As the “year of elections” continues to unfold, Ireland faces a changing global tax environment, but with change comes the opportunity to position the country as a beacon of stability for continued FDI. Cillein Barry and Susan Buggle dig into the details
As a small, open economy, Ireland is a competitive location for foreign direct investment (FDI). However, we are also subject to the impact of changes to tax regimes globally, most notably those driven by the Organisation for Economic Cooperation and Development (OECD), the European Union (EU) and the US.
Changes to the tax regime in the US, in particular, have an indirect material impact on Ireland’s attractiveness as a location for FDI.
This year has been cited as “the year of elections”, with roughly half the world’s population going to the polls in 2024. The outcome of elections across the EU and, later this year, in the US may serve to shape future tax policy impacting Ireland.
Here at home, though the Irish Government has denied claims of an early election in 2024, an anticipated “giveaway” budget on 1 October means an early Irish election remains a distinct possibility.
The US presidential election and tax policy
While the outcome of the US presidential election cannot be predicted with any certainty at this time, we do have some insight into the tax policy objectives of both the Democrats and the Republicans should they come to power this year.
In considering possible changes to US tax policy, it is important to note that the approval of tax legislation generally requires 60 votes out of 100 in the US Senate.
This means that one party must hold a large majority or, alternatively, there must be bi-partisan co-operation to approve any proposed changes to tax policy. Neither of these scenarios seems likely in the aftermath of the upcoming presidential election.
While tax legislation may also be passed by a simple majority using a process known as “budget reconciliation”, the relevant tax measures cannot increase the long-term deficit of the US.
In an era of limited bi-partisan co-operation, significant US tax reform is therefore unlikely, as it would require either a super-majority in the Senate or the introduction of tax measures regarded as fiscally neutral over the long-term.
Understanding the Tax Cuts and Jobs Act
In 2017, then US President Donald Trump’s Republican administration introduced some of the most significant reforms to the US tax code in three decades under the Tax Cuts and Jobs Act (TCJA).
The key measures for US businesses were broadly designed to lower the US corporate tax rate to one more comparable with competitors among OECD member countries and to protect the US tax base. These included:
- Corporate income tax rate: a reduction of the US corporate income tax rate from 28 to 21 percent.
- Global Intangible Low-Taxed Income (GILTI): a 10.5 percent tax on a portion of the income earned by foreign subsidiaries of US companies.
- Foreign-Derived Intangible Income (FDII): a preferential rate of 13.25 percent for income earned by US companies outside the US on certain intellectual property.
- Base Erosion and Anti-Abuse Tax (BEAT): a minimum 10 percent tax on base erosion payments made by US entities to related parties outside the US.
The TCJA was introduced using the budget reconciliation process at a time when there was a Republican congressional majority combined with a Republican president – not a single Democrat voted in its favour.
Having already introduced such significant reform, what more could the Republican side seek to introduce in 2025? In answering this question, it is important to note that a large part of the TCJA measures were temporary, with 25 of the tax cuts introduced under the Act due to expire in 2025.
This includes a slated increase in the rate of GILTI (10.5% to 13.125%), BEAT (10% to 12.5%) and FDII (13.125% to 16.406%). The Republicans are likely to face pressure from US businesses to reverse these planned increases and preserve the impact of the TCJA.
However, the Republicans are also likely to face pressure to extend several individual tax cuts included in the TCJA, which together impact more than half of US households. Indeed, both Democrats and Republicans are in favour of retaining at least some of these measures.
The Democrats’ tax proposals
The Democrats’ preferred tax policy was outlined in March 2024 in Joe Biden’s “Green Book” budget proposals. These proposals seek to reverse many of the TCJA tax cuts and include:
- Increasing the corporate tax rate from 21 to 28 percent;
- Increasing to the GILTI rate from 10.5 to 21 percent; and
- A repeal of the preferential rate for FDII.
To introduce such tax proposals under a new leader, the Democrats would likely require a significant majority, as it would be challenging to introduce such measures while balancing the books to achieve a fiscally neutral outcome.
US Presidential elections: the likely outcome
Many US commentators predict a split government in the aftermath of the US presidential elections, with neither party controlling the House and Senate.
Marrying this with the complex procedures required to pass tax legislation and the political pressure to preserve tax cuts for individuals, the most likely outcome for US business taxation is little change to the status quo regardless of who will be elected as the new US President.
Though Republican rhetoric has centred on cutting the federal corporate income tax rate to 15 percent, this should be viewed in a similar light, although the threat of 10 percent tariffs and the EU’s response will need to be monitored closely.
The other key area to watch is US engagement with the OECD’s Base Erosion and Profit Shifting (BEPS) 2.0 tax proposals.
