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US Tax Reform: What does it mean for Ireland

US Tax Reform

US Tax Reform

In this article, Anna Scally looks at US tax reform and considers the changes to the corporate income tax code and the impact on US parented groups with Irish based business and Irish based business operating in the US.

Last December, saw the enactment of the most comprehensive changes to the US tax code in more than 30 years.  The cornerstone of US tax reform was a reduction in the headline rate of federal corporate income tax from 35% to 21%, effective 1 January 2018.  The reform also saw the introduction of a number of other measures, some positive and some negative, and without doubt adding, to the complexity of the US tax regime. Since then, US companies with international operations in Ireland, and indeed Irish companies with operations in the US, have been assessing the implications of the changes. 

Changes to US corporate income tax code

The main corporate income tax changes of interest are:

  • 21% federal rate of corporate income tax effective from 1 January 2018. This represents a significant reduction from the previous rate of 35%.
  • Introduction of a minimum tax on global intangible low-taxed income (GILTI) for US headquartered companies. The GILTI US effective tax rate for 2018 is 10.5% (increasing in 2026).
  • 100% expense deduction for capital asset expenditure for old and new business assets for 5 years (does not apply to the real estate sector or to intangible assets).
  • 30% limitation on interest deductions by reference to EBITDA up to 1 January 2022 and by reference to EBIT for tax years beginning thereafter. 
  • A base erosion anti-abuse tax (BEAT). This applies to certain large taxpayers and will generally impose a minimum tax on profits. This is relevant to both US and non US headquartered group.
  • R&D tax credits were preserved.
  • A foreign-derived intangible income (FDII) regime was introduced which gives an effective rate of tax of 13.125% (increasing in 2026) on excess returns earned directly by a US company from foreign sales or services.

The mix of changes appear to follow a carrot and stick approach – some were designed to encourage further investment in the US – whereas others were designed to penalize investment elsewhere!

US parented groups also got hit with a mandatory repatriation tax. This would have hit taxpayers hard who had, under the previous regime, been motivated to keep overseas profits, overseas.

What do the proposals mean for Irish based business?

Ireland’s 12.5% rate of corporation tax remains attractive when compared with the US combined federal income tax and state tax rate, which is likely to see most US businesses taxed at corporate income tax rates of about 26%.

A threshold foreign minimum rate of tax of 10.5% applies to profits from exploiting intangible assets before additional GILTI tax applies to these profits. The taxable profits of most businesses in Ireland are taxed at a rate which is close to the Irish corporation tax rate of 12.5% meaning that Irish based business should broadly be subject to tax at a rate that equates to the target US minimum tax rate on such profits.  

The FDII proposals to subject foreign source profits to tax at a rate of 13.125% (increasing to over 16% from 2026) and the BEAT proposals, may both be in breach of World Trade Organisation (WTO) agreements and it remains to be seen what action is taken in relation to these.

Irish based business operating in the US

For Irish based business operating in the US, the restrictions in relation to interest deductions as well as additional taxes arising where payments are made for services (and goods) purchased from non US group members, could have significant consequences. 

100% expensing of asset expenditure together with the continuation of the R&D tax credit should improve the US after tax position of their investment in US based business.

Irish groups will continue to have to monitor the impact of the changes and in particular their impact on existing financing arrangements and business supply chains for US based operations.

 

Almost one year on, the impact of tax reform is becoming a little clearer for US companies with operations here in Ireland, and for Irish based companies with operations in the US. However the rules are very complex, and much uncertainty still exists in relation to how the rules operate in practice. More time will be required to determine the longer term impact of the changes and indeed how long many of the provisions remain intact. Our 12.5% tax rate continues to remain very competitive and the reality is - it’s “business as usual” for most international groups.  

This article appeared in the Sunday Business Post, and is reproduced here with their kind permission.

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