As Trump’s tax plan threatens Irish competitiveness, industry not affected much

DUBLIN, Ireland - As the Trump administration unveiled the dramatic and ambitious tax plan being proposed by the U.S. President Donald Trump, Irish industries and businesses were watching with bated breath. 

Trump vowed during his election campaigning that he would slash U.S. corporate taxes to lure American companies that have set up bases overseas, back to the U.S.

He had then pledged to slash the corporate taxes to 15 percent from the headline rate of 35 percent.

Now that the pledge has actually been included in the proposal placed before the congress - Irish industries believe that the tax plan would not have a direct impact on businesses in the country. 

According to Fergal O’Brien, director of policy and chief economist at Ibec, the business group did not see a great urgency for Ireland to respond to the U.S. tax cut by reducing the Irish headline rate. 

Ibec has said that it still wants a sort of response, in the areas of reducing personal taxes which can influence investment decisions and in boosting spending on infrastructure and education.

O’Brien has said, “On the basis of what we know, we do not think that the policies will be as severe as what we previously thought.” 

He further added that the estimated cost to the U.S. raises questions about whether the tax cut will be permanent.

The Irish business model, that is built around the low headline rate of 12.5 percent has added to the country’s competitive edge, allowing it to attract billions of dollars of U.S. investments since the early 1990s. 

It led U.S. pharmaceutical giants Johnson & Johnson, Actavis and Pfizer to become the largest Irish exporters.

Soon, over the years, the corporate taxes paid by the technology and pharmaceutical companies accounted for a big chunk of all the corporate taxes collected by the Irish exchequer.

It played a big part in the country’s economic recovery from the financial bust.

Now, Trump, in a bid to lure the $2.6 trillion U.S. companies hold offshore has put forward his plan to cut the headline tax, while moving to a so-called “territorial system” for U.S. overseas earnings.

Irish businesses believe that any U.S. pledge to cut its headline rate will have implications for the competitiveness of Ireland.

Analysts, however, claim that while the reduction will not affect U.S. corporations already based in Ireland, it will inevitably affect U.S. corporate decisions over future investments.

According to Edgar Morgenroth, an associate research professor at the Economic and Social Research Institute - the high cost of the U.S. tax cut will raise doubts about whether the Trump White House will be able to implement the cut. 

Morgenroth argued, “It is not the case that the U.S. is swimming in money. Reducing your tax rates and, presumably, the amount of tax revenues does not match that reality. And then what is in the interest of U.S. corporations? A lot of Congressional representatives will get calls on this. That is the reason that Obama did not get his reforms through.”

Meanwhile, Joe Tynan, head of tax at adviser PwC has said dropping the border adjustment tax is a positive sign for Ireland. 

He added that Irish firms would have been affected in selling into the U.S. 

Explaining further, he said, “The news is a positive for Irish firms exporting into the U.S. The same proposal would have been a benefit for U.S. companies to relocate back to the U.S.”

Further commenting on the rate cut, he said it will potentially slow the decisions of U.S. companies to locate in Ireland. 

Tynan added that U.S. states typically impose a further four to five percentage points on the corporate tax rate which would bring the real U.S. tax rate to 20 percent.

Further, Alan McQuaid, chief economist at Merrion Capital has said that businesses that are already in Ireland will not be affected but the looming test for the IDA will be in their ability to attract future investments.

He added, “The policy by itself may not be a problem but what could be a problem is if he starts imposing penalties. You would then see investments flowing back.”