The double whammy from Brexit and now a new US president who has pledged to slash US corporate taxes poses the biggest risk to Ireland’s economic business model since it was first devised in the late 1980s, analysts have warned.
Donald Trump on the campaign trail had pledged deep reforms of US company taxes, pledging to cut the 35% headline rate the US levies on corporate taxes to 15%.
He had also promised other far-reaching reforms and may in time offer a temporary tax amnesty to encourage multinationals like the pharmaceutical giants and Apple to bring home the tens of billions of dollars they currently house overseas.
President George W Bush used the lure of an amnesty 12 years ago, but analysts warn that the serious threat to Ireland lies in Mr Trump’s surprise capture of the White House and the clear path for deep reforms of the US tax code that it entails.
Despite the controversies surrounding Irish subsidiaries of multinationals and contract manufacturing and their global tax arrangements, the roster of US companies which have invested heavily here is impressive.
Microsoft, Google, Dell and Intel, as well as Oracle and Apple, are among the technology giants that are the largest exporters on the island.
The billions worth of exports of pharmaceutical giants Johnson & Johnson, Actavis and Pfizer are also among the top 10 Irish exporters.
“The two most important external economies have dealt us massive shocks this year,” said Dermot O’Leary, chief economist at Goodbody Stockbrokers.
“The Brexit hit is very much a hit to Irish SMEs given the bulk of their exports go to the UK. This latest development has potentially a large impact on investments”, he said, adding there is now a question over foreign-direct investment amid his pledge to reduce US corporation tax rates.
Mr O’Leary said the difference between the US and Irish corporation rates is an incentive for US firms to favour locating service jobs here, instead of creating jobs in the US.
Philip O’Sullivan, chief economist at Investec Ireland, said the election was the biggest external shock since Brexit.
“This country also acts as a de facto aircraft carrier for many large US multinationals’ overseas operations. Therefore we are far from disinterested observers where this election is concerned,” he said.
John Whelan, a leading consultant on Irish trade, Mr Trump will focus on incentives to lure US companies back home.
“It is not good news for anyone on the Irish scene. Probably our best strategy is for [Irish] companies to forge collaborations in the US. If you haven’t got a collaboration in the US, get one,” Mr Whelan urged, saying it was time for Irish exporters to review their international operations.
Any sharp weakening of the dollar if it played out anything like the way that Brexit sunk sterling, would also lead to US firms investing less in Europe and more back home, he warned.
Alan McQuaid, chief economist at Merrion Capital, said the threat has escalated because corporate taxes has provided so much of the unexpected bounty for the Government’s finances for almost two years.
If Mr Trump were to cut corporate taxes, “it would be serious,” Mr McQuaid said.
However, Capital Economics chief US economist Paul Ashworth said that Mr Trump’s plans to offer a tax holiday would likely be far down his list of priorities.
Any tax amnesty would lure pharmaceutical firms, in particular, to repatriate monies to the US, Mr Ashworth said.
Even a cut in the 35% corporation tax rate may not be hugely significant because many American corporates back home pay a much lower effective tax rate because of exceptions that they can write off against profits, he added.
In Dublin trading, there was a muted reaction from Irish stocks which generate profits from US operations.
Food companies were marginally down at worst, Kerry fell by less by 1% and Glanbia was unchanged.
However, Greencore shares dropped 3.4% in London.
While it may be ‘business as usual’ for the food firms, they will have an eye on consumer sentiment trends and currency fluctuations.
Building materials giant CRH, meanwhile, surged over 8% and is seen as being a potential big winner under a Trump administration, given his promise to spend trillions of dollars on infrastructure, including on highways and bridges, and generating 13 million jobs in the process.
CRH is the largest producer of asphalt and the third largest producer of construction aggregates in the US, and accounts for around 60% of its profits.
“It may be early days to be weighing the pros and cons for the stock, but CRH seems like an obvious beneficiary,” said Robert Gardiner of Davy Stockbrokers.
“Pharmaceutical and biotech companies stand to benefit the most under a Trump administration, given a likely ‘hands off’ approach to the sector versus a Democrat alternative,” said David Holohan, chief investment officer at Merrion Stockbrokers.
“Certainly, if he was to follow through on plans for his wall between the US and Mexico, it would represent a significant step-up in construction activity levels along Sun Belt states,” Mr Holohan said.
Currency trader TransferMate urged Irish firms to “act fast” and ready themselves for any potential currency volatility.
“The Trump win is very likely to lead to an initial fall in the strength of the dollar. Irish businesses that import from the US could benefit from this, but those that export across the Atlantic may take a real financial hit,” said company co-founder Barry Dowling.
Irish bank stocks were not hit yesterday.
“However, the overall read across is negative in terms of significant negative impact on the Irish macro outlook, negative impact on risk sentiment generally, and likely lower yield environment which is being priced in as a result,” said Owen Callan of Investec Ireland.
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