Corporate Taxes Under Trump (Part II)

Monday 12/05/16

     Last week I wrote about how Trump’s proposed tax policy would affect businesses in the United States. Normally you wouldn’t think about how a domestic tax policy would impact foreign nations, but the scale of the proposed changes will have a major impact on many foreign governments. Governments that have developed reputations as tax havens are likely to feel the impact of a major drop in U.S. corporate taxes. This week we will take a look at Ireland in particular.

Ireland

     Ireland has been a huge beneficiary of high corporate taxes in the United States. Many multinational firms have relocated their corporate headquarters to Ireland. In fact, eight of the top ten companies in Ireland in terms of turnover are American multinationals. Figure 1 shows a list of the top ten largest companies in terms of turnover according to the Irish Times.

     Multinationals have flocked to Ireland because of its low corporate tax rate of 12.5%. When compared to the 35% corporate tax rate in the United States, that is a pretty good incentive for businesses. However, that alone isn’t a reason for packing up and moving the business to Ireland, after all, you’ll probably want to sell your products in the United States. If you’re making hamburgers and selling them in the U.S., it probably won’t help you to relocate to Ireland (nobody wants day-old hamburgers shipped from Ireland). However, if you’re a multinational tech or drug company whose value comes from intellectual property, it can be a really great deal.

     You may recall that Apple was recently dragged before congress and scolded for hoarding money overseas. Why was Apple doing this? The answer has more to do with the U.S. tax code than the Irish tax code. Corporate taxes are levied depending on where the value was added. To avoid paying U.S. taxes Apple opened an Irish subsidiary and routes their foreign sales through this subsidiary. The subsidiary owns the foreign rights to Apple’s U.S. based technology. Apple will have to pay U.S. taxes on these profits only if they are brought back to the U.S. so they keep the money overseas.

     Multinationals have to jump through many hoops to avoid paying taxes in high tax countries like the U.S., but if the U.S. were to lower the corporate tax rate to the lower end of the spectrum, the hassle of setting up a headquarters in Ireland will most likely not be worth the bad press and complexity.

     You may recall that Ireland was included in the list of PIIGS (Portugal, Italy, Ireland, Greece and Spain). PIIGS is a derogatory acronym used to describe European countries that were facing a crisis because of high levels of debt and/or weak economies. The economic fundamentals of Ireland helped its economy recover quicker than the other PIIGS, but their elevated levels of debt remain. If Ireland loses its favorable tax status, it could easily resurface as a crisis point in the eurozone. U.S. multinationals pay taxes, hire employees and invest heavily in Ireland. That could all change very quickly and it would leave Ireland in a difficult situation. A drop in outside investment, tax revenue and employment could mean another European bailout on the horizon.