Obama’s Tax Proposals

Even after a string of bad economic forecasts, the news on Obama administration proposals to reform the taxation of overseas’ profits stands out as particularly worrisome news for the Irish economy. 

The White House website provides a good overview of the proposed reforms: fact sheet here. 

Let’s hope the powers that be take note of findings summarised in this recent HBS Working Paper by Harvard’s Mihir Desai (via Greg Mankiw’s blog).   The best hope is that the U.S. Senate waters down the proposals (see here from some initial reaction).  But the politics look unfavourable.

12 replies on “Obama’s Tax Proposals”

The White House fact sheet seems most worrying. Page one, chapter one has this:
“Nearly one-third of all foreign profits reported by U.S. corporations in 2003 came from just three small, low-tax countries: Bermuda, the Netherlands, and Ireland.”

So we made the top three. Looks like our low corporate tax-rate continues to make us very few international friends..

I thought that the keys to the Irish ability to enlarge its corporate tax base were transfer pricing (i.e. creative reporting of the prices of inputs and outputs used by Irish subsidiaries) and the parking of intellectual property-owning subsidaries in Ireland so that all the royalty income accrues to Ireland. I see nothing in the Obama proposals that addresses either of these issues, but as usual the devil is in the details.

There seems to be two dimensions: 1) employment – and the potential conflict/complementarity between domestic and overseas employment 2) tax – the capacity of governments around the world to levy taxes on organisations that operate on an international scale. The US proposal links the two dimensions.

However, it isn’t necessary to see the relation between overseas and domestic employment of firms as zero-sum in order to see a problem with taxation of multinationals. FDI by US companies into Sweden may have employment effects (likely to be positive by Desai’s account) but isn’t likely to create a decline in overall government tax take. FDI into the Netherlands or Ireland will almost certainly reduce overall government tax take, regardless of employment effects. The worries about ‘jobs moving overseas’ seem less significant to me than the worries about lost tax revenues (from the wealthiest entities in the world).

The problem is amplified when the lost taxes are not just due to different tax rates on the same activities but when transfer pricing means that the taxes levied in one jursidiction are in effect being levied on activities conducted elsewhere. Obviously, there is a significant amount of this kind of activity being undertaken – and huge amounts of lost revenue.

The upshot of this is that we should probably be less worried about the globalisation of production (although there are very serious issues of displacement, retraining etc for specific groups of workers) and we should be more worried about the globalisation of tax avoidance (a sub-category of the financial globalisation that has us where we are now). This also has the happy consequence that it places less emphasis on competition between different national labour forces and more on the need for governments to be able to raise the revenues they need. It doesn’t help Ireland’s position of course, given the transfer pricing issues here, the role of the IFSC etc. Apart from the various other issues, it suggests that we move as quickly as possible to develop some pathways to development that can complement the FDI strategy.

Frank Galton
This incentive is directly threatened by the proposals, if they have big teeth. US companies invest here only because they can avoid double taxation and thereby avail of the reduced rates here. This is through the web of DTAs spun by the OECD. Some contain more favourable provisions than others. Ireland has been lucky (pause while my ex-colleagues heat up to 90!) that we have had the most favourable provisions. US companies may park profits abroad often via tax havens, having earned them in Ireland, and then repatriate at a lesser CT rate in the US, whenever they repatriate them. The USA offered a much reduced CT rate recently under GWB, to get cash back. There are a few ways in which the proposals have teeth, but Obama, may Allah bless him, is a creature of the Chicago machine. Daley. So Irish eyes may still be smiling at the end of a lengthy process! But he did mention Ireland and the Dutch…… and the 210Bn is desirable. One way to get that is to have more US industry move to Ireland! That way the tax from Ireland goes up. Just a creative way of looking at it, but it is a possibility, as the other errr…. the tax havens come under pressure from other actions by the US, we may be a more attractive location, but those operations tend to be financial, not an expanding industry, or otherwise service based. This may be very positive in fact!
The US agency most concerned is the IRS. It is fundamentally understaffed. It has very poor anti-avoidance training and has been left that way for decades. I would be more concerned by a massive increase in staffing in appropriate areas in the IRS. Then we might have to clear the decks! It is one thing to have a law…..

Seán Ó Riain
On the contrary, we need to stick to our last! The shoes we make are the finest……
We have a massive tax avoidance industry inIreland created by years of funny ct rates! One of my last cases, never formally commenced, involved an indigenous company, employing very many people, who made things. I cannot be specific as it would not be fair and might also be a breach of OSA. They had many corporate entities, one of which was fantastically (!) profitable, and strangely, liable at only 10%. I was looking back a few years to ascertain the scope of the “audit”. This was the old manufacturing rate of CT. The cost of sales was not 40%, not 4%, but 0.4% of sales. Such gall would of course be the opening negotiating position, but these accounts were fully signed off by one of the big auditing companies, not a Bernie Madoff type! Accountants and tax advisors would have been fully employed and paid for the structuring. There were no international aspects, except that it had an export company.
But there were many employees most of whose wages were in the accounts. Like Goodman, the meat exporting company publicly commented upon in the early 90’s, there were alleged cash payments in addition to the declared wages to skilled staff. So there was probable evasion of PAYE, PRSI, CT and VAT as turnover would have been down to provide the cash payments. Not unusual, but it was a work of art and it will only get more audacious. But it did represent a substantial operation. Possibly 10 M pounds and euro were evaded.
My point: we have the legal cloak and the expertize infrastructure for large operations. As tax becomes a greater threat to cashflow, it will of its own, prompt a move to a “quality” jurisdiction. That will only accelerate as companies come under pressure.

