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Abstract

U.S. multinational companies have been among the  largest group to book profits in Ireland in order to take advantage of  the tax incentives that Ireland offers. The U.S. recently introduced a number of  changes to its tax policies with the passing of the Tax Cuts and Jobs  Act (TCJA) of 2017. In this article we examine whether or not these tax  policy changes are sufficient to entice U.S. multinational companies to  return to the U.S. or if there is sufficient benefit for them to retain  their practices in Ireland.  

Background

Ireland  has successfully encouraged many multinational companies to shift  profits to its shores with its highly attractive tax policies. Among  these companies, U.S. multinational companies have become the largest  group to book profits in Ireland. With the introduction of the Tax Cuts  and Jobs Act (TCJA) of 2017, which was enacted in 2018, the U.S. hopes  to motivate multinational companies to revisit their profit shifting  strategies and to encourage the repatriation of U.S. multinational  company profits back to the U.S.  Is it the time for U.S. multinational  companies to return to the United States or to stay in Ireland?

According  to a study published by the National Bureau of Economic Research,  multinational companies shift as much as 40% of their profits to low-tax  foreign jurisdictions each year (Tørsløv, Wier, and Zucman.  2018). Among these, Ireland is the number one global profits shifting  destination, booking an estimated $106 billion in profits in 2015  (Tørsløv, Wier, and Zucman.  2018). U.S. multinational corporations, including well-known companies  such as Apple, Google, Facebook, Microsoft, Twitter, Pfizer, Johnson  & Johnson, and Boston Scientific, have shifted more profits to  Ireland than any other countries’ multinational companies. This surge in  Ireland’s tax revenue, derived from taxing paper profits, contributed  58% of the corporate tax revenue to Ireland in 2015 (Tørsløv, Wier, and Zucman. 2018). 

In  contrast to the 21% U.S. corporate tax rate, Ireland has a corporate  tax rate of 12.5%. In addition to its low statutory tax rate, Ireland  developed a comprehensive profit shifting arrangement to assist  multinational companies to shift profits globally. Via these additional  incentives, multinational companies could achieve an estimated effective tax rate of as low as 4% (Tørsløv, Wier, and Zucman.  2018). The masterpiece of the arrangement is called the Base Erosion  and Profit Shifting (BEPS) tool, which works through the large tax  treaties network with high-tax jurisdictions such as the United States.  Through utilization of the BEPS tool and other customized incentive  policies, multinational companies are sometimes able to achieve an  effective tax rate of as low as 0%. These competitive incentive policies  may even be used to shield multinational companies from Ireland’s  corporate tax system. 

In  addition to the aforementioned tax incentives, Ireland often serves as a  conduit for multinational companies, providing means for the  multinational companies to shield their revenue records, information and  data in traditional tax havens such as the Caribbean and Bermuda that  offer both financial secrecy and zero tax rates. These traditional tax  havens have no tax treaties or very limited tax treaties with the U.S.  Upon establishing such a conduit, U.S. multinational companies can essentially shield their profits, data and information from the rest of  the world, and make themselves non-tax-residents of any nation.

Impacts of the Tax Cuts and Jobs Act (TCJA) of 2017

The  United States taxes corporations on their worldwide income. However,  U.S. multinational companies are taxed on their foreign profits only when they are repatriated and returned back to the United States. Before the Tax Cuts and Jobs Act (TCJA) of 2017, the repatriated profits were taxed at 35%. Many U.S. multinational companies chose to park their  profits offshore in order to avoid the 35% U.S. tax. According to the  U.S. Congress Joint Committee on Taxation, U.S. corporations accumulated  more than $2.6 trillion in profits in foreign subsidiaries as of 2015.  The Irish Times estimated that $3.1 trillion in corporate cash was held  offshore in 2018 (Irish Times, 2018). With such a substantial amount of  cash in play, many U.S. multinational companies are continually seeking means for utilizing the offshore funds. JR Hines and EM Rice (1994) have  proposed the following three means for utilization of offshore  after-foreign-tax profits: 

