There has been plenty of discussion about what Donald Trump’s will do in office and what this will mean for the Irish economy. But how do we calibrate the risks? And what are the key factors which will affect his room for manoeuvre after he comes into office?
Taxes
What the incoming president does on corporation tax is clearly important for Ireland. Last time in office he cut the US corporation tax rate to 21 per cent. During the election campaign he said he would reduce it further to 15 per cent – this would match Ireland’s headline rate for big companies, introduced as part of the OECD corporation tax reform process. This would remove one reason why US companies move to Ireland – to pay less tax.
However, cutting the rate to 15 per cent would be costly and this comes at a time when the US is struggling to control its budget deficit and has a rapidly rising debt burden, a point underlined in a recent seminar organised by Davy and Grant Thornton.
David Sites, tax partner with Grant Thornton in the US said it was more likely that a Trump administration would introduce a lower 15 per cent rate aimed at specific areas, rather than a cut in the general rate. In particular, the lower rate – or some special allowances – could be used to encourage production in the US as part of a protectionist agenda. It will also be important to Ireland what Trump does on rules applying to the taxation of profits earned overseas – changes to these rules in 2017 were seen as actually pushing companies in sectors like pharma to produce more overseas – and other potential rules changes to try to encourage more production in the American market.
The Trump administration will benefit from having control of Congress, Sites said, but the likely need to use what is called a reconciliation process to get a major budget package through Congress will, due to the rules saying this kind of agreement must be budget neutral in the long term, lead to constraints on what the administration can actually do. This is complicated by the cost of rolling over a host of tax changes introduced by Trump’s first administration in 2017 and due to expire this year. Permanently extending the tax cuts would cost over $4.6 trillion over the next ten years – it is important to note that the reduction in the corporation tax rate in 2017 to 21 per cent was permanent and is not part of the package that will expire this year, unless extended.
There is a school of thought in the incoming administration – referred to by Trump himself – that the revenue raised from imposing additional tariffs on imports could help fund lower taxes elsewhere. Tariffs, after all, are a tax on goods brought in to the US. Sites believes that they are more likely to act as a tool through which the Trump administration tries to win concessions and change the behaviour of countries it trades with and businesses, rather than a significant fund-raising tool. It is not, he believes, as some in the incoming administration argue “ a way to rethink taxes.”
Tariffs
The possible imposition of tariffs on imports into the US is a potentially big issue for Ireland. Particularly vulnerable to blanket tariffs would be massive pharmaceutical exports from the Irish operations of American companies back to the US market. Trump has threatened blanket tariffs of 10 per cent to 20 per cent on imports – higher tariffs of 60 per cent are threatened on China. Canada has been threatened with immediate 25 per cent tariffs as Trump demands that it cracks down on illegal immigration and drug smuggling. The extent of his ability to act without Congressional approval in the area of tariffs is a matter of some debate
What Trump does here is vital for Ireland. But the decisions for the administration are not straightforward. Tariffs – and blanket tariffs in particular – would push up prices and inflation in the US. In the case of pharma exports from Ireland, one of the key buyers is the US government for its national healthcare programmes and so higher tariffs would likely increase prices to them, unless Trump could squeeze the pharma companies to accept lower profit margins. These kinds of consequences could leave politicians “scratching their heads”, according to Sites.
Tariffs are the key short-term uncertainty facing Ireland as Trump takes office – and remember that some key figures in the administration have already outlined the large US deficit in goods trade with Ireland. But will Ireland be targeted? Sites believes that China is first in the target line and the Trump “ will not want to pick a fight with the EU” or to specifically target Ireland. However Ireland could get caught up if blanket tariffs are imposed.
Tariffs on EU imports would quickly be met by reaction from Brussels, which would impose its own tariffs on US imports. The resulting trade war would hit both sides of the Atlantic – but could happen. While tariffs apply to goods, there could also be tensions in relation to the activities of the big US digital service companies. This could come first from regulation, as evidenced over recent weeks but also from possible moves by big EU countries to impose new digital service taxes on these companies due to the likely collapse of a part of the OECD tax deal which would have allowed them to collect more taxes from these companies.
Impact on Ireland
The uncertainty means calibrating the likely impact on Ireland is difficult, though the risks are clear. Kevin Timoney, chief economist at Davy, underlined at the seminar that the top three multinational players pay around 40 per cent of corporation tax – according to new figures for 2023 – and that multinationals are also responsible for around one third of payroll taxes and 40 per cent of VAT payments. Davy has recently taken a bullish view of Irish economic prospects and Timoney said that in the years to come increased domestic investment – including in the wider construction sector – could in part compensate for some reduction in investment from overseas.
Still, there is a lot at stake as Trump takes office. A lot will hang, according to Peter Vale, partner in international tax with Grant Thornton in Dublin, on the impact on the intellectual property (IP) held by US operations here, which is central to the international routing of revenues and the recent surge in Irish corporate tax revenue. The Department of Finance has estimated that for this reason up to half of all corporate taxes may be “windfall” – in other words related to tax planning based on IP and not economic activity here. Even on a conservative estimate that puts €10 billion plus of revenue at risk.
Vale believes there are dangers and a potential tipping point ahead, but there will not be a “cliff edge” for Ireland, with all the IP being moved out of this country and back to the US overnight. More likely, if there were US rules changes, he says, would be “a more gradual shift of IP from Ireland to the US, leading to a drop over time in corporate tax receipts. ”
Tax rules introduced here under the aegis of the EU, however, mean the companies moving IP from Ireland would face a tax bill based on the increase in value of this asset over time, which could potentially be large in some cases. Another senior source underlined that moving IP is complicated and costly and was more concerned about the movement of some production facilities from Ireland over time, as companies bow to the Trump agenda of producing at home, than of IP moves.
For now, companies exporting from here to America are stockpiling product in the US in case of tariffs being applied as Trump takes office. There is a feeling that trouble is ahead, even if nobody is sure when it will hit or how serious it will be. A nervous few months lie ahead.
