2017 will be the year in which the plans and promises of the Republican Party and the new US President will be put to the test, having important economic implications for Ireland and the EU. We look at how the priorities of the incoming US administration could affect Irish companies and international groups with Irish operations in 2017.
Proposals by the Republicans could radically reshape US tax policy in the next two years, with potential consequences for multinational groups with Irish connections.
The proposals are a combination of rate cuts and adjustments to the federal tax code, which will affect the fundamentals of how US corporation tax – called “business tax” in the US – is calculated. These reforms could have a dramatic impact on cross-border tax planning used by multinational groups, causing them to rethink every aspect of their corporate structures, such as supply chains, capital structures and the location of corporate earnings and operations, which in many cases is Ireland.
The prevailing view from US tax policy experts is that the Republican Party's capture of the presidency and both Houses of Congress has shortened the odds that the tax proposals will become law. The only open question is whether President Trump will approve the Republican proposals in all their detail.
The latter point is surprisingly relevant, since it is not clear that congressional Republicans take the same view of tax policy as the president. For example, congressional Republicans propose to cut the rate of business tax from 35% to 20%, while Mr Trump’s campaign promise was to cut it to 15%.
Both Mr Trump and the congressional Republicans agree on the desirability of repatriating the assets and operations of US companies from foreign jurisdictions, but they differ on the mechanism for implementing this. Mr Trump proposes a “deemed repatriation” of corporate profits held offshore at a one-time tax rate of 10%, but the congressional Republican proposal emphasises a new destination-based or territorial system for business tax.
The latter proposal is the most radical, since it would permit companies to totally exclude revenue from exports when calculating their tax burden, and would prohibit them from deducting the cost of imports they purchase. On the face of it, this operates like a value-added tax. This could be interpreted as a trade-distorting subsidy for domestic companies which would violate international commitments to avoid trade-distorting subsidies, raising the prospect of sanctions levied by the World Trade Organisation against the US.
Another area in which the incoming Republican administration has concrete plans to reshape policy is financial regulation. The massive post-recession financial regulation law commonly known as the Dodd-Frank Act has been a constant target for Republicans since it was enacted by Democrats in 2010 with negligible support from the Republican minority.
Republicans on the House Financial Services Committee, led by Chairman Jeb Hensarling (Texas), spent much of 2016 laying the groundwork for a reform effort in 2017. Chairman Hensarling’s Financial CHOICE Act, published in June, is a comprehensive compilation of the Republican Party’s priorities for financial regulatory reform.
These reforms will have ramifications for policy in Ireland and the EU. To give an example, the proposal in the Financial CHOICE Act to permit venture exchanges that are suitable for emerging companies could provide head-to-head competition for small company exchanges in other countries, such as AIM in London, TSXV in Canada and the ESM in Dublin.
At present, a large number of companies with US leadership or US operations have found a home on AIM in London – and a smaller number on the ESM in Dublin. Such exchanges have been attractive to US companies, since they avoid the substantial regulatory burden associated with a listing on one of the US exchanges, such as NASDAQ. The new proposals would exempt newly registered “venture exchanges” from a range of US securities regulations.
This aspect of Chairman Hensarling’s proposals poses a direct competitive challenge to the ESM and AIM. Despite its reputation as a listing venue for early-stage companies, the reaction from NASDAQ has been relatively muted. NASDAQ already incorporates a separate tier for small cap companies and operates a couple of smaller exchanges in Europe.
Potentially, the parts of the Financial CHOICE Act that would facilitate capital formation by SMEs – such as creating venture exchanges and easing restrictions on crowdfunding – would attract bipartisan support. Other elements of the package, such as restructuring the Consumer Financial Protection Bureau were likely to be more controversial and could take more time to pass both Houses of Congress.
2017 will provide a key test for the ideas and priorities of the new Republican administration. A reshaped policy landscape in the US could present new challenges to Irish companies and international groups with Irish operations or structures.