Frank Barry

Irish Independent - Business Week - - TECHNOLOGY -

DON­ALD Trump achieved his first ma­jor leg­isla­tive vic­tory in De­cem­ber with the pas­sage of the new US tax act. The act rewrites the fun­da­men­tals es­tab­lished in the era of John F Kennedy more than half a cen­tury ago. In terms of how busi­ness taxes are struc­tured, it is gen­uinely his­toric.

Be­cause of the sig­nif­i­cance of US multi­na­tion­als to the Ir­ish econ­omy, de­tails of the leg­is­la­tion were ea­gerly awaited here. In the rush to record a leg­isla­tive vic­tory for Pres­i­dent Trump within a year of tak­ing of­fice, how­ever, many of those de­tails re­main to be fleshed out.

Th­ese will be pro­vided in US Trea­sury guide­lines to be is­sued over the com­ing years as bugs in the sys­tem come to light. This means there is still a high de­gree of un­cer­tainty as to the pre­cise im­pli­ca­tions, ei­ther for in­di­vid­ual firms or for coun­tries like Ire­land.

The re­cep­tion by US com­pa­nies has been ex­tremely pos­i­tive. The de­tails that have made the head­lines have all been skewed to­wards favour­ing them.

The most straight­for­ward is the huge re­duc­tion in the fed­eral cor­po­rate tax rate. At 35pc, the old rate was among the high­est in the world.

The new rate of 21pc is much closer to that of other large economies. The for­mer high rate led to all sorts of dis­tor­tions as US cor­po­ra­tions did every­thing they could to avoid it. One in­creas­ingly com­mon re­sponse was to ‘re-domi­cile’ – which meant chang­ing na­tion­al­ity.

This en­tailed ‘re­vers­ing’ into a for­eign cor­po­ra­tion in a merger with the US cor­po­ra­tion.

Medtronic be­came an Ir­ish com­pany in this way. Burger King be­came Cana­dian. Many oth­ers be­came Bri­tish.

Another fac­tor driv­ing the de­sire to change na­tion­al­ity was that the US taxed its cor­po­ra­tions on their global prof­its, while most other sys­tems tax com­pa­nies only on their do­mes­tic prof­its.

The se­cond ma­jor com­po­nent of the Trump tax change en­tailed a shift in this di­rec­tion. This move to­wards a ‘ter­ri­to­rial’ tax sys­tem is some­thing that Repub­li­cans have long sup­ported. To­gether th­ese two changes re­move the in­cen­tive for US cor­po­ra­tions to re­domi­cile. In the long run, this should in­crease the at­trac­tive­ness of the US as an in­vest­ment lo­ca­tion com­pared with over­seas. Both changes will be dam­ag­ing to the US ex­che­quer. The Trump ad­min­is­tra­tion, how­ever, will gain a much-needed short-term rev­enue boost through the third ma­jor change – a range of once-off taxes on prof­its that US cor­po­ra­tions cur­rently hold off­shore.

Un­der the old sys­tem, pay­ment of US taxes on for­eign prof­its could be de­ferred. Tax was payable only when prof­its were repa­tri­ated to the US. Some $3trn (€2.43trn) in for­eign prof­its is kept off­shore; per­haps around half of it in cash.

Th­ese off­shore prof­its could pro­vide se­cu­rity for bor­row­ing in the US, and the bor­row­ings used to fi­nance new in­vest­ments or buy-backs of shares. Cap­i­tal gains could be gen­er­ated for share­hold­ers while US tax bills re­mained un­paid.

Un­der the new leg­is­la­tion, th­ese off­shore prof­its are to be hit with a once-off tax, which re­moves the in­cen­tive to keep the cash off­shore. The ad­min­is­tra­tion hopes that much of the cash that is re­turned to the US will be in­vested in job-cre­at­ing projects, al­though not ev­ery­one is con­vinced.

The US cor­po­rate tax frame­work that the De­cem­ber changes re­place was based on a 1962 com­pro­mise be­tween the Kennedy ad­min­is­tra­tion and Con­gres­sional Repub­li­cans. The most com­plex is­sue in both frame­works was the tax treat­ment of in­tel­lec­tual prop­erty (IP).

IP as­sets such as patents and trade­marks are in­her­ently mo­bile. If they can be lodged off­shore, then the li­cence fees paid for their use by the US com­pany count as an ex­pense and serve to re­duce the com­pany’s US tax bill.

