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Ireland Inc is nervous of Obama’s tax plans
Sunday, April 26, 2009 By Cliff Taylor
Complex provisions of US corporate tax law are not, at first glance, a topic to get the pulse racing. However, such is the issue’s importance to Ireland that a massive lobbying campaign is swinging into gear to try to ensure that changes proposed by the Obama administration do not seriously damage our attraction to US inward investment.

Last week, Tánaiste Mary Coughlan met senior US politicians and officials - including treasury secretary Tim Geithner - with tax issues high on the agenda. The IDA is shortly to base a senior official in Washington, whose responsibilities will include lobbying on this issue.

US president Barack Obama, in his election campaign, promised to attack tax measures which - in the rhetoric - led to the ‘‘export of jobs’’ from the US to the rest of the world.

Among the measures in the firing line is tax deferral, which allows US multinationals based abroad to defer paying tax on profits earned overseas until the money is returned to the US. In practice, this often allows these firms to avoid US tax charges on overseas profits altogether, by keeping the money offshore and using it, for example, to fund expansion outside the US.

Deferral is a big issue for Ireland because tax is a significant attraction for US companies investing here. The Irish corporate tax profit rate is 12.5 per cent for these companies, compared to the 35 per cent federal rate they pay at home. If - to put it simply - US companies based here were to be taxed at home on the profits recorded in Ireland, much of the attraction for locating here would be gone.

For this to happen, it would require a complete ending of the deferral provisions in US tax law, a development which would be fiercely opposed by US industry and is seen as very much a worst case scenario by Irish tax experts.

Still, there are significant dangers for Ireland, with 100,000 people employed in about 600 US firms here.

‘‘We have major concerns about that, and we are very anxious to have an interaction with the senior members of cabinet to indicate to them the implications that deferral would have from an Irish perspective,” Coughlan said in the US last week.

The threat comes at the same time as the US is re-examining its double tax treaties with a range of countries, including Ireland. However, official sources here said that there appeared to be no immediate cause for concern from this arm of the negotiations and there was no apparent rush from the US to change any of the key terms of the treaty.

Going back many years, Democratic presidential contenders have threatened to change tax law to favour investment ‘‘at home’’ - in fact, the provisions were reformed somewhat during the Kennedy administration in the 1960s.

Once elected, however, such threats are normally forgotten, most recently in the case of the last Democrat in the White House, Bill Clinton.

Will it be different this time? Will the global economic crisis and the desperate need for tax dollars push Obama to act? We don’t know yet, and more urgent policy concerns may delay any action, but there are some signs for concern.

Already US business is lobbying hard on the issue, and Ireland will seek to row in behind this, arguing that the current provisions benefit the US and Ireland and that changing deferral would seriously damage the competitiveness of US industry. For example, a US company operating in Europe and selling into EU markets would face an effective tax rate of 35 per cent, higher than pretty much any of its European competitors.

Obama’s recent outline budget plan included provisions to raise $210 billion over the 2010-2019 period through measures that would ‘‘implement international enforcement, reform deferral and other tax policies’’. While no detail was spelt out - more may come as the budget plan is explained in the weeks ahead - the intention in these words appears clear.

Subsequently, Geithner said that a range of measures would be introduced over the next few years to tighten the tax net.

‘‘Some proposals will focus on the rules in our tax code that put those who invest and create jobs in the United States at a disadvantage.

We will propose rules to both reform US corporations’ ability to defer foreign earnings and deter high income individuals and corporations from using tax havens to avoid [tax],” said Geithner.

A US Treasury Department spokeswoman, quoted in the Wall Street Journal last week, confirmed the intention of the administration to ‘‘reform deferral’’ to reduce the incentive for companies to invest overseas ‘‘in order to avoid taxation’’.

Privately, according to reports in the US, the Obama administration has indicated that the restriction or repeal of deferral will be effective in 2011.

