Ireland, the US and Brexit

With the biggest overhaul of US taxation in three decades and the small matter of Brexit waiting for us in 2018, it would be remiss to think it’ll be business as usual next year. But our reputation as the little country that “punches above its weight” is not only tired, it’s not true anymore either.

Our trade and economic policies are well-established and globally recognised, nowhere more so than in the US, where Irish companies now operate out of all 50 states.

Anyone not following US-Irish trade relations closely would be forgiven for assuming it was still a very one-sided affair. While there have been major shifts in the geopolitical and economic landscape the world over, many nations remain heavily dependent on the whims of the American economy.

Throwing a US administration as difficult to read as President Trump’s into the mix is enough to send any small nation with an open economy into a tizzy.

Then there’s the impending tax policy overhaul, the likes of which hasn’t been seen since the Reagan era.

Oh, and there’s the minor issue of Brexit. It never rains but it pours, eh? Thankfully the Irish know a thing or two about rain.

The only country working harder to prepare for Brexit than the UK is Ireland. Since the news that our biggest trading partner would be leaving the European Union, the country's policymakers and enterprise creators have been working tirelessly to ensure the economic equivalent of a kidney punch to Ireland won't necessarily lead to the referee calling time on Ireland's economic success. And unlike our UFC champion, Conor McGregor, Ireland Inc actually has a fighting chance in this unprecedented bout, despite what the pundits say.

The first point worth making before we delve deep into the ‘what ifs’ is that there is yet to be any significant trade policy shifts outlined by the US administration regarding Ireland. Why? Because they need us just like we need them.

"Enterprise Ireland's advice to Irish companies is simple: there have not been any significant legislative changes to US trade policy," says Sean Davis, Enterprise Ireland's North America and Canada territory director. "Clearly Ireland has a trade surplus with the US, and that has been noted by the administration."

However, two-way trade brings with it many benefits. Currently, Irish companies employ more than 100,000 people in the US. Of that 100,000, 81,300 are employed by Enterprise Ireland client companies. "Irish companies are drivers of significant economic impact in the US," says Davis. "I think we can be confident that any changes in actual policy will reflect the truly globalised nature of international trade. Given there has been a mutually productive trading relationship with the EU for a long time, this is almost certainly going to remain the case, which Ireland as a member state clearly benefits from."

Exports to North America by Enterprise Ireland client companies grew by 19 per cent to €3.74 billion in 2016 and Ireland is now the 13th largest supplier to the US.

Brexit

In a speech given to the Brookings Institute in Washington DC last November, Minister for Finance and Public Expenditure and Reform, Paschal Donohoe, outlined to an American audience just how significant Brexit would be for Ireland. In this context of this article, it is worth quoting a key section on Brexit:

“While Ireland’s trade with Britain has dropped from over 50 per cent in 1973 to 17 per cent today, it is still our single largest trade partner. Estimates vary somewhat but over 110 million border crossings took place between Ireland and the UK in 2016. Irish people cross the border for vacations, for university, for work, and even for marriage. So, we share not just trade but language, history and culture. Brexit negotiations between the EU and the UK are ongoing but I can confirm that Ireland’s priorities remain unchanged . . . We must ensure that there is no introduction of a hard border. We must maintain the Common Travel Area between Ireland and the UK. And we must ensure there are effective transitional arrangements leading to the closest possible trading relationship between the UK and the EU.”

This is just an extract from the section of his speech on Brexit. But it hits home the concerns felt by so many in Ireland as to what Britain’s exit from the EU could mean for our economic security.

Ireland’s understanding of its trade relations can only be seen within the context of Brexit. But if you were to take the comments made by every economist, politician, and pundit from the last year on the likely impact of Brexit, and develop an algorithm that could correlate a one-line response encompassing them all, it would be this: “Brexit is bad news but Ireland’s response to it will determine just how bad it will be.”

“Of course, there will be an impact from Brexit once the details are known,” says Enterprise Ireland’s Sean Davis. “Brexit represents a huge challenge for Irish companies and is top of Enterprise Ireland’s agenda. The UK is, and will remain, the largest export market for indigenous companies. Over 1,400 clients are active in the UK market – 600 with significant UK exports.”

According to Davis, exports to the UK as a proportion of total Enterprise Ireland client exports have fallen from 45 per cent in 2005 to 35 per cent in 2016 as more and more Irish companies diversify their export strategies into northern Europe and the US as well as high-growth markets, such as China, India, the Gulf and Brazil.

But even as companies diversify their portfolios into less well-known territories to reduce the impact of a hard-Brexit, others see many opportunities for indigenous enterprise to capitalise on.

"Decision makers in the US and elsewhere looking at inward-investment locations have a range of considerations," says Brian Daly, head of Brexit with KPMG Ireland.

“Many of these revolve around certainty and stability – these have been brought into sharp focus as a result of Brexit and Ireland scores very well in this area. Key selling points include political stability and long-term certainty on tax rates and, of course, guaranteed access to an EU market of half a billion people.”

US taxation reform

The last time Anglo-Irish relations were this muddled, British political satire enjoyed its golden era for producing cutting-edge wit, principally through the TV show Spitting Image.

One of their key political targets at the time was Ronald Reagan, the last Republican president to make sweeping changes to US taxation policy. Three decades on and one can only wonder what the geniuses at Spitting Image would have made of a political leader as confounding as President Trump.

While their comedic material might have drawn from each leaders’ own unique character traits, Reagan and Trump would likely be on the same page when it comes to many aspects of taxation. But in a globalised world, the US must be cognisant of what’s happening elsewhere as much as what’s happening at home.