I hope that MNEs reading this, will take it as an advertizement for such services. I am retired. But others are legion!

Looking for silver linings, it occurs to me that the White House proposed deferral of investment tax relief could actually have an indirect side-benefit for Ireland (vis-a-vis otherwise preferred new locations) for MNCs already here but thinking of moving.

There will be intense lobbying against the proposals but opposition from say the two Democrat senators from California will probably be offset by some Republican support in an election year.

It will certainly have some consequences.

An amendment to the stimulus bill in February, introduced by California Democrat Barbara Boxer and John Ensign, a Nevada Republican, to allow a second tax amnesty (the first one was approved in 2004) on repatriation of profits, had been rejected by 55 votes to 43 in the Senate.

The use of Ireland as a corporate tax haven has been significant.

US Bureau of Economic Analysis data shows that the combined net profit of US corporations in Ireland was $8.58 billion in 1997, $13.39 billion in 2000 and reached $31.3 billion in 2003 – – despite a slowing in activity because of the high tech bust. The $48 billion net profit in Ireland in 2005 compares with $37.01 billion in the UK and $74.06 billion in the Netherlands. US companies in Germany reported net profits of $11.22 billion in the same period while French operations made $9.52 billion and their Italian operations made $8.58 billion.

In 2005, US tax expert Martin Sullivan did an analysis on what he termed a $4.8 billion tax subsidy, which was the equivalent to an economic development grant from the US Treasury payable in part to the Irish government and in part to corporations investing in Ireland. He said of the $18.3 billion of profit reported by Irish subsidiaries of US multinationals in 2002, $13.7 billion did not belong there. With a statutory tax rate of 12.5%, Ireland collected approximately $1.7 billion of extra corporate tax on that shifted profit.

“That’s pure gravy for the Irish Treasury. At the same time, US corporations enjoyed a 22.5% lower rate (35% minus 12.5%) as a result of shifting income from the United States to Ireland. On $13.7 billion of profit, that is a tax reduction of $3.1 billion. Combining the two, the total US subsidy for Ireland attributable to profit shifting in 2002 equals $4.8 billion,” Sullivan said.

While we have ta low CT rate, we also have other factors in our favour and these will be pursued during the lobbying process.

It would be no harm to have a quiet word with the Dutch, as their Head Office model is successful and played a part in the IFSC model. We have shared interests and should not provide any extra ammunition to detractors in this period. Merely closing down the tax havens may achieve the Obama goal?

Was the repatriation really in 2004? Wow, I was sure it was much more recent. Sorry!

Reading the detailed and poorly reported press release, the change in the deferral rules is only planned to take place at the earliest, in 2011. This announcement will have the effect of temporarily speeding up inward US investment in Ireland. There are still many profitable companies in the USA. Just not in finance….

Unfortunately, they are hiring in the IRS. 800 does not seem to be many, but the biggest targets are few and will produce the most of his target.

$86Bn of the $210Bn are to come from the attack on the currently legal use of tax havens to shift dividend and other income and expose it to US tax. This should not impact on Ireland over much, and may even facilitate more US investment here, as there is less advantage to shifting it offshore once earned here.

I am not an expert on US tax law but these reforms appear sensible and just and should not impact too much on Ireland, as we invited very genuine industrial operations here. The main spin-off for us is the payroll which includes the tax element paid here.
The tax havens are being hammered.

Obama’s tax proposals are not intended to raise a lot of tax revenue, but they are mostly intended to make the US tax system “fairer”. It is infuriating to many Americans to learn that the US tax system gives a tax preference to U.S. multinationals to invest abroad rather than in the USA.

If Obama’s tax reforms are passed as proposed, the net effect will be to increase US investment a little and reduce non-US investment a little. But Ireland’s attractiveness relative to all other non-US investment destinations won’t change. Ireland has a lot of other strengths that will more than offset this tax reform — for one thing Ireland’s recession has greatly eased the shortage of good-quality workers, which had become a major restriction on investment.

Ireland has now been removed from the White House statement. Obama must have spotted the shamrock bowl on his mantelpiece!


I told you so!
This is doubly significant as Accenture used to be part of Arthur Andersen…..the most infamous accountancy firm. Accenture were very clever and cashed in and left their audit and accident prone buddies.
Who were then disbanded as the US branch were found to be destroying evidence and emailing one another about how clever they were…..
The move to Dublin therefore has fascinating ramifications. And is VERY positive. Whoopee! Thank you Biffo! Obama has rellies from Money gall….

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