Alan Connell, Partner & Head of Tax, Eversheds Sutherland discusses the implications of the US tax reform for Irish businesses
On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. The TCJA is the most substantial overhaul of the US Internal Revenue Code since 1986. The law is far-reaching and significantly changes how the US taxes domestic businesses and multinational businesses.
While the centrepiece of the TCJA is the reduction of the US corporate tax rate from 35% to 21%, the TCJA also adopted a number of significant changes to the way the US taxes multinational businesses that are relevant to US multinationals with operations or investments in Ireland.
The US is transitioning to a quasi-territorial system of taxation and so, the repatriation of future non-US earnings should be exempt from US tax for 10% owned non-US corporations. In tandem, a mandatory one-time transition tax/deemed repatriation tax was introduced on previously untaxed accumulated earnings of certain non-US corporations at rates of 15.5% to the extent of cash/liquid assets and 8% on the remainder of such earnings.
Global Intangible Low-Taxed Income
Importantly, the US has adopted a new tax on global intangible low-taxed income (GILTI). GILTI is broadly defined and, notwithstanding its name, generally includes the net earnings of a US shareholder’s controlled non-US subsidiaries in excess of a notional 10% return on the tax basis in the depreciable assets of non-US subsidiaries. In effect, this provision introduces an immediate US income tax liability for controlled foreign companies of US corporations and acts as a worldwide minimum tax on such earnings.
As a corollary to GILTI and incentive to retain activities domestically, the US adopted a deduction for US corporations equal to 37.5% (reducing to 21.875% from 2026) of the corporations’ foreign-derived intangible income (FDII). The impact is that FDII is generally subject to an effective US rate of tax of 13.125% (increasing to 16.4%. from 2016) In theory, GILTI and FDII are intended to make US companies indifferent as to whether sales to non-US parties are made directly from the US or through a subsidiary in a lower taxed jurisdiction.
In addition to a new limitation on the ability to deduct interest expenses, generally limiting such deductions to 30% of adjusted taxable income, the US also adopted a new base erosion and anti-abuse tax (BEAT). The BEAT is effectively a minimum tax for certain large taxpayers, which is computed disallowing the benefit of deductions for certain payments to related non-US parties. Thus, a taxpayer subject to the BEAT will owe residual US tax on GILTI regardless of the local taxes paid with respect to the earnings of its non-US subsidiaries.
What’s the impact for Ireland?
With an onshore low headline corporate tax rate of 12.5%, an attractive holding company regime and a favourable intellectual property (IP) tax regime, combined with the necessary physical, regulatory and commercial infrastructure to support profit generating activities, Ireland, as an EU Member State, offers significant opportunities to multinational companies, including as a gateway into the European market for US multinationals across all business sectors.
The changes enacted by the TCJA are significant, therefore, multinationals should analyse the impact of these provisions on their existing structures. For US multinationals with operations or investments in Ireland, earnings from Irish operations could be subject to residual US tax as GILTI, particularly if the US parent corporation is limited in its ability to use foreign tax credits or, if the earnings are subject to reduced rates under the patent box regime. Base erosion measures could have an impact on investments into the US by Irish companies. However, as with GILTI, these provisions apply to all jurisdictions and, importantly, do not disadvantage Ireland relative to other jurisdictions.
The deduction for FDII reduces the difference between the effective US rate of tax on qualifying income and the Irish rate of tax that would apply to the same income. However, companies may want to pause before moving operations to the US on this basis. The deduction for FDII is subject to challenge on trade law grounds, the effective rate of tax on FDII increases to 16.4% beginning in 2026 and any transfer of intangibles and/or operations may trigger significant local or US tax costs. In particular, the effective US tax rate available under FDII remains above Ireland’s headline corporate tax rate of 12.5%. Companies may however want to look at restructuring their financing to take account of the impact the new restrictions on interest deductibility may have on existing debt/equity structures.
The base erosion measures described above could have an impact on investments into the US by Irish companies. However, as with GILTI, these provisions apply to all jurisdictions and, importantly, do not disadvantage Ireland relative to other jurisdictions.
Ireland retains its attractiveness to US businesses locating outside the US
In this respect Ireland can continue and indeed enhance its attractiveness as the jurisdiction of choice outside the US for locating outside US value. The core principles of many US/non-US operating models remains the same and there will be a continued requirement in many instances to have operations outside the US to service other markets. This is particularly the case in respect of intellectual property. Ireland has a favourable IP tax regime and continues to develop as one of the most attractive jurisdictions in which to hold non-US IP.
In overview, the TCJA enacted significant changes that are relevant to US multinationals with operations or investments in Ireland. As noted, such multinational groups should work with their advisors to understand the impact of these provisions on them. However, in the final analysis, they are likely to discover that Ireland remains an extremely attractive jurisdiction for investment, being ideally placed as a gateway to do business both in Europe and beyond.