Trump’s tax reform and its impact on Ireland

In April (and before his rough month of May), President Trump set out his proposal for tax reform, including some significant tax cuts. For businesses, the plan includes reducing the US federal corporate tax rate from 35% to 15%; a one-time tax on all profits held offshore by US companies and their subsidiaries (in order to encourage companies to bring these funds back to the US, we imagine); and a move from a worldwide system of tax to a territorial system of tax.

The proposals, if enacted, could result in a far more competitive US corporate tax rate than it has currently and lead to a boost to the US economy. A low corporate tax rate intends to, to some extent, discourage multinationals from shifting their profits around the world for the sole purpose of avoiding high corporate US taxes. This move by the US reflects the trend in many countries, including Ireland, to increase their competitiveness through lower corporation tax rates. 

So what do the proposed reforms mean for US investment into Ireland?

First off, Ireland’s 12.5% corporate tax rate will still be more competitive than the US rate. In addition, the impact of a switch to a territorial system could boost Ireland’s attractiveness – a point that has been missed in much of the commentary, which centred on the change to the headline rate. 

In essence, a territorial system means that US multinational groups would pay tax in Ireland and be able to repatriate profits tax efficiently back to the US. This would, in fact, be an improvement on the current system that aims to tax Irish profits in the US, either when they arise or when they are repatriated to the US.

Ireland’s corporate tax rate is only one of a number of compelling reasons to invest in Ireland. Our talent pool, technology base and track record are equally convincing reasons for businesses to successfully expand into Ireland. Added to that, our education system, easy access to Europe and our English-speaking economy will remain winning factors that make Ireland the choice for international expansion.

Most Importantly, though, Trump’s reform did not include any reference to the “border adjustment tax” present in earlier drafts, which would have imposed a tax on goods imported into the United States and increased incentives for US exporters. Such reform would have had a significant negative impact on world trade.

The question also arises – how will US tax rate reductions be paid for? Changes in the headline US corporate tax rate may come at a cost elsewhere.

So, while negativity surrounded the build up to the announcement of these reforms, when the full context of the proposals is looked at, a positive picture for Ireland emerges.

Donal Leahy is the Tax Partner and Rory Morgan is in the tax department at Baker Tilly Hughes Blake.

You can read more about Trump's tax proposals in the June 2017 edition of Accountancy Ireland.