Until recently the United States had the highest corporate tax rate in the industrialized world. Companies seeking relief sometimes chose to relocate offshore to places like Ireland that offered a much more hospitable climate for business.
Now the Emerald Isle’s reputation as a virtual pot of gold at the end of the rainbow is in some doubt. Recent actions by the Irish Revenue – the country’s tax collecting body – have created the very real possibility some companies that moved there may move back. And why not? The Tax Cut and Jobs Act pared the corporate tax rate back to 21 percent while President Donald Trump’s deregulatory initiatives acted like rocket fuel when added to the engine of the American economy.
It doesn’t have to be this way. Before the TCJA was enacted, Ireland brilliantly leveraged its 12.5 percent base corporate rate – which was about a third of what companies in the U.S. were subjected to – to lure American multinationals to invest there and, in more than one case, relocate.
By combining what was then a super low rate with the favorable treatment of capital gains and other business transactions, companies focused on pharmaceuticals, airplane leasing, and technology/intellectual property were encouraged to follow the policy rainbow to its end across the sea. As a result, the Irish are now the custodians of more than 50 percent of the world’s leased aircraft, and have located within its boundaries the headquarters of an incredible 19 of the world’s leading 20 pharmaceutical and biopharmaceutical companies.
The American Chamber of Commerce/Ireland recently valued U.S. foreign direct investment (FDI) there at nearly $400 billion. The influx of foreign capital was so great, U.S.-based companies eventually made fully half of Ireland’s 50 leading companies. Moreover, U.S. investors and corporate presence accounted for an extraordinary one-quarter of its private sector workforce which was paid more than twice the average domestic industrial wage. What’s more, these American visitors paid 80 percent of Ireland’s corporate and business taxes. A pot of gold, indeed!
Despite the analogies, it’s not a fairy story. It’s real life, and has meant improvements in living standards for Irish workers as well as the U.S. investors who reaped the benefits of its up to then enlightened, forward-thinking tax policy. But last fall it all began to change.
Irish Revenue’s apparent wishes to grow the pot may send foreign investors searching for a new home. The agency suddenly flipped years of tax precedents regarding the recognition of revenue from intellectual property sales brought the shillelagh down hard. It sent Perrigo, a respected global pharmaceutical company, a back taxes bill of nearly $2 billion and hit up Analog Devices, a chipmaker, for $50 million with little notice and no explanation.
Perrigo has taken Irish Revenue to court. It’s widely expected to prevail or, failing that, settle with the government on terms favorable to the company. Nonetheless, the corporate world is watching. The effects of the assessments, and the dreaded uncertainty they’ve created on the two companies, their shareholders, and their strategic planning processes, have everyone keeping a sheep’s eye out for more bad news.
The reforms enacted as part of the TCJA bill also allowed for the full expensing of capital investments and made the hated corporate alternative minimum tax disappear. Equally tempting as a reason to consider doing business in the U.S. once again is the special one-time lure of 15.5 percent rates on repatriated foreign profits -- 8 percent of those earnings are reinvested.
It’s no surprise then that these provisions and other policy improvements have recaptured $300 billion previously buried in overseas corporate accounts. Now, Ireland’s mistake of raining on its own parade may well up that figure. And if the administration gets around to changing the definition of cost for the purpose of calculating capital gains so that they are indexed for inflation, something many economists have urged and which people expect to happen before the end of the summer, the siren song of sound American tax policy may become impossible to ignore.
If there are any three wishes– the traditional proffer given by a leprechaun to the finder of a pot of gold to gain its return -- a presidential candidate entering his re-election year wants to make sure there are, in order: jobs, more jobs, and still more jobs. Tax reform has already led to new employment records. It now provides President Trump the chance to take hold of a suddenly careless Irish leprechaun and recapture the pot of billions of American investment dollars that have been enriching that country’s treasury, along with many thousands of well-paying positions.
He should call these companies and investors to come home. The lower rates have been a boon to American business, generating economic activity that’s causing growth in the U.S. economy that hasn’t been seen for nearly a decade. It makes sense to return.