Foreign  subsidiaries can dispose of their after-foreign-tax profits in three  ways: 

[1] repatriate profits immediately, 

[2] invest them in passive  assets, or 

[3] (possibly) reinvest them abroad in active investments.  (p. 10)

Since trillions of  dollars of profits are piled offshore, repatriating profits and making a  big tax payment at 35% to the U.S. was certainly not a popular choice  for U.S. multinational companies prior to 2018. Instead, U.S.  multinational companies heavily invested their offshore cash in passive  assets such as U.S. treasury bills, U.S. bonds and corporate bonds. The  Irish Times stated in 2018: 

Apple  had $60 billion in government debt and about $153 billion in company  bonds. Microsoft held almost all its cash in Treasuries and debt issued  by federal agencies, totaling $122 billion. Google’s parent Alphabet had $66 billion, with about two-thirds in government securities. (Jan. 17)

Apparently,  the popular choice for the U.S. multinational companies has been to  invest profits shifted to foreign low-tax countries in U.S. bonds. About  a half trillion dollars in cash are in U.S. bonds which the U.S.  multinational companies cannot use. Trillions of profits are trapped  offshore where they yield little benefit to the shareholders of U.S.  multinational companies. 

One of  the attempts of the Tax Cuts and Jobs Act (TCJA) of 2017 is to  encourage these U.S. multinational companies to repatriate their  offshore profits. The Act includes several new regulatory changes aimed  at stimulating repatriation of the profits held in foreign nations by  U.S. multinational companies. First, the Act reduced the corporate tax  rate from 35% to 21%. Next, the corporate Alternative Minimum Tax was  repealed in 2018. The 14% corporate tax cut (from 35% to 21%) was based  on research conducted by Hines and Rice in 1994. The Council of Economic  Advisers in the White House cited the Hines and Rice research as  follows: 

Applying Hines and  Rice’s (1994) findings to a statutory corporate rate reduction of 15  percentage points (from 35 to 20 percent) suggests that reduced profit  shifting would result in more than $140 billion of repatriated profit  based on 2016 numbers. (p. 9)

In  addition to cutting the corporate tax by 14%, the Tax Cuts and Jobs  Act also offers U.S. multinational companies an even lower tax rate for  repatriation of offshore cash and cash equivalents at 15.5%, and a very  favorable 8% repatriation tax rate on non-liquid assets, all of which,  prior to the TCJA of 2017, were taxed at a 35%. In addition to these incentives, U.S. multinational companies are now allowed to pay the  repatriation tax in installments over a time period of eight years.  

According to the United States House of Representatives House Ways and Means Committee tax plan, the lawmakers expect to collect as much as  $223 billion in repatriated tax over a ten-year period between 2018 to  2027. How much U.S. multinational companies truly repatriate to the U.S.  over this time frame is anyone’s guess at this point.

The  Tax Cuts and Jobs Act (TCJA) of 2017 also attempts to discourage  U.S. multinational companies from using intangible assets to shift  profits off shores. In order to tax the digital economy, the U.S.  implemented an initial tax of 10.5% on the global intangible low-taxed  income of U.S. multinational corporations (GILTI). The offshore profits,  which are generated from intangible assets such as intellectual  property, will be subject to GILTI tax annually. Among Apple, Google and  other 700+ U.S. multinational corporations in Ireland, their offshore  profits, which are generated from the intangible assets, may be taxed  under GILTI as of 2018.

Stay or Leave?

U.S. multinational companies have trapped about 3 trillion U.S. dollars in profits offshore within low-tax foreign jurisdictions. Among them, about a half trillion U.S. dollars in cash is parked in U.S. bonds. Utilizing  the newly enacted U.S. corporate tax cut and tax incentives, U.S.  multinational companies now have means at their disposal to strategically repatriate their offshore profits and non-liquid assets to the U.S. The repatriations will be taxed at the favorable tax rate of 15.5% and 8%  respectively. The upside for the U.S. government is that it will be able to collect taxes on the repatriations, which are estimated to be $223  billion in repatriated tax over a ten-year period between 2018 to 2027.  For the U.S. multinational companies, the upside is that, after paying  the repatriation tax, billions of legitimate profits returned to the  U.S. are then available for use in investing in business expansion,  innovation, research and acquisition, instead of parking the cash in long-term U.S. bonds. The shareholders of these U.S. multinational  companies are also winners in that the repatriated profits may generate enhanced dividends and capital gains.

