Moody’s Investors Service Report: Brexit and US taxes pose huge risks

A hard Brexit and US plans for tax reforms are the biggest risks facing Ireland’s long-term prosperity, according to a report by Moody’s Investors Service.

The analysts said Brexit could disrupt trade across the Irish Sea more than initially thought as the UK seeks to stay out of the single market and warned “some form” of border controls between the North and the Republic will likely re-emerge to disrupt trade.

An overhaul of US corporate taxes could reduce the flow of investments by US multinationals and harm the public finances here.

It is the first time that a credit rating agency has clearly detailed the risks facing the economy from Brexit and from the election of US president Donald Trump.

Moody’s nonetheless expects Ireland to continue to post very strong growth though the effects on the economy in the longer term could be “significant”.

“But a hard Brexit and more recently the prospect of major corporate tax reforms in the US now constitute the biggest risks to the country’s otherwise very positive growth prospects,” it said. “While these risks are not exclusive to Ireland, we believe it is the European country most exposed to them.”

On Brexit, the analysts are concerned that the risk to Ireland have ratcheted up, if the UK were to adopt a trade agreement under World Tarde Organisation rules.

It notes that in terms of exports that the UK is Ireland’s second largest market overall. Supply chains between Britain and Ireland could be disrupted because some manufacturing industries in Ireland rely heavily on imports from Britain, if the UK and the EU fail to strike a trade deal.

It also highlights sectors such as food and beverages and tourism that are exposed more than others. And financial services firms relocating to Ireland from Britain and the country’s potential to lure investment projects that would otherwise have gone to the UK may offset “some but not all of the negative trade impact”.

It finds that shortages of housing in Ireland could limit the ability to attract large amounts of foreign direct investment from any Brexit fallout.

“Also any positive Brexit effects wold be undermined if the UK lowered its own corporate tax rate beyond its current target rate of 17% by April 2020, compared to the current rate of 20%,” said Moody’s. “The UK prime minister recently pointed to this option in case its negotiations with the EU did not result in a favourable new trade agreement.”

In saying that existing investments would unlikely be affected, Ireland could in time be exposed more than most to proposals for US tax reforms due to the huge level of US investments here.

“It is unclear whether the current US proposals — including a reduction in the corporate tax rate to 20% from 35% currently, tax incentives for corporate investment in the US and the repatriation of profits currently held abroad as well as changes to discourage tax inversion transactions — will be implemented in full and over what timeframe,” Moody’s said.

“But, if implemented, they would be detrimental to Ireland and other low-tax jurisdictions with a large presence of US multinationals.”

American Chamber of Commerce Ireland president James O’Connor yesterday told a gathering of the industry group that “2017 is likely to be a year of both challenge and opportunity for the US-Ireland relationship”.

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