How Biden would help the FDI sector – or not

Nov 01, 2020

 

Originally posted on Business Post 1 November 2020.

It's more than ten years since Joe Biden addressed the European Parliament, opening his remarks with his trademark quote from an Irish poet and then saying positive things about Europe. Then, the Obama-Biden administration was just over one year in office and Biden was already carrying out the role which seemed to typify his vice presidency – that of an international envoy.

Whatever about his thinking on international relations, Biden’s views on economic policy never achieved much prominence abroad until his current presidential campaign was well underway. Because we depend so much on the US for trade and foreign investment, what happens to the US economy matters very much here.

Ireland did well during the Trump presidency, as highlighted in successive IDA annual reports. US foreign direct investment projects involved 722 companies generating 144,000 jobs in 2016. By 2019 those numbers had increased to 847 and 174,500 respectively. Now, according to a report last week from UNCTAD, the United Nations agency which monitors these things, Covid-19 is demolishing foreign direct investment activity. Can Ireland retain the investment already won if there were US foreign tax policy changes under a Biden presidency?

Irrespective of what you might think of Trump’s other policies, the US Tax Cuts and Jobs Act of 2017 was a signal achievement if only because it was the first major US tax reform package in 30 years. While it reduced the standard rate of tax for US corporations from 35 per cent to 21 per cent, it also reduced or removed many tax advantages for US multinationals investing abroad, including into this country.

While these advantages were diluted, the Trump administration didn’t eliminate them entirely. There are sound policy reasons for this. It’s not a good idea for a US president to tax US companies investing abroad to the extent that they are no longer competitive, say, with their European competition in the foreign direct investment market. Furthermore, while the Tax Cuts and Jobs Act is a stand-alone entity, it comes with strings attached. Some of its relief provisions are time-limited and due to expire in the next two to three years, meaning that as things stand, US multinationals could find their tax bills going up again anyway.

A major element of the Biden economic proposals involves raising taxes on companies by increasing the tax rate by 7 percentage points to 28 per cent. A higher rate requires new tax law but at least some of Biden’s policy aspirations to raise taxes on the multinational sector can be achieved simply by not renewing the existing time-limits within the Tax Cuts and Jobs Act.

This is significant for two reasons. Firstly, some multinational businesses would already have factored these built-in tax hikes into their medium-term projections, which may make increased tax bills more manageable if not more palatable. Secondly, it is never easy for any US president to bring about major or complex tax changes.

Both Biden and Trump would probably be delighted with the kind of tax law arrangements we have in this country. Here, only the Minister for Finance can introduce a Finance Bill which the upper house of the Oireachtas may neither amend nor block indefinitely. That ease of legislative accomplishment is unknown in the US.

But if anyone can navigate the labyrinthine procedures of the US Congress, it is probably Biden. He was a long-term senator and knows the ropes for getting stuff through the House of Representatives and the Senate. There is also a possibility that the Democratic Party next week could gain control of both houses as well as securing the presidency.

The US approach to OECD international tax regime coordination efforts is also unlikely to change much irrespective of who is in the Oval Office. Over the past decade there has been a consistency of approach by the Obama and Trump administrations to the international agenda. Both supported the OECD processes while jibbing at attempts to target US based digital economy multinationals. There has even been consistency in recent years in the personnel involved. In contrast to the revolving-door approach of the Trump administration to other appointments, both Steven Mnuchin, the Treasury Secretary, and Chip Harter, the International Tax Affairs Secretary, kept their positions throughout the current presidential term.

There may, however, be more pressing matters on the agenda no matter which man gets elected. An additional US Coronavirus relief package is still to be finalised. If the Democrats are successful on November 3, other Democratic Party priorities such as healthcare and immigration may take centre stage for a new administration.

The campaign up to now has been dominated by the pandemic, the US Supreme Court appointment, and the suitability of either candidate with reference to their personal conduct, the conduct of their families and their financial affairs. All this makes for fascinating viewing, yet, in the foreign tax policy area which could most affect Irish business interests, there is little enough to see.

Some attendees missed Biden’s speech to the European Parliament earlier in May 2010 because of flight chaos from an exploding Icelandic volcano. After this week’s votes are counted, perhaps there will be plenty of opportunity to hear him quote Irish poets again.

Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland