Threat to exports lifted as US drops key corporate tax proposal

A key part of the US plan to reform corporate tax which posed one the greatest threats to Ireland has been abandoned. The proposal to introduce a US border adjustment tax has been shelved by Republicans in Congress, a development that will be welcomed by the Irish Government and the IDA.

A group of senior Republicans announced that they were setting aside the proposed tax – a crucial element of which was a tax on imports – which would have hit Ireland’s exports to the United States. The plan would also have posed a long-term threat to foreign direct investment out of the US to countries such as Ireland, as it would have provided a tax incentive for companies to export from the US, rather than establishing plants overseas.

The proposed tax would have effectively taxed goods imported into the US and exempted exports. It had split US business, leaving its implentation in doubt for some time.

Ibec chief economist, Fergal O’Brien, said Irish businesses would welcome the news. The tax would have been damaging for world trade, he said.

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Feargal O’Rourke, PwC’s managing partner said the news was particularly welcome for Irish exporters to the US as the new tax would have made their products more expensive in the US.

It would also benefit Ireland’s efforts to attract FDI, he said, and could make it difficult for President Donald Trump to afford to reduce US corporation tax from 35 per cent to 15 per cent as planned. The border tax would have raised revenue to help pay for this.

Trade surplus

Ireland runs a large trade surplus in goods with the US – exporting more than it imports – an imbalance that the White House has said it wants to rectify. China, Mexico and Germany are some of the other main exporters that run such a surplus.

A statement from the group known as the “Big Six” – the most senior Republicans in the legislative and executive branch of the US government – said that they “had decided to set this policy aside in order to advance tax reform.”

“While we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform,” the group said in a statement.

They added that they intend to bring forward new legislation in the autumn “that will result in the first comprehensive tax reform in a generation . . . American families are counting on us to deliver historic tax reform. And we will.”

The group includes House speaker Paul Ryan and senate majority leader Mitch McConnell, White House economic advisor Gary Cohn, Senate finance committee chairman Orrin Hath and Kevin Brady, chairman of the ways and means committee. Treasury secretary Steve Mnuchin is also a member.

Central plank

The border-adjustment tax had been touted by Republicans as a way of raising money to offset other tax cuts, and discouraging companies from manufacturing their goods overseas, a central plank of Mr Trump’s “America First” economic policy.

But the proposal met resistance from some Republicans in Capitol Hill, particularly those in southern states, who were concerned that the tax could raise prices for consumers and hit businesses that rely heavily on imports.

The sidelining of the plan means that Republicans need to now focus on alternative ways to pay for the loss of revenue under Mr Trump’s plans for the “greatest tax cut in history”.

It is understood that the group, which held a series of meetings on Wednesday night, decided to issue an update on tax reform in a bid to show some progress on the issue before the August recess.