US President Barack Obama has proposed sweeping changes to tax rules for American companies operating in Ireland but stopped short of calling for a complete repeal of overseas tax benefits.
US multinationals would still be able to defer paying US tax on profits earned in Ireland but would no longer be able to claim tax deductions in America for expenses related to their Irish operations.
The proposals, which relate to Ireland and other low-tax countries, must be approved by Congress and will not come into effect until 2011.
There was a cautious reaction here to Mr Obama’s proposals. A spokesman for the Department of Finance said: “We will be studying the proposals in detail to consider their impact on Ireland.”
A source close to the department said its initial view was that Mr Obama’s proposed measures will target offshore tax havens rather than countries like Ireland that offer low corporate tax rates but have transparent tax treaties with the US.
IDA chief executive Barry O’Leary said this morning the agency had expected the measures to be more severe and was not overly concerned that the proposals would deter US firms from investing here. He pointed out that the plan was “well signalled” in advance by Mr Obama and yet US companies such as Hewlett Packard, Intel and Paypal have continued to invest heavily in Ireland.
Some 70 per cent of all foreign direct investment into Ireland last year was from the US, he told RTÉ's Morning Ireland.
The Irish Government has lobbied the Obama administration energetically in recent weeks in an effort to avert changes in the rules governing tax deferral.
In addition, Mr O’Leary said the agency has been working closely with US tax advisers for the past three years and a senior IDA executive has been sequestered to the Irish embassy in Washington DC to work with diplomatic staff on the “influencing agenda”. He said Ireland has to emphasise that it is still a good, profitable place to do business, rather than simply a place to secure low tax rates.
In a briefing note accompanying yesterday's announcement, the White House identified Ireland as one of three small countries, along with Bermuda and the Netherlands, accounting for nearly one-third of all foreign profits reported by US corporations in 2003.
Mr O'Leary explained that Bermuda is typically regarded as a tax haven, while the Netherlands is regarded as a holding company location that doesn't have a great deal of substance. "Ireland is part of the equation that brings huge substance with multinational investment so I think Ireland is quite different from the other two locations," he said.
"It's also important to bear in mind that Ireland's success has predominantly been in the high-tech, IT industry and the live sciences and they are very profitable businesses globally in any case so you would expect that the profits would be much higher than most businesses."
While there would be some uncertainty over the next year to 18 months, Mr O’Leary was confident Ireland will not be too severely affected. “It does appear from initial reading that we’ll fare pretty well out of this whole process,” Mr O’Leary said.
Mr Obama also wants to overhaul “check the box” rules that give companies great leeway in deciding where their subsidiaries should be taxed. The administration believes the rules, which were introduced in 1997, have encouraged US companies to take further advantage of low-tax regimes overseas.
A third proposal would tighten rules on the use of foreign tax credits to avoid paying US tax on some earnings.
“One of the strengths of our economy is the global reach of our businesses,” the president said as he announced the proposals at the White House yesterday. “And I want to see our companies remain the most competitive in the world. But the way to make sure that happens is not to reward our companies for moving jobs off our shores or transferring profits to overseas tax havens.”
Feargal O’Rourke, an international tax partner with PricewaterhouseCoopers in Dublin, said: “The good news is that their primary focus is on tax havens, which we are not. There is no abolition of deferral. That’s the really good news.”
Yesterday’s proposals are less severe than the worst-case scenario for Ireland – a complete repeal of the right to defer paying US taxes on overseas earnings – and the new rules on expense deductions include an exception for research spending.
The proposals would, however, reduce the tax advantage for US corporations investing in Ireland and the US Chamber of Commerce yesterday condemned them as an unacceptable burden on American firms.
Unlike other countries, the US demands that its citizens and corporations pay US tax on all their worldwide earnings. Corporations can, however, defer paying US tax on foreign earnings until those profits are repatriated. The top US corporate tax rate is 35 per cent, compared to Ireland’s 12.5 per cent, giving US multinationals a lucrative incentive to invest in Ireland.
In 2004, US multinationals paid $16 billion of US tax on $700 billion of foreign active earnings – an effective US tax rate of about 2.3 per cent.
Mr Obama said the changes would raise more than $210 billion in extra revenue over the next 10 years. This would help to pay for a middle-class tax cut and for a permanent tax credit for research and development investment, he said.