Beyond the foreign profit repatriation benefits allowed for under the Tax Cuts and Jobs Act of 2017, the act also moved the U.S. to a territorial tax system eliminating the tax on repatriated profits. With this change, U.S. multinational companies can not only park profits offshore free of  U.S. tax in low-tax foreign jurisdictions, the profits earned after 2018  can be brought back into the U.S. tax free. This piece of legislation encourages rather than discouraging profit shifting. 

In  the midst of all this, Ireland has been under increasing scrutiny by the press from the European Union (EU) as the EU examines the tax  policies of all EU member nations including Ireland who has been accused of stealing tax revenue and jobs from other countries. Across Europe, politicians brand Ireland’s low corporate tax rate as “tax dumping”  (Lucey, 2019). If the EU and other high tax jurisdictions are successful in their actions to prevent tax avoidance and tax revenue loss among its member nations, Ireland may have to adjust its tax incentives and policies. So far, Ireland is on the winning side of the tax battle with the EU.  On July 15, 2020, Ireland won a landmark tax case with the EU,  in which Apple will not have to repay $13 billion euros in taxes (CVRIA,  2020).

From a global  marketplace perspective, Ireland has done an exceptional job hosting  multinational companies and successfully helped them to lower their  taxes. Intel was able to achieve an effective tax rate of 2.5% in Ireland in recent years. Given the benefits of Ireland’s tax system and tax incentives, it will continue to lead the way in attracting  multinational companies by offering a combination of benefits which  include a low-tax environment, an open legitimate system based on active  tax treaties with 73 countries, its Base Erosion and Profit Shifting (BEPS) tool, and conduit to tax havens with financial secrecy. According to the National Asset Management Agency of Ireland, Google recently acquired multiple office buildings in Dublin with plans to expand its presence beyond the initial acquisition in the future. Despite gradual repatriation of offshore profits for a number of U.S. multinational  companies being foreseen in the future, it is highly likely that many  multinational companies will continue to leverage Ireland’s policies and systems to shift profits offshore.

Conclusion

With  the Tax Cuts and Jobs Act (TCJA) of 2017 being enacted in 2018, it is  still too early to determine the long-term effects of the Act on profit shifting practices. Amidst the shifting sands of multinational taxation,  multinational companies are encouraged to weigh the benefits of both  sides of the stay/leave equation, and enlist professional guidance where  appropriate, to determine the net effects of each option for the corporation, investors, and other stakeholders.  As this is done, the  passage of time and collection of further data will provide greater  insight into the overall impact of the policies that exist within both  nations.

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References

TR Tørsløv, LS Wier, & G Zucman. 2018. The Missing Profits of Nations. Working Paper 24701, 22/37, Table 2. 

The Irish Times. 2018. US corporations could be saying goodbye to Ireland. January 17.

The Council of Economic Advisors in The Executive Office of the President of the U.S. 2017.  Corporate Tax Reform and Wages: Theory and Evidence. 9/12. 

JR Hines, & EM Rice. 1994. Fiscal Paradise: Foreign Tax Havens and American Business. Quarterly Journal of Economics, vol 109. Working Paper 3477. 10/37

Lucey, Cormac. 2019. EU still hounds us over our low corporate tax regime – and now it has a road map. The Times.June 09.

General  Court of the European Union. 2020. Judgement in Cases T-778/16, Ireland  v Commission, and T-892/16, Apple Sales International and Apple  Operations Europe v Commission. Press Release No 90/20. July 15.

Author 

K.W. Crosswhite, CPA

BAS Accounting Services, Certified Public Accountant Firm

www.bascpa.com