When the Trump administration announced proposals at the end of April to slash its corporation tax rate to 15%, it quickly became a cause for concern in Ireland, the future of its 12.5% rate, foreign direct investment, and the tech sector as a whole.
Frank Barry is a professor of international business and economic development at Trinity College Dublin and has been an observer of corporation tax matters in Ireland and the US for years.
Professor Barry spoke to Dublin Globe about how these changes in the US are unlikely to come to pass for many reasons, how Ireland should continue to respond to criticisms of its corporate tax rates as well as deal with the ongoing challenges of Brexit.
You’ve previously spoken about Trump’s plans on corporation tax. Now that we have some more specifics, how will Ireland be affected?
The timing was interesting. Trump’s treasury secretary announced further details of what they’re talking about with respect to changes in corporation tax policy. That’s of interest to Ireland because clearly most of the foreign firms that we get here are American and to the extent that a lot of Ireland’s foreign direct investment is associated with corporation tax matters, any changes in US corporation tax policy potentially have important implications for us.
What I was talking about a couple of months ago was much more nebulous because it wasn’t clear what the Trump administration was planning. Then they seemed to give some clearer indication but it’s still very hard to pin down because US tax policy is not the sole responsibility of the president. It has to get through Congress and we’ve already seen that he hasn’t been very successful in dealing with Congress on other matters. It’s very unlikely, or most analysts deem it unlikely, that they will actually be able to get these proposals through Congress but still you have to start somewhere.
Why is it unlikely to happen?
Companies would love it but it will blow the budget deficit apart. It would be very costly and the Republican party, like most political parties, is a coalition of interests. Some of them really want to do the bidding of what the big multinationals want. Others, and this has been a tradition in the Republican party, are fiscally conservative and they don’t like budget deficits and so this idea of more than halving the rate of corporation tax down to 15% would be so costly that fiscal conservatives, who essentially dominate in the Republican party, are not going to like that.
When he was on the campaign trail, Trump was talking about combining a rate cut like that with what’s called a border adjustment tax that would essentially tax imports into the US to pay for the budget deficit consequences of slashing the corporation tax rate.
This border adjustment tax didn’t make an appearance in the announcement [last month]. It’s very likely that it didn’t because it would be in breach of the World Trade Organisation rules and would provoke a trade war. That’s not going to be good for anybody so I think the US administration has finally seen sense and realized that a trade war is not in its own interests or anybody else’s interest so it’s not going to proceed with that.
Therefore it now has no way of paying for the budgetary consequences of this slashing of the corporation tax.
With all this talk around corporation tax rates and US companies, how should Ireland respond?
Ireland essentially has no power in this matter. There’s not really anything much we can do. We rely on the big countries to make the running. The important point to make is that I don’t think a cut in the American corporation tax rate would be damaging to us anyway. The way most Irish analysts and journalists seem to have interpreted it is as though we’re competing with the US on corporation tax. I think we’re not.
There’s been a huge change to campaign rhetoric. On the campaign trail, Donald Trump announced that he wants to abolish deferral, which is this really important component of the US tax system. US companies operating abroad can continue to owe taxes to the US exchequer but they can defer payment of those taxes until the profits are repatriated to the US so that incentivizes American companies to hold their offshore profits to avoid triggering this US tax liability.
This whole notion of deferral was dropped and they announced instead to move to a territorial tax system that essentially means US multinationals’ profits that they earn outside the US are not liable for any US tax. That’s hugely significant. In fact for Ireland that’s probably more significant than the announcement about the drop in corporation tax. This gets complicated but this in many ways would be a bigger change to the US tax system.
If the two [proposals] were to go together, it would massively increase the incentive for US multinationals to invest both in America and across the globe. That’s clearly not detrimental to us. It’s taking the two bits together that one really needs to focus on.
One can take them one at a time and say ok, if the US cuts its corporation tax rate, what are the implications for Ireland? Well, Ireland is not really competing against the US on corporation tax except in one respect. It’s called redomiciling where American headquarters could essentially reverse gear into an Irish company and become an Irish company. That was done for tax reasons. That’s actually detrimental to Ireland and Barack Obama prevented that happening by executive order.
How was that detrimental?
Bizarrely because it raises our GDP without raising what’s a better measure of Irish national income which is gross national product. Our payments to the EU depend on our GDP. Redomiciling of these companies raises our GDP and therefore raises our required contribution to Brussels without really affecting our national income. It doesn’t really create new jobs. It might create some small number of jobs when they move their headquarters but what we’re interested in is jobs with substance.
Beyond that it’s wrong to think that we’re competing with the US on corporation tax rates. Really a better way to think about it is a US company decides to do business offshore outside the US, it might decide to come to Europe and then it says where is a good location in Europe in which to set up our headquarters for tax reasons? In that sense it’s better to think of Ireland as competing against other European countries in terms of taxes rather than competing with America.