Under Pillar Two of BEPS 2.0, this year has seen the most significant change in international tax in recent memory, with many countries, including Ireland, introducing a minimum 15 percent tax on the corporate profits of large multinational groups.
Despite positive indications from the US Treasury, achieving sufficient political support to introduce the Pillar Two proposals in the US has proved elusive. However, the mechanics of these rules will mean that US-headquartered groups are likely to be affected by the global minimum tax rules from 2026 onwards.
If Pillar Two plans proceed as anticipated, it remains to be seen how the US will react and whether the party in power will seek to introduce retaliatory measures.
Republicans sitting on the powerful Ways and Means Committee have already outlined proposals to impose an additional five percent tax rate each year on the US income of entities located in foreign jurisdictions applying the Pillar Two rules.
The outlook in Europe
We have witnessed significant political developments across Europe in recent weeks, including the election of a new European Parliament in June and domestic parliamentary elections taking place in several neighbouring European countries, most notably France and the UK.
In July, Hungary took over its Presidency of the Council of the European Union and Ursula von der Leyen was re-elected as the President of the European Commission. EU commissioners and working groups will be appointed in the coming weeks. These developments will play a key role in shaping the future direction of taxation policy in the EU.
Recent years have seen the introduction of a swathe of EU-wide tax initiatives, including measures aimed at tackling tax avoidance (e.g. the Anti-Tax Avoidance Directive), measures to increase transparency (e.g. the EU public Country-by-Country Reporting Directive) and measures to introduce OECD BEPS 2.0 Pillar Two provisions across the EU via the Minimum Tax Directive.
While Pillar Two has progressed, work on the OECD’s other key initiative to reallocate a portion of the profits of the largest multinational groups to jurisdictions in which customers are located (known as Pillar One) is at best delayed, but more likely dead.
With progress on Pillar One potentially stalling, a renewed focus may be placed on introducing alternative Digital Service Taxes (DSTs), either unilaterally or on an EU-wide basis. In this regard, the current moratorium on introducing DSTs at an EU level is due to expire on 31 December 2024.
EU-wide tax measures
EU institutions are continuing to work on a range of other tax measures, including Business in Europe: Framework for Income Taxation (BEFIT), a proposal for a consolidated EU tax base that would be allocated to Member States, and the proposed “Unshell Directive” aimed at tackling the potential misuse of entities without sufficient substance for tax purposes.
It remains to be seen which tax initiatives will get priority treatment under the incoming Hungarian Presidency of the Council of the EU, with its stated slogan – “Make Europe Great Again” – focusing on European competitiveness as a key priority.
This is likely to signal shifting sands ahead for EU taxation policies, particularly in the context of Hungarian Prime Minister Victor Orban publicly calling BEPS 2.0 Pillar Two “a catastrophic failure,” serving to dampen competitiveness.
EU Member States have also advised the European Commission to slow the pace of development of direct tax proposals, given the significant volume of measures introduced in recent years. Therefore, a more benign approach to tax policy is expected at an EU level for the foreseeable future.
Shifting taxation policy: the Irish impact
In an environment of increasing uncertainty, it is worth bearing in mind Ireland’s unique position as an economic gateway for both Europe and the US.
While US investment in Ireland is well-publicised with more than 950 US companies located here, Ireland now also ranks as the ninth largest foreign direct investor in the US, employing about 100,000 people in the States.
Ireland is also the only English-speaking common law trade and investment gateway to the EU.
Ireland’s competitive corporate tax rate and transparent and stable tax policies have been a crucial factor in attracting FDI. This tax policy has consistent cross-party support.
Other key factors include our highly educated and skilled pool of graduates, particularly in science, technology, engineering and mathematics (STEM), our clear and consistent regulatory environment in key areas such as data protection, and Ireland’s attractiveness as a place to live and work.
Ireland must, however, guard against complacency. In a constantly evolving environment, it is essential that we focus on ensuring that Ireland remains a competitive and attractive location for FDI. This includes reducing the cost of doing business and facilitating access to talent.
On a global basis, tax competition remains alive and well and a new wave of incentives and subsidies is being introduced by competing jurisdictions.
Our regimes for attracting high-value jobs and businesses – particularly our research and development (R&D) tax credit, reliefs for intellectual property and international assignees – continue to be key pillars in this space.
With ongoing uncertainty within the EU and across the Atlantic, we now have an opportunity to position Ireland as a beacon of stability and a safe harbour jurisdiction for foreign direct investment. This opportunity must be grasped.
Cillein Barry is Tax Partner with KPMG
Susan Buggle is Tax Principal with KPMG
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