Following a contentious legislative journey, the Tax Cuts and Jobs Act was signed into law by US President Donald Trump on 22 December 2017. The Act represents the most significant revision of the US tax system in decades. Given the substantial presence of US multinational companies in Ireland, the changes to the US tax code could have significant implications for the Irish economy.
In a new discussion paper published on the IIEA website, Professor Frank Barry of Trinity College Dublin describes the changes to the structure of US business taxes as “genuinely historic.” Professor Barry summarises the key elements of the Act’s business tax dimension as follows:
- A reduction in the federal tax rate from 35% to 21%
- A one-time toll charge on foreign profits held offshore
- A shift from a worldwide to a territorial tax system
- The introduction of new taxes and tax provisions to police the offshoring incentives introduced by the shift to territoriality.
Although the new federal tax rate of 21% positions the US just above the OECD average, the rate remains considerably higher than Ireland’s headline corporation tax rate of 12.5%. The new toll charge on undistributed profits earned outside the US will be levied at 15.5% for cash and 8% for investments in illiquid assets in the hope that funds will be reinvested in the US.
Prior to the passage of the Act, the US taxed its corporations on a worldwide basis. If a US subsidiary paid a low rate in Ireland, the balance between the Irish and the US rate was owed to US authorities. The shift to a territorial tax system, then, represents a significant departure. Combined with the much-reduced federal tax rate, the new US system is predicted to trigger a significant increase in US-EU ‘real economy’ FDI flows in both directions, with Ireland well-positioned to increase its share of European-bound FDI inflows.
The new tax regime largely removes the incentive for corporations to redomicile to jurisdictions outside the US. This too should work to Ireland’s advantage as corporate inversion has been found to increase Ireland’s financial obligations to the EU without raising national income.
The Act’s new ‘policing’ provisions apply primarily to IP location. In any case, Ireland is likely to remain an attractive location for corporations seeking to ‘blend away’ the tax costs of locating IP-related R&D projects in higher-tax foreign jurisdictions. Certain provisions of the Act also incentivise US corporations to hold more tangible assets abroad in support of their foreign IP operations, which may benefit Ireland.
The signing into passage of the Act was hailed by President Trump as a significant victory for his administration’s business-friendly tax agenda. Nevertheless, Professor Barry notes in his paper that many of the operational details remain to be fleshed out. These will be clarified by US Treasury guidelines to be issued over the coming years. Other uncertainties surround the long-term budgetary sustainability of the new tax regime and the compatibility of elements of the Act with WTO rules and existing double taxation agreements. These lingering uncertainties can be expected to temper any significant short-term impacts on output and employment.