There’s genuine affection between Ireland and US President Joe Biden. That’s been on display all week, notably in the rapturous reception he got in the Oireachtas on Thursday. And the President has clearly been enjoying his visit. 

The visit matters, and not just for symbolic reasons. Ireland is an economic province of the United States. It’s hard to overstate the importance of the US to the Irish economy. The visit cements the commitments between our two countries.

The US dominates Ireland’s multinational sector, and the multinational sector dominates the economy. Between those directly employed by multinationals and spin-off jobs, about half of Ireland’s workers depend on the US for their employment.

In Dublin, Biden saluted the 950 American companies contributing to growing bilateral trade and investment between the US and Ireland to more than $1 trillion in 2021. He told assembled TDs and Senators: “We’re going to continue to grow our enormous economic relationship as a foundation for both our nations’ prosperity. We’re going to continue to strengthen our economies, building them from the bottom up and the middle out. Yesterday and always, Ireland draws a disproportionate amount of the foreign direct investment from the United States of America.”

The most acute risk that comes from Ireland’s dependence on the US is to our public finances. It won’t be news to readers of The Currency that the State’s coffers have come to depend on corporation tax. Last year, corporation taxes made up a quarter of all tax received. And in the most recent Fiscal Monitor report for March, the state collected €2.6 billion in corporation tax — €1 billion more than for the same month the previous year. Thomas explained how this was almost entirely attributable to one American company, Apple.

The public finances are at greater risk than the broader economy, or employment, because corporation tax receipts are a function of real economic activity plus taxes on intangible assets, such as intellectual property, which reside in Ireland but don’t otherwise contribute to the Irish economy. 

The risk to Ireland’s corporate tax regime has up to now been framed around the OECD’s efforts to introduce global tax reform. Those reforms are now coming to a conclusion, and the uncertainty they pose to Ireland’s economy is receding. 

The OECD’s approach, which involved coordinating dozens of countries with competing interests, was always going to be difficult. Yet the bigger risk to our corporate tax regime comes not from the OECD, but from potential changes to US tax law.

Ireland’s advantage in corporation tax depends on a few key features of US tax law, as pointed out by Thomas on Thursday in a list on unanswered questions for the Biden administration.

US tax law is not set in stone

One is that US corporations in Ireland benefit from a quirk of US tax law not shared by many other developed countries: US companies allow their overseas subsidiaries to be taxed at the local rate. Most other countries expect profits to be repatriated and taxed in the mother country. This is perhaps why we don’t see many German multinational companies basing subsidiaries in Ireland. 

Instead, the US is happy to see its high-tech multinationals have overseas profits taxed in Ireland at nearly half the American rate. They can either do it on the back of intellectual property held in the US, and declare the resulting profit as foreign-derived intangible income (FDII); or locate intellectual property rights in Ireland under the so-called green jersey structure, where the US tax authority regards the corresponding profits as global intangible low-tax income (GILTI).

Either way, there is only a symbolic top-up due in the US as both regimes happen to be closely aligned with Ireland’s corporation tax rate. This is a key feature of the US-Ireland tax relationship.

Yet those rules are not set in stone. At the beginning of his presidential term, Biden had radical tax reform plans for multinationals. He wanted to double the tax due under the GILTI scheme, and apply it country by country, which would have hit Ireland’s tax revenue directly by removing a large part of the incentive for companies like Microsoft to base intellectual property and associated taxable profits here.

He also wanted to do away with FDII altogether, which in isolation would encourage US firms to move intellectual property to countries like Ireland, but in conjunction with the proposed increase of the GILTI rate would become neutralised.

After the Trump administration had lowered the standard US federal corporation tax rate from 35 per cent to 21 per cent, Biden also wanted to hike it back up to 28 per cent. From an Irish perspective, this would be good news – there are many reasons why so many American pharmaceutical companies, for example, come to Ireland to make drugs ultimately sold to Americans, and tax plays no small part in this.

Washington’s political divisiveness comprehensively derailed this proposed package. Instead, the US adopted lowest-common-denominator legislation last year that ensures multinationals headquartered there pay a minimum of 15 per cent tax on their bottom line, but only after the blending effect of their business in low-tax countries like Ireland combined with those with a higher corporation tax rate is averaged out.

This is a significantly watered-down version of the minimum, country-by-country 15 per cent rate agreed at the OECD and implemented by an EU directive applicable from the end of this year. US tax reform has, so far, left Ireland’s tax advantage intact.

“The global minimum tax will continue fair competition for investment while creating benefits for all our people.”

Joe Biden

Last year’s half-measure allowed Biden to have it both ways when he told the Oireachtas: “The global minimum tax will continue fair competition for investment while creating benefits for all our people. And I have no doubt that the thriving economic relationship between our countries is going to continue to grow. I’m grateful for Ireland’s partnership in delivering this game-changing international agreement.”

There is, however, no guarantee things will remain this way. Ireland’s tax advantage is only as stable as politics in the US, where a presidential and congressional election is scheduled next year. In preparation for this fight, where he looks increasingly likely to run again, Biden and the Democrats are conscious that two thirds of American voters surveyed in 2021 supported their initial plan to raise corporate tax revenue as a way of paying for investment like public infrastructure.

One month before he flew to Belfast, Biden submitted his draft budget for the upcoming fiscal year to the US Congress. Last year’s defeated measures have come back: Increase the standard federal corporation tax rate to 28 per cent, double the GILTI tax rate to 21 per cent and abolish the FDII discount. 

Like last year, they will be rejected by the Congress. In the Senate, Democrats have a one vote majority, not all of whom support a heavier tax burden on business. But unlike last year, the votes will be counted as campaigning starts for the 2024 elections. Biden’s calculation is that his corporation tax measures will ultimately be decided by popular vote in the polls, where he will pose as the people’s champion against the protectors of corporate interests. 

For this strategy to be a success, Biden needs not only to be re-elected, but also to lead the Democratic Party into overturning the Republican majority in the House and becoming more disciplined in its own Congress voting.

Alternatively, we can’t rule out a Republican victory leading to a populist decision that, if opinion surveys are to be believed, voters would be quite happy to see taxes raised on the overseas earnings of multinationals. 

Either scenario would cause a massive shake-up in the foundations of what Biden described as the “disproportionate amount of the foreign direct investment” Ireland draws from the US, and of this country’s public finances.

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Elsewhere this week, Tom interviewed corporate financier Walter Hobbs, who had a front-row seat in the 2012 controversial Siteserv deal for IBRC. The role entangled him in a seven-year statutory probe. Hobbs argues that the commission was fundamentally flawed, sheds new light on the investigation, and reveals the personal toll.

Another compelling interview was Rosanna’s with Bus Éireann chief executive Stephen Kent. The state-owned bus company is at the start of its transition to an emission-free urban fleet and Kent discussed plans to get back into the black after another loss-making year.

Stephen, meanwhile, reflected on the role of auditors. From ancient Greece to artificial intelligence, he charted the surprisingly steady presence of financial watchdogs over thousands of years and the key role they play in ensuring accountability in a functioning society. And in a small country like Ireland, he wonders whether we should look overseas for truly independent auditors.