The Trump administration has proposed one of the biggest reforms of the US tax system in decades, saying it will cut the corporate tax rate from 35 to 15 per cent in an effort to “unleash” growth in the economy.
The proposed package – which still needs to be approved by Congress – could have a significant impact on US foreign direct investment into Ireland if passed in its current form, potentially eclipsing Ireland's competitive advantage on corporate tax.
Minister for Finance Michael Noonan responded cautiously on Wednesday night, pointing out that it was so far light on detail and would require political agreement in the US, something that many see as difficult to achieve.
“We really don’t know where it will land until we see the detail of it,” the Minister said, adding it remained to be seen whether any rate reduction would be permanent or temporary.
A 15 per cent rate would be close to the Republic’s 12.5 per cent corporation tax rate, a level viewed as a key international advantage for the Irish economy.
"For the last 25 years other countries have been aggressively cutting their tax rates and moving to a territorial system in order to attract business, and the US has done none of this," President Trump's chief economic adviser Gary Cohn said as he made the announcement in the White House.
As Mr Cohn heralded a “once in a generation” opportunity to revise the US corporate tax scheme, he said the announcement was a “broad brush overview of where we are”, admitting that details still needed to be worked out.
‘Repatriation tax’
The US administration has also promised to institute a one-off “repatriation rate” that it said would also be offered to encourage US companies to move profits back to the United States, but it stopped short of specifying a rate for this.
The US has long been toying with ways of encouraging companies such as Apple, which have cash piles of billions, to repatriate their profits to the US.
While Republicans control both houses in Congress, making tax reform much more likely to achieve than during the Obama era, Mr Trump is facing sceptics within his own party who are alarmed that the tax proposals will cause the US deficit to balloon.
The US treasury secretary Steve Mnuchin has argued that the dramatic cut in corporate tax – which could lead to over $2 trillion in lost revenue over 10 years – will be compensated for by economic growth.
But fiscal conservatives in the Republican party want the proposal to be “revenue-neutral”, setting the stage for difficult negotiations in Congress.
One possible solution – the introduction of a border-adjustment tax that would levy imports into the United States – was not included in Wednesday’s proposal, following opposition from some Republicans who were concerned about its impact on consumer prices. The decision to drop the border adjustment tax was welcomed by business lobby Ibec on Wednesday and is also likely to bring some comfort to the Government.
Import tax
There had been concerns that an import tax could have hit the billions of dollars worth of pharmaceutical and medical devices products that are shipped each year from Ireland to the United States.
Ibec’s director of policy and public affairs, Fergal O’Brien, was positive on the move back from the import tax, and said the corporate rate reduction marked “just one in a long line of challenges” successfully faced by the State in recent years.
Irish tax experts said that, while the proposed change might not threaten existing US operations in Ireland, it could stymie future FDI.
With Mr Trump approaching his 100-day mark in office this weekend, Wednesday’s tax proposal was seen as the latest attempt by the administration to rush through a legislative proposal as the president seeks to highlight his achievements since assuming the presidency.
