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Ireland is facing new challenges in attracting foreign investment due to sweeping changes to US tax rules which are now close to being voted into law.
In particular major US companies will in future find it less attractive to locate valuable intellectual property assets in countries such as Ireland, as under the latest plans income from these assets would be subject to US tax for the first time.
The planned reduction in the US corporation tax rate from 35 to 20 per cent has been on the cards now for some time, but new proposals on taxing offshore income of multinationals have been included in more recent plans emerging from the US Senate.
The House has already voted through its plan and the Senate is expected to do so shortly, though some senators are worried about the impact on the US deficit and are seeking late changes. Assuming the Senate votes its plan through, negotiations will then take place with the House to come up with an agreed package.
“From moving at a glacial pace for the last decade, the tax reform process is now moving at 100 metre world record pace in the last few weeks,” said Feargal O’Rourke, managing partner at PWC. “ There is no doubt that the direction of travel will transform the landscape in the US in terms of corporate tax competitiveness.”
The Irish headline corporation tax rate of 12.5 per cent will still be around half the US rate, counting in the new 20 per cent federal rate and state taxes of around 5 per cent.
However specific details in the plan are designed to encourage US firms to invest and locate assets in the US.
In particular a key change proposed in the US plan would have a significant impact on where companies locate intellectual property (IP) assets, which are the copyrights, patents and trademarks from the design and development of products. Big US companies have typically moved IP assets relating to sales outside the US to low tax countries, or tax havens.
This was part of a strategy which allowed them to avoid paying tax on much of their income earned overseas, provided the money was not returned to the US.
The Senate plan, responding to these tax avoidance strategies, is to force companies to include half the income coming from these assets in their US tax returns each year, effectively exposing them to a 12.5 per cent tax. Together with a new charge on tax held offshore, and new measures to encourage investment in the US, this signals a major change.
Ireland has been seeking to attract companies to base their IP assets in Ireland, to deepen the links to the Irish economy and in the hope of some research activity being based here.
Some major IP has relocated here, due largely to the desire of the big US players to move these assets out of offshore tax havens where zero tax is charged, due to new international tax moves discouraging this. However the new tax charge on income arising from these assets will make the job of attracting this investment here much more difficult,as there will be an incentive to hold the assets in the US.
“US companies will be less inclined to move their intellectual property offshore”, according to O’Rourke “ and the efforts which Ireland has been making in recent times to attract this type of FDI will get a lot harder. I don’t believe it is going to have any fundamental impact on the stock and flow of FDI in Ireland but the “fixing” of the US tax system after a decade of trying will have a lot of new and existing US companies thinking in the first instance about “America first”.”
The Senate plan is now under intense discussion, with some Senators pushing for an increase in the planned corporate tax rate to 22 per cent and others looking for an automatic rule to reverse some of the measures if the budget deficit rises.
However a version of the plan is now expected to be passed, signalling the biggest shake up for decades in the US tax system, also involving big cuts in personal tax and tax on smaller companies.