US and UK moves on corporation tax pose serious challenge for Ireland

The chancellor of the exchequer, Philip Hammond, last week reaffirmed a reduced UK corporation tax rate of 17 per cent by 2020. The tax policies of both the UK and US are now a greater influence than ever in shaping our economic strategy. Mindful of the challenges of Brexit, including downgraded growth forecasts for next year from 2.2 to 1.4 per cent and increased inflation, Hammond signalled an increase in the UK tax-free personal allowances. By 2020 these will rise to £12,500 from £11,000 and the higher-rate threshold will increase to £50,000 from £43,000. Perhaps taking his cue from the International Monetary Fund, which has argued that a 40 per cent increase in research and development spending by the private sector may lift long-term gross domestic product growth by about 5 per cent, Mr Hammond also confirmed significant increases in R&D investment with an extra £2 billion allocated between now and 2020.

New regime

The determination of the British government to keep Britain "open for business" will test the mettle of Irish policymakers also having to contend with a new regime in Washington. The president-elect campaigned on a platform of reducing corporate tax from 35 to 15 per cent. With Republican control over both the House and the Senate, it would appear that Donald Trump's route to substantial tax reform is relatively straightforward – with obvious implications for Ireland.

Although the new president may have to negotiate with Republicans concerned about the detrimental effect of such reductions on tax revenues, a deal between the White House and Congress will probably result in a compromise rate of corporation tax that stays most likely at about 20 per cent. Given the checks and balances in the US political system, it would be necessary for any reform package to be passed by a 60 per cent Senate majority if it is to become "permanent". Otherwise any measure passed will have a 10-year shelf-life and this period may be insufficient to sway long-term investment decisions.

Trump has also signalled an end to the proposed Transatlantic Trade and Investment Partnership deal between the EU and US and a more protectionist attitude to trade. Last week he killed the Trans Pacific Partnership agreement. Globally successful US businesses will want to be close to the markets they serve and this will remain a key selling-point for Ireland – despite any reduction in the relative appeal of our tax regime. However, our regime will still need to remain competitive and adaptable to circumstances.

Stable government

As national interests come to the fore again across Europe in a way not seen for some time, Ireland needs stable government and a strong hand on the tiller of public finances. In addition to a concerted effort to stay attractive to multinational investment, rewarding entrepreneurs for the risks they take needs greater priority to boost the domestic sector. Despite heralding October's budget as helping to "Brexit-proof" the economy, the scale of the challenges will require additional intervention with evidence-based action on the regulatory regime for financial services and on tax, particularly as it relates to supporting domestic enterprise and foreign direct investment. Furthermore, workable policies to mitigate the negative social and economic impact of the housing crisis are required.

Of great importance are efforts to reduce the negative impact of Brexit on trade and employment. At the Confederation of British Industry's annual conference, British prime minister Theresa May indicated that she does not want to see the UK economy falling over a cliff-edge as a result of Brexit. Ireland has a particular incentive to help ensure this does not happen given our strong economic relationship with the UK and it will require considerable Irish diplomatic effort in EU capitals to argue the case for potential solutions.

While there were no specific options cited by the prime minister, it is possible that the UK could secure a transitional trade deal based on a Norwegian style arrangement. This would allow trade to continue on current terms for an agreed period. Although politically challenging, the UK would likely still need to contribute to the EU budget and comply with EU regulations and basic freedoms. From an Irish perspective this has appeal as it would allow a longer-term deal to be done – helping avoid disruption to trade and employment. Ultimately, it will depend on the attitude of the remaining countries. The Irish Government should be supportive of such an arrangement.

Shaun Murphy is managing partner of KPMG