving companies who have competitive advantages relative to the rest of the world.  Europe currently sees tax policy primarily as a way of funding government projects and redistributing wealth.  America currently sees tax policy primarily as a way to stimulate the economy to provide jobs and to reduce dependency on the State.

Framework

There was little detail in this week’s US plans for corporate tax reform, just as there was little detail in last week’s EU plans for an “equalisation levy” on companies.  The key element of the US framework on corporation tax published on Wednesday last is that it is only a framework.  It sets out a destination to which the president hopes, with his encouragement, Congress will eventually arrive.  That destination is a new 20% rate of corporation tax to apply in the US, in tandem with a radical reform of the rules for taxing the profits of US multinationals abroad.

While the new rate looks great – a reduction of 15 percentage points in the federal rate of tax charged on companies – there may be some sleight of hand involved in getting there without completely undercutting the US federal budget.  The reduction in the Irish corporation tax rate several years ago from 40% to 12.5% turned out to be a rate increase for many companies because they were paying tax at a preferential 10% manufacturing rate which was abolished at the same time.  That and some other measures, which included bringing payment dates forward and removing the cap on employer PRSI contributions, made the dramatic rate cut in this country affordable. 

Similarly there are clues towards some counterbalancing measures in the US tax reform proposals which would make the rate cut plan more affordable for the US Treasury; the complex web of existing allowances and reliefs is to be curtailed.  Many US companies will view the reform proposals with some suspicion despite the promised rate cut.

Benefits

One benefit of this week’s US tax plan from an Irish perspective is that it should finally dispel the myth, widespread in Europe, that it is Ireland’s fault that US companies are not taxed.  In his speech Trump squarely blamed the US tax system for the offshore stockpiling of profits by multinationals because US taxes are “so ridiculous”.  Currently those profits are within the charge to US tax, but the US tax liability does not have to be paid until the profits are repatriated.   If the US were to change that rule, as envisaged in the proposed US framework this should help any fair-minded European assessment of the Irish system.

Another benefit is that the US framework does not include any proposal for the kind of equalisation levy put forward at an informal EU finance ministers meeting last month which is intended to tackle the taxation of companies which trade online across borders.  This idea had been mooted in the US in the guise of a Border Adjustment Tax but I think it is now fair to say that it has been completely dropped for being “too complicated” to implement.  Ireland has already signalled opposition to the EU proposal and our position must be strengthened by the rejection of the same approach in the US.

Statements of Intent

What we have seen in the past fortnight are statements of intent and directions of travel both in Europe and in the USA which we are not obliged to follow.  There is no such thing as international tax – all taxes are paid locally to the sovereign government under the law of the country.  Europe cannot make us change our sovereign laws on company or individual taxation because the European treaties don’t allow it.  Nor is there a piece of paper anywhere which obliges us to change our company tax rules at the behest of the US.  However Ireland cannot simply ignore these developments as they affect our markets and our investors.

EU cooperation and goodwill towards Ireland are essential and never more so than right now as Brexit discussions are at a critical stage.  Yet if we were to follow the EU route and increase corporate tax levels, we will surely lose inward investment from the US.  As a small player in this transatlantic clash of policy and culture, we have to accommodate all sides if we are to continue to get along with the countries which buy from us and invest in us. 

Brian Keegan is Director of Public Policy and Taxation with Chartered Accountants Ireland