Obama’s tax changes will not impact on multinational job creation prospects

IRELAND’S ability to lure job creation investments by US multinationals will not be diminished by the tax changes being proposed by US president Barack Obama, according to a leading economist

Davy chief economist Rossa White believes the tax proposals will do nothing to change the relative attractiveness of investment into Ireland versus other countries.

“Crucially, the deferral rules for tax on overseas profits earned by American multinationals have not changed. What the proposals might do is to make investment abroad by US owned companies slightly less attractive at the margin.

“The bottom line is that there is nothing unique to Ireland in these plans. It was simply mentioned as a country where US multinationals have located in major clusters and generate significant profits,” Mr White, said yesterday in a note to clients.

Mr White said that some people have mistakenly grouped low-tax countries, such as Ireland, with tax havens. “These proposals relate solely to the payment of corporation tax; they have nothing to do with a possible crackdown on tax havens associated with banking secrecy. Note too that there is no guarantee that a final bill will strictly follow Obama’s outline and it is unlikely to come into effect until 2011 anyhow.”

Mr White said there are a few key points to make from an Irish perspective.

“Crucially, the proposals do not do away with deferral of tax repatriation. US multinationals can continue keep their profits here. There is no plan for a re-hash of the 2005 Homeland Act whereby companies could repatriate at a reduced 5.25% rate versus the 35% US rate,” he said.

Mr White noted two proposed changes to the deferral rules.

“The first relates to expenses: costs incurred here can be set against US-owned companies’ tax liabilities even if the profits have not yet been repatriated (or are not repatriated in the same year). The plan is that the US-owned company will not now get the tax benefit from overseas expenses until it repatriates the profits,” he said.

Mr White said the second relates to foreign tax credits: using tax already paid abroad to offset the liability at home.

“In certain jurisdictions, loopholes may exist that inflate the size of tax credits. Obama’s plan would tackle these,” he said.