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US Tax Reform

US Tax Reform

The Administration has reaffirmed its commitment to a dramatic US corporate tax rate cut, but what does this mean for Ireland?

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President Trump's Proposed Tax Plan

Treasury Secretary Mnuchin and National Economic Council Director Gary Cohn announced at a White House press conference on 26 April, what they called the “core principles” of the President’s plan for tax reform and simplification. The announcement reiterated a number of the President’s campaign promises in respect of tax reform and has promised to be the largest tax cut in US history. This repeated broad policy statements such as the goal of making US businesses the most competitive in the world, introducing massive tax cuts, and effecting massive tax reform and simplification.

However, the proposal lacks sufficient detail to allow a true assessment of its impact and importantly the likelihood of its implementation.

The main proposals relating to business taxation were:

• 15% federal corporate tax rate (down from current rate of 35%)
• Territorial system of federal taxation
• One time US federal tax on overseas earnings at a “competitive rate” (not       identified)
• Eliminate tax breaks for “special interests”

The proposal did not provide any further insight into the Administration’s view on a Border Adjustment Tax as proposed by the Republican’s House Blueprint for tax reform (A Better Way Forward on Tax Reform). The Border Adjustment Tax would seek to exempt from tax earnings from US exports, while placing a tax burden on companies importing goods and services into the US. This measure, widely viewed as raising significant US tax revenues, has proved controversial amongst legislators and corporate taxpayers. Further there was no detail in respect of the other aspects of the House Republican’s Blueprint for tax reform such as the removal of corporate tax deductions for interest expense or immediate tax write off of capital expenditure.

The cost of the tax plan has still be finalised, however Mnuchin indicated that it would be neutral when economic growth, reduction in personal tax deductions and the closing of tax loopholes were taken into consideration. Initial reactions are that achieving economic neutrality through these measures alone could prove challenging. Indeed, reaction from some sources was that the principles could result in an increase in the US federal budget deficit of several trillion dollars over a 10 year period, and as consequence would not be acceptable to many Republican members of Congress, and as such could prevent the change from being permanent under congressional budget rules.

The Trump Administration stated that it will continue to work behind the scenes with Republican Leadership from both the Senate and the House of Representatives to develop a set of proposals that have a realistic chance of passage in both Houses. The content of that package and the new corporate tax rate are very uncertain at this point. In addition, the timing of the legislative process and intended effective dates are unknown. The Administration is hopeful that the legislation can be developed and enacted this year but given the complexity of the US legislative process, that would appear to be most ambitious, if not very unlikely. Compromises will almost certainly need to be made to arrive at a bill that has a prospect of getting through Congress.

Notwithstanding the proposal was light on detail, it is clear that the Administration is reaffirming its commitment to a dramatic US corporate tax rate cut.

What ultimately emerges and what it might mean to Ireland is difficult to say. The proposal to reduce US federal corporate tax to 15% will, if implemented, undoubtedly reduce the delta between the US rate and Ireland’s corporate tax rate of 12.5%. However, the Republican Blueprint points to a 20% federal tax rate. If that was to be the case, adding State Taxes of circa 5%, would mean a US rate of double the Irish rate – so still a compelling difference between the two.

The proposed one-time tax on overseas earnings is unlikely to have a significant impact on the Irish operations of US companies.

It will undoubtedly be very important for companies to assess the implications of what is ultimately agreed, once those proposals become clear. Notwithstanding this, we believe that US corporates will continue to need international operations to service international customers and access talent. We believe that Ireland’s Corporate Tax Regime will continue to remain competitive. That said, US tax reform will also bring into focus the other attributes that Ireland has to offer international investors. They include our work force, long and stable track record of welcoming foreign investment, a pro-business environment and the fact that we are an English-speaking, common law EU member state.

If you have any questions relating to the President’s Principles or the Tax Reform Process, please do not hesitate to contact us.

 

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