Getting up early

Apr 30, 2018

Sunday Business Post, 29 April 2018
Brendan Behan is sometimes credited with the notion that the man who has a reputation for getting up early can stay in bed all day, but I suspect this wry observation of human nature long predates the Borstal boy. 

I've spent the last few days Stateside trying to get my head around the vagaries of the recent US tax reforms, somewhat to the bemusement of some American tax consultants who regard Ireland as a colder version of Bermuda for tax purposes.  They see the Irish as the guys who invented, as one commentator put it to me, the “Irish sandwich”, which was apparently a strategy for deferring indefinitely tax on the offshore earnings of US companies.  There is no point protesting that our domestic law has been changed to prevent this malapropism from happening, a change which was implemented long before the US Tax Cuts and Jobs Act 2017 ruled it out as a possibility from the US perspective altogether.  We’re not going to dispel this tax haven reputation any time soon.

Temporary Arrangements

The US will have its own reputational issues to contend with.  It seems to me that the US Tax Cuts and Jobs Act, whose headline measure was to reduce the US corporation tax rate down to 21%, has created even more uncertainty than the regime it was designed to replace.  The roots of the temporary nature of US taxation policy lie in the George W Bush era, whose tax reforms on the back of a booming economy were always going to be temporary and would expire after a few years.  Similarly there is a temporary nature to the new US tax law.

The Tax Cuts and Jobs Act itself can be divided into two sections – the first being a bundle of measures aimed at providing tax relief (mainly) for individuals.  These are scheduled to expire around 2025.  The second bundle of measures which have more apparent permanency deal with the corporate sector.  The measures in the second bundle don't have expiry date, but that's not to say that they cannot expire.  Some Washington observers are saying that as the US deficit continues to mount partly as a result of tax relief profligacy, wiser heads in Congress might in future look at a 21% corporation tax rate and decide that it is too low.  The most pessimistic observer I spoke to thinks the rate could increase back up towards the previous 35% rate within the next three years.  This prognosis is based on a working assumption that the current Republican president and his fellow Republican lawmakers will no longer have full control over Congress within that time span.

This prediction, correct or otherwise, belies a sense of impermanence which is of fundamental importance to countries like Ireland.  We rely among other things on the relative attractiveness of the tax environment here to attract the crucial foreign direct investment we need to sustain our current employment levels, and assert that our own tax rates are “settled policy”.  Paschal Donohoe is quite correct with his comments that gains in the labour market presented in the Stability Programme update this week are what really matters. 

Working through the short term

If there is some question over the longevity of the new US corporate tax rate, there is even more uncertainty as to how the other new tax rules might apply in the short term.  Oireachtas Éireann is careful about preserving its control over tax legislation.  The ethos of the special parliamentary procedural rules which apply to tax law transfers into the substance of how tax law is constructed.  In general Irish companies and citizens alike are taxed under the letter of the law.  The Revenue Commissioners are allowed only to make some administrative arrangements, for example in the operation of PAYE, by regulation. 

On the other hand US tax legislation has an air of constructive ambiguity about it.  US tax law constantly refers to the need for the making of regulations, and until those regulations are finalised, the precise effect of the law can't be seen.  The drafting of regulations by the US revenue authority, the IRS, is at present in full swing. 

Deciding where to invest

That's not particularly helpful for business making investment decisions.  While the greatest tax risks to US foreign direct investment into Ireland abated considerably in the final version of the US Tax Cuts and Jobs Act, there remains much fine print to be resolved.  A key issue is whether or not a US headquartered corporation can always get the full benefit of any taxes paid outside of the US when working out its own domestic tax bill.  The 8.5 percentage point differential between Irish and US headline rates helps, and as mentioned there is an expectation in some quarters that this differential will increase over time.

In fact, it may be that the greater tax risks to US direct investment in Ireland does not lie with US tax policy but with EU tax policy.  The bizarre attempts by the EU to make any form of foreign corporate investment into Europe less attractive with the CCCTB project and the equally suspect Digital Tax levy at present pose a far greater threat to Irish jobs than anything currently happening in the US. 

Capital investment is easily frightened.  A poor European reputation could do far more harm to investment into Ireland in the long run than almost anything else, no matter how early any of us get up in the morning.

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