However, fortunately from an Irish point of view, the Obama administration - fresh in office and hit by a range of major economic problems - does not appear to have developed proposals on the issue yet. Proposals have been put forward in the Senate over the past couple of years, related to ‘Subpart F’ of the Internal Revenue Code, which covers deferral.

For example, a number of proposals, including one tabled in the Senate in 2007,would address the issue by limiting the expenses that US companies can claim at home, in relation to activities conducted in lowertax locations overseas. Depending on how this is structured, it could deal a serious blow to the overall deferral regime.

As a quid pro quo to US business, the suggestion is that the change would be accompanied by a cut in the US corporate profit tax rate , which is currently at the higher end of the international average.

In the US, the debate has also centred around the emotive issue of ‘tax havens’. Of particular concern to the US tax authorities is a trend where companies have incorporated in places such as Bermuda and the Cayman Islands, largely for tax reasons, while maintaining the bulk of their operations in the US.

A bill proposed by Obama when he was a senator suggested that such companies be taxed on their worldwide profits in the US. Since his election, this has led to a steady trickle of US companies incorporated in Bermuda and the Cayman Islands deciding to move their headquarters to European countries which - unlike the tax havens - have treaties with the US. Tyco International and Tyco Electronics, recently said they would move to Switzerland, along with engineering companies Weatherford and Foster Wheeler.

The thinking is that the US may, in future, only allow companies to claim that they are incorporated overseas if it is in a country with which the US has a tax treaty, and where a genuine amount of the company’s management is carried out. Thus, firms such as Tyco have opted for European locations with strong accounting and legal resources, and where senior executives might comfortably be attracted to live.

In a clear sign that every cloud has a silver lining, Ireland is also putting itself forward as a location for these headquarter operations, and the IDA has had some success, attracting Covidien - a healthcare company which is a Tyco spin-off.

Negotiations are, apparently, also advanced with a number of other US companies. While such operations do not generally involve huge employment, the IDA would hope to build on the presence of these companies in Ireland over the years.

Unfortunately, Ireland was included in a report by the US General Accountability Off ice, an investigative arm of Congress, on ‘tax havens’ where US subsidiaries were established. Its inclusion of Ireland resulted from a previous study by another US quango, as international bodies like the OECD would not classify Ireland as such.

Thus it was important from an Irish viewpoint that, when Taoiseach Brian Cowen visited Washington for St Patrick’s Day, he got Obama to acknowledge that Ireland was not a ‘tax haven’ from the administration’s point of view.

This appears to have removed the danger of us being targeted in specific measures aimed at tax havens, but it does not remove the threat posed by wider reforms to the deferral arrangements.

There is no doubt that, whatever Obama said in the bonhomie of St Patrick’s Day, we are on the US radar.

The issue of Ireland being used by US companies to avoid tax has reared its head a number of times over the years, first during the ‘‘transfer pricing’’ controversy of the 1980s,when companies were accused of falsely inflating profits here to benefit from our low tax rate.

More recently, the Wall Street Journal’s 2005 report on Round Island One, a Microsoft subsidiary based in Dublin which, by legally availing of Irish patent income tax rules, was able to save Microsoft an estimated $500 million on its annual tax bill.

Meanwhile, a report in the Wall Street Journal last week estimated that ten of the biggest US corporations accumulated nearly $58 billion in overseas earnings during 2008, representing about $20 billion in revenue if taxed in the US.

As total US corporate tax receipts last year were just over $300 billion, the amounts involved are significant. Among the companies affected would be top tech firms such as Hewlett Packard and Google, and most of the big pharmaceutical firms. All of these have significant operations in Ireland.

The devil will be in the detail in terms of any changes, of course. If alterations are aimed mainly at tax havens, or at companies selling goods back into the US, the impact here will be limited.

It is changes to the overall deferral regime which are the key danger to Ireland.

It will be a debate that ranges from the intricacies of tax law to big issues, such as globalisation and whether the US, the main driver behind global business expansion, can benefit by trying to ‘‘bring jobs home’’ or would such a move actually damage US industry in the long term by going down this road.

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