Focus on drug giants as Trump plans 20% tax

Ireland could attract fewer manufacturing investments in future years from US pharmaceutical giants, according to a leading analyst, as President Donald Trump unveiled a plan to cut the tax levied on US companies to 20%.

The proposed lowering of the US profit tax rate to 20% from 35% — less than the originally mooted reduction to 15% — should have little effect on many of the investments made by US technology giants in Ireland because firms such as Google and the social media giants need to have operations and staff based in Europe, said Owen Callan at Investec Ireland.

Mr Trump had long focused on luring manufacturing jobs back to the US, but any reforms face considerable hurdles over the high cost of implementing the tax overhaul.

Republicans in Congress and the White House called for tax rates on businesses and the wealthy to be slashed as part of a tax plan that offers few details about how to pay for cuts without expanding the federal deficit.

Hammered out over months of high-level talks among Trump aides and top Republicans in Congress, the plan proposes a 20% corporate income tax rate; a new 25% tax rate for pass-through businesses, including partnerships; and a reduced 35% top income tax rate for individual Americans.

Economists said details remain vague on a tax amnesty, with plans to tax accumulated profits estimated at $2.6 trillion (€2.2tn) held by US firms abroad.

Mr Callan said there will be concerns about some aspects of the challenge to foreign direct investment flowing into Ireland but that any new US low level of tax may in effect work to Ireland’s advantage by taking the international focus from Ireland’s tax regime.

Edgar Morgenroth, an associate professor at the Economic and Social Research Institute, said there will be questions about whether Mr Trump will be successful in implementing the tax cuts.

Republicans stymied efforts by Mr Trump’s predecessor, Barack Obama, to run a higher US deficit, and the scope of any US tax reforms to affect Ireland’s 12.5% rate “are pretty small” because many US firms need to be based in Europe, said Mr Morgenroth.

Economist Seamus Coffey said Mr Trump will still have to get the tax proposals through Congress and that the effects on Ireland would be limited.

Mr Coffey was speaking as an independent economist and not in his capacity as chair of the Irish Fiscal Advisory Council, he said.

European Commission plans to introduce a common corporate tax throughout Europe would, if successful, pose a greater threat to Ireland’s corporate tax regime, said Mr Coffey.

“The evidence from other countries that have lowered their corporate tax rates is that it does not lead to any significant pick-up in the growth of investment, productivity, employment, or economic activity. Instead, lower corporate taxes tend to boost dividend payments,” said Capital Economics in London.

Peter Vale, tax partner at Grant Thornton, said: “President Trump is likely to face some hard battles ahead before significant tax reform in the US becomes a reality.”

Joshua Mahony, market analyst at online broker IG, said tax cuts may “promise a bounty for stocks” but the “tax reforms are going to be as difficult to pass as the health reforms”.