"There's a general trend towards lower corporation taxes worldwide and it's likely that the US will follow this pattern," says Shaun Murphy, managing partner, KPMG Ireland. "When and by how much will be the result of political negotiations – the inbuilt checks and balances in the American system tend to slow down significant policy changes. The impact of tax cuts on the US deficit, how any cuts will be funded and so forth are all the focus of intense political debate and the outcome remains unclear."

Murphy doesn’t believe current US proposals to be as negative to Ireland as earlier suggestions. However, there is a very long way to go. “Ireland needs to control what it can,” he stresses. “What matters is our attractiveness relative to other locations. That appeal remains strong as a result of consistent Government policy and near unanimity across the political spectrum. It recognises the tax receipts from FDI, the significant employment benefits and the fact that small countries such as Ireland have fewer policy levers than larger nations. Staying competitive and avoiding complacency are and should remain two of our biggest objectives.”

The big issue for US taxpayers is individual income-tax changes. But the real impact on Ireland will stem from corporate taxation changes. And the part everyone is focused on is the overall corporate rate. It’s likely the US will reduce its rate to 20 per cent. Currently at 35 per cent, that’s a huge reduction.

The likely reduction to 20 per cent – while significant – still doesn’t come close to Ireland’s 12.5 per cent. This cannot be ignored.

Neither, however, can the incentives to US companies about to see a sizable chunk of their overall tax liability slashed, allowing them to stay put and create economic growth domestically. Perhaps, but the tax rate is only part of the picture, says Joe Tynan, head of tax at PwC. "US companies will continue to want access into a European market of over half a billion people," he says. "In other words, US companies have major presences here for more reasons than attractive corporate taxation rates."

Eversheds Sutherland tax partner Alan Connell believes comprehensive US tax reform has potentially significant impacts on taxpayers across the globe, not least here in Ireland, having regard to the fact that the Ireland-US business relationship is very much a two-way street.

"While some important hurdles have been cleared in both the House and the Senate, it remains the case that countless technical, political and revenue difficulties remain to be solved, and the outcome of the efforts so far remains highly uncertain," he says. "The remainder of this year will be a very interesting and possibly eventful time for taxpayers and their advisers, as they will need to carefully scrutinise relevant legislation to determine its potential impact on their businesses."

Pending precise detail on the approach that will be taken in respect of US tax reform, it appears existing incentives for US multinational corporations to conduct certain operations in favourable jurisdictions will continue, he adds. “In this respect, Ireland remains a very favourable jurisdiction for US multinationals doing business from, or looking to establish, a European base – particularly post Brexit, as such corporations continue to enjoy the benefits of Ireland’s EU-approved low-tax regime. Ireland remains committed to ensuring that its tax offering remains competitive, certain and compliant with international standards, in order to remain a first-choice platform for international investment and expansion projects of US multinational corporations.”

Trade policy shifts

“Barriers to trade tend to inhibit economic growth and for Ireland the ability to trade freely has been a pillar of our economic development for decades,” notes Shaun Murphy. “So, the threat of protectionism anywhere tends to be viewed negatively by Irish business leaders. Brexit is also bringing market access issues into sharp focus across Europe – and it reinforces how vital being part of the EU is to Ireland.”

Murphy also highlights another variable, all too easily overlooked when bogged down in the economic and political. The impact of tech and the increasingly powerful tech sector, will make its mark on the future of US-Irish trade relations. “As well as macroeconomics and geopolitics, it’s impossible to ignore the potential impact of technology,” he says. “The challenge for business leaders is trying to appropriately anticipate and drive change. The threats and opportunities from the likes of AI and robotics aren’t about the far and distant future anymore. It may take a few years to impact but technological change should be high on the board agenda today.”

Irish companies in US

There are Irish companies operating out of all 50 states in the US. More than 100,000 people are being employed by these same companies. Innovation in virtually every sector is being generated by both Irish and Americans on both sides of the pond, principally through the continued proliferation of open trade channels. There is too much dramatic change in the offing to allow for things to be easy. But the established channels are working well for both sides. Meaning clichés like ‘business as usual’ are unhelpful in a forecast of what’s likely to come in 2018. But others, like ‘If it ain’t broke, don’t fix it’, are still perfectly apt.

Showdown at Gucci Gulch

President Trump is by no means the first US president in recent years to declare his intentions to reform America's corporate tax system. President Obama acknowledged the need for reform in a June 2014 speech when he accused US companies engaged in so-called "inversions" of "gaming the system".

President Clinton and the two Bushes also lamented the high rate of US corporation tax – 35 per cent federal tax plus about 5 per cent at state level, but Ronald Reagan is the only president since the second World War to achieve meaningful reform.

This came about following the famous Showdown at Gucci Gulch in 1986.

Gucci Gulch is the nickname for the corridor outside the meeting room of the powerful Senate Ways and Means Committee. It is so called because this is where you'll find the world's highest-paid and best-dressed lobbyists all waiting to grab a quick word in the ear of a committee member or jump on the latest nugget of information about the way the wind may or may not be blowing on a piece of legislation.

It is generally acknowledged that the application of President Reagan’s famed charm and communications skills was the crucial factor in bringing the Act over the line. By going over the heads of the committee members and the well-heeled lobbyists and appealing directly to the American people, the president made it morally and electorally very difficult for senators to oppose the Bill and it was duly passed into law.

Who is to say that the current American president, who also spends much of his time bypassing Congress and appealing directly to the people, will not achieve similar results?