Potential impact of US tax reform for Irish business and FDI

We recently shared our insights into the potential impact of US tax reform for Irish business and FDI.

We would now like to discuss the White House announcement regarding the Trump administration’s tax reform agenda, and what that might mean for Ireland.

The proposals are very light on detail, but they contain significant personal and business tax reductions.

It is important to note that this is the opening position from the Trump administration. Where the reforms will end up and the timing of any changes remains uncertain.

Yesterday's announcement

In summary, the US tax reform plan is as follows:

1. Reduce the federal rate from 35% to 15%
2. Change the US tax system from a worldwide system to a territorial system.
   Most countries with territorial systems have specific anti-avoidance provisions to deter companies moving profits overseas. Sometimes they specify a minimum tax rate that the overseas country must apply. This will clearly be something for US companies doing business in Ireland to monitor carefully.
3. A one-time tax on all profits held offshore by US companies and their subsidiaries.
   It is estimated that the US has US$2.6 trillion in overseas retained earnings. A one-off 10% tax could raise US$260bn in tax, the equivalent of one year’s corporate tax revenue in the US.
4. Eliminate tax breaks for special interests.
   

There are no further details on this proposal at this stage.

What does this mean for Ireland?

A lower business tax rate should help to make the US more competitive. However, it is important to remember that the US typically also applies additional State tax of up to 5%.

Even if the corporate rate is reduced to 15%, it would result in a combined Federal / State tax rate of between 15 and 20%, still significantly higher than the Irish rate of 12.5%.

While a rate reduction may result in US companies taking decisions to invest overseas more cautiously, we don't expect it to impact materially on existing US investment in Ireland.

While corporate tax is just one of a range of factors in investment location decisions, US companies investing overseas will also be reluctant to invest in a country with a corporate tax rate higher than 15%. They would incur incremental foreign taxes for which they may not get credit in the US.

Given Ireland’s 12.5% corporate tax rate and other favourable tax and business attributes, a 15% US tax rate may actually enhance Ireland's competitive position for new US FDI.

A lower US tax rate should also be positive for Irish companies with operations in the US, as it will allow them to retain significantly more of their US profits for reinvestment or repatriation.

When you factor in Ireland's strong competitive position generally in the context of overall international tax reform, and opportunities for new or displaced activity arising from Brexit, there should be significant opportunities for new FDI in Ireland.

The White House believes that reductions in personal taxes will trigger significant growth in the US. If realised, this will be positive for both US companies and Irish companies with US operations.

Mandatory Deemed Repatriation

The proposed one-time 10% tax on overseas profits or "mandatory deemed repatriation" is unlikely to have a significant impact on US FDI in Ireland. We had a version of this in 2005 and, outside of short term cash realignment and repatriation planning, it had little impact on the substantive Irish operations of US groups.

Border Adjustment Tax

Importantly, yesterday's announcement contained no reference to the Republican-proposed Border Adjustment Tax. This is good news as it would likely have a more significant impact on Ireland, and possibly world trade, than any of the other elements of the proposed tax reforms.

What happens next?

All we have at the moment is broad principles. No draft legislation or economic data supporting the reform plans have yet been released.  We don’t have a definite timeframe for the provision of more detailed proposals.

It may be challenging for the administration to garner support for these proposals in the US House of Representatives and Senate. We should expect lots of discussion and debate over the next few months and beyond.

Ultimately, the consensus seems to be that agreement on what changes are likely is still quite a distance away. The legislative process to approve any tax changes is more likely to run into 2018.

The US House of Representatives is expected to issue more detailed reform proposals over the coming weeks. These proposals could differ significantly from what was announced yesterday.

We will update you further once we have more detail, but these proposals should be viewed as the next step in a complicated negotiation and legislative process.

What should I do now?

We are ready to discuss what the potential reform of the US tax system might mean for your business, and how to mitigate any impact. Please reach out to your regular PwC contact today.