Best of all for the com­pany, of course, is if its IP as­sets can be lodged in a ju­ris­dic­tion like the Cay­man Is­lands that levies no cor­po­ra­tion tax.

The im­por­tance of IP has grown mas­sively over the years. Most multi­na­tional prof­its th­ese days de­rive from the value of brand names and patents.

The Trump ad­min­is­tra­tion’s at­tempts to tackle IP off­shoring are cru­cial to en­sur­ing that the shift to a ter­ri­to­rial tax sys­tem does not un­der­cut the ad­min­is­tra­tion’s ‘Amer­ica first’ agenda.

To square the cir­cle, a host of sub­sidiary rules, of both the car­rot and stick va­ri­ety, have been in­tro­duced to deal with IP as­sets.

Among the sticks is a re­quire­ment that US cor­po­ra­tions pay a min­i­mum tax rate of 10.5pc on IP prof­its. This rep­re­sents much less of a dis­ad­van­tage to Ire­land, with its 12.5pc rate, than to the Caribbean ju­ris­dic­tions; al­though it is not yet clear if it wipes out the ben­e­fits from Ire­land’s re­cently es­tab­lished Knowl­edge De­vel­op­ment Box.

The ‘car­rot’ on of­fer is a tax break for US cor­po­ra­tions that keep their in­tel­lec­tual prop­erty as­sets in the United States. Ex­port prof­its de­rived from th­ese in­tan­gi­bles will be taxed at a pref­er­en­tial rate of around 13pc rather than the new fed­eral tax rate of 21pc.

Ire­land’s cor­po­rate tax rate will be only slightly lower than this pref­er­en­tial US rate, but even a very thin mar­gin on vast amounts of profit can rep­re­sent a con­sid­er­able in­cen­tive to lo­cate and ex­port from Ire­land. Clar­ity will likely have to await the pub­li­ca­tion of the US Trea­sury rules and guide­lines.

Th­ese, in turn, will be in­flu­enced by the prac­tices adopted by multi­na­tional cor­po­ra­tions in the in­ter­ven­ing pe­riod.

EU fi­nance min­is­ters have writ­ten to the US au­thor­i­ties to com­plain that this im­plicit ex­port sub­sidy is in breach of World Trade Or­gan­i­sa­tion rules.

This in­tro­duces fur­ther un­cer­tainty into the cal­cu­la­tions.

If the Trump Ad­min­is­tra­tion suc­ceeds in pre­vent­ing the off­shoring of in­tel­lec­tual prop­erty from the US, it will, para­dox­i­cally, have achieved some­thing that Con­gres­sional Democrats have long de­sired.

Where would this leave Ire­land? A move away from IP and a re­turn to that more old-fash­ioned world where for­eign di­rect in­vest­ment was sought for the em­ploy­ment, up­skilling and up­grad­ing ad­van­tages it brought might be no bad thing.

Ire­land’s low tax rate will con­tinue to make it an at­trac­tive Euro­pean lo­ca­tion, off­set­ting the nat­u­ral ad­van­tages that ac­crue to coun­tries like Ger­many and France on ac­count of their size, cen­tral­ity and in­fra­struc­ture.

Pres­i­dent Trump tweeted that his new leg­is­la­tion would al­low tax re­turns to be “filed on a post­card”.

Hardly. The new busi­ness tax leg­is­la­tion is, if any­thing, more com­plex than the old. ‘Ag­gres­sive’ tax plan­ners thrive on com­plex­ity. They have been rub­bing their hands in glee since the pub­li­ca­tion of the ‘Tax Cuts and Jobs Act’.

There may be one fur­ther unan­tic­i­pated ben­e­fit for Ire­land.

The Gov­ern­ment has ques­tioned the Euro­pean Com­mis­sion’s de­mands that it col­lect the back taxes al­legedly owed by Ap­ple, in­sist­ing that th­ese taxes are owed to the US rather than to Ire­land.

Ap­ple will now be pay­ing the new once-off US tax on th­ese and all its other off­shore prof­its. The head­line writer’s dream seems one step closer: ‘EU case against Ap­ple crum­bles’.

EU fi­nance min­is­ters have writ­ten to the US to com­plain that this im­plicit ex­port sub­sidy is a breach of WTO rules

Frank Barry is Pro­fes­sor of In­ter­na­tional Busi­ness and Eco­nomic De­vel­op­ment at Trin­ity Busi­ness School

US Pres­i­dent Don­ald Trump signed a tax-over­haul bill into law in the White House late last year. Photo: AFP/Getty

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