Ireland needs an investment strategy to avoid getting Trumped
2016 US Election
Trump’s ‘America first’ policy means we must work hard to attract foreign direct investment
Donald Trump will now have a major influence on the world, including Ireland, and his approach to taxation and trade will have major implications for Ireland. Whether we like him or not is irrelevant – his approach and stated tax and trade positions, which include lowering the Federal Corporate tax rate from 35% to 15% and to pursue ‘An America – First’ trade policy, could have a significant impact on our small open economy. We do not know whether Mr Trump will do in office all the things he said he would do during the campaign. But, he will serve four years as president at a minimum. Ireland needs to work with him, his administration, and friends of Ireland in Washington. However, most critical now is for us to take a fresh look at our market position and FDI strategy to ensure they will continue to work well for us in the changed US political landscape.
There are a number of options open to us including lowering our corporate tax rate of 12.5%, seeking a more flexible application of EU fiscal rules which currently limit capital investment in infrastructure, and increasing our efforts to support the re-emerging indigenous sector. We must also focus on non-tax factors such as political and economic stability, our regulatory regime, labour availability, operating costs and market access in order to retain our FDI companies.
Trump proposes lowering the US Federal Corporate tax rate from 35% to 15% and provide a deemed repatriation of corporate profits held offshore at a onetime rate of 10% (payable over 10 years).
He proposes eliminating most corporate tax special deductions – expenses businesses can offset against profits for tax purposes - except for R&D.
Firms engaged in manufacturing in the US may elect to expense capital investment and lose deductibility of corporate interest expense.
Under Trump’s stated corporate tax regime, US corporate tax would in future apply to a US-headquartered multinational corporation’s (MNC) worldwide income, with a credit given for taxes paid in other countries. This would end the current law’s deferral of tax on these profits until repatriated.
Aligned to the above he intends to pursue an “America – First’ trade policy.
The underlying assumption is that his changes would bring a much higher level of annual economic growth, thus creating a larger economy, and that this would ‘pay’ for the dramatic reduction in the corporate tax rate.
From an Irish perspective, the concern is that large reductions in the US corporate tax rate and the repeal of deferral would reduce the incentive for companies to locate activities outside the US, including in Ireland. In particular, business functions that do not need to be close to a key market location will now be more likely carried out in the US than elsewhere.
As tax will no longer be one of the key drivers of decisions as to where to locate, the focus of US businesses in future will be more on political environment, economic stability, regulatory regime, labour availability, operating costs, market access and so on. In essence, non-tax factors will determine the location of business activities.
Ireland already does well in this regard, MNCs who are ‘talent seekers’ choose Ireland because of its educated and experienced workforce. We will need to build on this solid footprint if we are to avoid any erosion in our MNC base.
Ireland needs to review its FDI strategy to ensure it is fit for purpose in this new paradigm. Our 12.5% transparent tax regime would no longer be a unique selling point (‘USP’). The force of attraction back to ‘home office’ driven by a new US tax regime will negatively impact Ireland in terms of its FDI base of companies in the medium term. Hence in the short term we need to hone our market and brand proposition to adjust it to the new reality.
An opportunity lies with regard to activities located in countries where the corporate tax rate is in excess of 15% e.g. France and Germany. Given that US MNCs would pay tax at 15% on their worldwide income they may become very focussed on avoiding foreign taxes in excess of this rate. This could result in the relocation of non-local market critical functions in an EU context from countries such as Germany and France to say, Ireland. Obviously such an evolution is only effective if CCCTB does not become a reality.
There are a number of actions Ireland must now consider. Given the focus on non-tax factors, more capital investment in infrastructure is critical. EU fiscal rules are currently limiting our ability in this regard. For 2017 total capital spending is to be €4.5bn spread relatively thinly across areas with roughly 25% allocated to Transport, Tourism & Sport, and 13% allocated to education and housing respectively. The overall capital spending budget is set to grow to €6bn by 2019 – to circa 10% of overall expenditure from c.7.5% in 2016. Whilst this increase is welcome given the Brexit and now US ‘headwinds’ we need to achieve more flexibility from Brussels to allow greater capital investment in the productive capacity of the economy.
Location is ultimately about real people and their families. Unless the housing, education and personal taxation ‘package’ is made fit for purpose we are at risk of our FDI base eroding i.e. negative growth over time.
Finally, we need to redouble our efforts to support the re-emerging indigenous sector to ensure our economy has a better balance over the medium term.
Pádraig Cronin, Vice Chairman and Partner, Deloitte.
This article first appeared on IrishTimes.com.