Ireland's corporate tax regime was the unlikely focus of "fake news" allegations this week after US president Donald Trump claimed Ireland was reducing its rate to 8 per cent.
His comments were made during an impromptu press conference on Monday with Senate majority leader Mitch McConnell – with whom he has been sparring – following a meeting between the two men to discuss tax reform among other issues.
The myth first came to light the previous day when Kentucky senator Rand Paul – who wants to cut US corporate tax to 15 per cent rather than the 20 per cent under discussion – spoke to reporters on returning to the White House after a day's golfing with the president.
Dismissing concerns about the Republican plan to cut the US corporate tax rate to 20 per cent, Paul said: "My goodness, Ireland is at 12 [per cent] thinking about going to 8. You've got Canada at 15. We really need to do it."
It remains unclear who was the source of the story – Trump or Paul – although evidently they discussed it on the golf course. But pointed phone calls and contacts ensued nonetheless between Irish diplomats and the offices of both men in a bid to clarify the situation.
Trump's comments prompted a piqued response from Taoiseach Leo Varadkar in the Dáil, where he confirmed that Trump's comments were indeed fake news, a riposte that itself was covered by several international media outlets.
Sources say the confusion appears to have arisen over a misunderstanding of Ireland's "knowledge development box". This tax device, which was introduced by former finance minister Michael Noonan in Budget 2016, allows companies engaged in certain intellectual property activity to qualify for a reduced rate on profits, of 6.25 per cent. The device was announced to bring Ireland in line with many European countries that offer similar tax incentives for research and development activities.
Highly concerning
The spectre of Ireland’s corporate tax regime being dragged into the centre of debate over US tax reform is highly concerning for the government. This week marks the latest mention of Ireland by the US president in the context of tax reform, as Republicans prepare to unveil a tax plan by the end of the year.
In August Trump cited Ireland during a press conference when he accused American companies of not conducting sufficient activity within the US. In a speech in Springfield, Missouri, later that month he again namechecked Ireland along with several other low-tax countries that run a trade surplus with the US.
Altough the Government may have been able to escape any major damage from Trump’s latest comments by dismissing the comments as more fake news from the mercurial US leader, the US public and political world can’t be blamed for assuming that American companies are shirking their tax responsibilities.
Despite repeated claims that Ireland applies a transparent 12.5 per cent rate to domestic and international companies, in fact many US companies effectively pay a much lower tax rate than the nominal rate, sometimes by establishing subsidiaries in Ireland that are not tax-resident there.
Apple’s 2 per cent
After all it was Apple chief executive Tim Cook's claim at a Senate committee hearing in 2013 that Apple had negotiated a 2 per cent rate with Ireland – not 12.5 per cent – that prompted the European Commission's anti-trust investigation into Ireland and demands that €13 billion in unpaid taxes be recovered.
While the government has rejected the Apple ruling, the reality is that structures such as the “double Irish” – which has now been abolished – enabled big US corporations to avoid paying tax on a large chunk of their profits.
Unsurprisingly, then, Ireland and other low-tax jurisdictions have come into particular focus as Trump tries to execute his "America first" plan to bring back jobs to the US. In particular, Ireland runs a very high trade surplus in goods with the United States, mainly reflecting the manufacturing activity of the pharmaceutical and medical devices sectors . It is exactly this kind of activity that the Trump administration wants to bring back to the US.
Already there are signs that large US tech companies are honing their message with an eye to the administration in Washington. Apple, for example, may have just got the go-ahead for a new data centre in Athenry, but Cook recently announced plans for a data centre in Iowa after the state and local authorities offered a package of tax incentives.
US companies will still need a European base, but the pressure is on to deliver for American workers. The administration in Washington will be watching closely to ensure that US companies do so.