You make it seem like any changes to corporation tax in the US just aren’t going to happen.
I’ve been paying attention to this corporation tax stuff for a long time and essentially the American system has been paralyzed for over 50 years on corporation tax, since the era of President Kennedy because they can’t agree on an appropriate model for corporation tax.
Under President Kennedy, a compromise was reached that is essentially the same compromise that is in place today. It’s undoubtedly outdated. It doesn’t make much sense anymore and multinationals have found all sorts of loopholes to avoid the kind of requirements that the Kennedy era compromise entailed but it’s difficult just to get the political agreement in the US to rectify the system.
Despite that, does increased talk about tax in the US, on top of criticism from Europe, put any more pressure on Ireland to make changes?
There’s not any pressure from the Americans to change our rate of corporation tax. Americans love it because American companies are able to use it for their own purposes as of course European companies can as well.
We’re not going to get any flak from the American government about our rate of corporation tax. The US Senate report into Apple back in 2013 criticized Ireland but that was US senators playing political games for their own constituencies. Those exact senators who criticized Ireland – I checked their voting records – are the same people who voted through the loopholes that they criticised companies for exploiting. That’s just political gamesmanship.
The flak we get from some European countries is likely to continue but Ireland’s response and the response of the G7 is that they’ve handed over responsibility for global corporation tax matters to the OECD, which obviously has a wider remit than just the EU.
The OECD’s initiative is called BEPS, base erosion and profit shifting. That’s their initiative for how to deal with corporation tax matters. Ireland responded to the OECD BEPS initiative by changing its legislation to get rid of the main loophole that was being used by multinational companies, which is called the Double Irish. We got rid of that with grandfathering clauses so it will be completely unusable by any company in a number of years’ time.
I think the Irish government probably views that as having done enough to deflect future criticism. But who knows? We’ve seen the European Commission case about Apple and that will be in the courts for a few years so it will be a bit of time before we know what the outcome of that is.
The election of Trump as well as Brexit has obviously marked a big change in global politics. Where does Ireland’s tech sector fit into all of this and how will it be affected in the coming years?
Globalization has been hugely good for Ireland. I think there’s very few people that would disagree about that. A reverse of globalization would clearly be bad.
Brexit is going to be extremely bad for Ireland but not so much for the tech companies. Ireland’s tech companies don’t export so much into the UK, they’re focused more on other markets. It’s mainly the food processing sector exporting into the UK. It’s going to be potentially very severely damaged and because that’s located outside the Dublin region, that’s going to make Irish regional policy more difficult.
I think Dublin is likely to gain from Brexit because we’ll have an inflow of financial services firms into Dublin where the rest of the country suffers. That will be economically very damaging, politically pretty difficult to handle as well because you’ll get Dublin benefiting and the rest of the country suffering.
I think Brexit is certainly less important for [tech firms] than it is for the food processors. Tech companies can export, they don’t face customs barriers, border controls, things like that. Even a hard Brexit is unlikely to affect them the way it would affect manufactured goods.
There’s been plenty of talk about major companies potentially relocating operations, namely in the financial sector, to Ireland in light of Brexit but in your view, how likely is that?
The City of London is gigantic in terms of employment. It probably employs more people than the population of Ireland perhaps. All we need to do is attract a small sliver of financial services activities from the City of London to create a massive boost of employment in Ireland.
I think there will be no difficulty in doing that. We don’t need to capture the high-profile firms, all we need is a thin sliver of that huge pie and it will increase significantly the numbers that work in the financial services sector here.
US tech companies continue to set up shop in Ireland. For example, just last month we saw the cyber-security firm Tenable open its European HQ here. Do you expect Ireland to remain a prime location for US tech companies coming to Ireland?
I mentioned earlier the OECD BEPS initiative. Nobody could really have predicted how that would have turned out for Ireland, whether it would be beneficial or detrimental but the thrust of that initiative is that if a corporation is to be headquartered in a particular location like Ireland, it has to carry out its substantive activities there.
Companies have responded to that OECD BEPS initiative by moving more intellectual property into Ireland because they think they can support that because they do have substantive activity and so our corporation tax receipts have shot way up over the last two years as a consequence of that and this is a self-reinforcing process that companies are now on-shoring in Ireland more of their intellectual property because they have substantive activities here and that will require them to develop more substantive activities here to support that intellectual property.
Rather than Ireland’s FDI strategy unraveling, the way a lot of analysts predicted it would, I can see it going in the opposite direction. I’m not at all pessimistic about the ability of the model to continue to survive and generate prosperity as I think it has undoubtedly done for us so I’m much more optimistic than pessimistic on that score.
Jonathan is a freelance tech writer living in Dublin covering tech start-ups, innovation, and everything else in between.
This article appears courtesy of The Dublin Globe. For more stories on Dublin's tech industry and startup ecosystem, visit their website here.