POLITICS
FEW doubt that if the Irish people had a vote in this month's presidential election, Senator Barack Obama would receive the overwhelming majority of our support, writes CONOR BEGLEY

Our political affinity has long been with the Democrats, but what is good for our hearts may not be particularly good for our wallets, or the economic prospects on this island.

Obama could radically change the face of Irish business and our corporation tax base.

Intel, Dell, Microsoft, Pfizer, Google and their compatriot firms are worth at least €3 billion a year to the Irish Exchequer according to estimates from the American Chamber of Commerce. And both Senator John McCain and Senator Barrack Obama want the US to get large portions of its tax income back.

Each wants to kick-start the American economy, revive its flagging financial fortunes and ensure that the US remains at the centre of world affairs. None of this is revolutionary.

The area of tax, however, clearly illustrates the differences between the candidates and their parties. Under the candidates' tax reform policies we see a clearer picture.

McCain is intent on continuing the major themes of the Bush administration with lower marginal rates and low taxes on capital while Obama follows the Clinton administration approach of expanding targeted tax breaks for social policy objectives and introducing new tax breaks and protectionist policies designed to penalise American companies that declare profits abroad.

McCain's plan gives the largest tax cuts to high-income taxpayers, while Obama's plan directs the largest cuts towards lower-income taxpayers.

What is, obviously, of interest to Ireland is the potential impact the different policies could have to US companies already located in Ireland or US companies which are hoping to locate subsidiaries in Ireland.

This is of particular concern to our Government as never before has it been so important to retain and attract more investment into Ireland through multinational companies. If the tax gap reduces or tax protectionist policies are introduced in the US, the attractiveness of Ireland's corporate tax regime for US multinationals will be severely eroded.

Income from outbound investments earned by separately incorporated foreign subsidiaries of US corporations are generally not subject to US tax until that income is repatriated. It is this deferral mechanism that Ireland has benefited and grown from, playing off the tax differential of mainstream US corporation tax of 35 per cent versus Irish corporation tax of 12.5 per cent.

McCain proposes to cut the corporate tax rate to 25 per cent. A lower corporate tax rate would, he believes, encourage multinational corporations to invest in the US and, for a given amount of investment, to report a larger share of their worldwide taxable income to the US instead of foreign treasuries.

Obama's proposals are to tighten rules involving tax havens and offshore activities in his sweeping Stop Tax Haven Abuse Act and the Obama Patriot Act.

He wants to penalise companies that abuse the US tax code and stop the use of tax havens. Ireland would not, technically, be considered a tax haven, however. Obama's Patriot Act, which he co-sponsored and introduced in to the Senate in August 2007 when he was already running for the White House, seems to have been forgotten about. However, it deserves a significant amount of attention as it has the potential to completely torpedo Ireland's corporation tax policy.

The Act would provide a tax credit equal to 1 per cent of taxable income to employers who fulfill the condition of maintaining their corporate headquarters in the US.

To finance this tax break, the taxing mechanism of US corporate profits earned abroad may be revisited.

In addition, the Act states that employers must not decrease their ratio of full-time workers in the US to full-time workers outside the US. This restriction is distortionary.

Companies should be able to decide the location of their headquarters and their domestic and foreign employment levels without being subjected to fiscal disincentives.

Foreign direct investment undertaken by US persons is not a substitute for US domestic investment, but rather is a complement to US domestic investment.

A foreign production facility can be a major source of demand for components from its US affiliate and that the foreign production affiliate relies on US-based research facilities and headquarters operations.

If a foreign production facility fosters overall demand for the firm's products, then investment in the US-based component facilities, research facilities and headquarters operations will be required to sustain the increased worldwide demand.

The sweeping changes that Obama is proposing, if implemented, could severely damage Ireland's attractiveness to US foreign direct investment. We can ill afford to lose US investment at a time when our public finances are under so much threat.

US firms have already invested over €67 billion in the Irish economy and pay more than €3 billion a year in corporate taxes not to mention the huge indirect taxes their presence here generates. Future US protectionist policies would severely curtail this.

• Conor Begley is a tax director with Grant Thornton