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Ireland Defends Low-Tax Status As Obama Seeks To Block US "Inversions"

Tom Burroughes

28 July 2014

Ireland, which has a corporation tax rate of 12.5 per cent (source: KPMG) has defended its low-tax regime against criticisms that US firms are switching legal headquarters to such places to cut tax bills. The top rate of corporate tax in the US is 40 per cent.

Late last week, President Barack Obama hit out at US firms that minimize their federal taxes by shifting tax domiciles abroad; he has called on Congress to curb such moves. A report by Reuters said Obama singled out Ireland for criticism. For years, Ireland has made a point of its low corporate taxes, a factor sometimes claimed to explain its "Celtic Tiger" status in the 1990s and the period before the financial crisis of 2008.

The comments prompted Ireland’s enterprise minister, Richard Bruton, to comment that “Ireland has a very robust strategy for attracting foreign companies who invest substantively, put real investment into the ground and provide employment”.

As the US corporate rate compares with an OECD area average in the mid-20s – there is a strong temptation for US firms to relocate legal addresses abroad. In recent months, for example, firms such as Medtronic and Mylan have announced they want to make such moves. In a case that led to political controversy in the UK, Pfizer, which is based in New York, tried to make a similar move to the UK by its attempted purchase of UK-listed AstraZeneca, although that attempt failed.

Arguably, the most effective solution to the issue is for the US to pull down corporate tax rates in line with the OECD average. Organizations such as the Washington DC-based think tank and the has called for undertaking business tax reform as a way to improve the investment climate in the United States and to support the creation and retention of high-quality American jobs. Short of undertaking a comprehensive reform of the business tax system, there are concrete steps that Congress can take now that would address this urgent issue,” the letter said. Among the suggestions is that firms cannot change their corporate tax domicile without a change in control of the firm itself. The letter said Congress should change the law immediately and apply it retroactively to May 2014.

The letter said that firms making these “corporate inversions” cover sectors such as pharmaceuticals, retail, consumer and manufacturing” and that they still expect to benefit from being located in the US, with protection of intellectual property rights, support of research and development, investment climate, “all funded by various levels of government”.

"The best way to address this situation is through business tax reform that lowers the corporate tax rate, broadens the tax base, closes loopholes, and simplifies the tax system," his letter said. "But even as we do that, we should prevent companies from effectively renouncing their citizenship to get out of paying taxes."

(Editorial comment: While this is a corporate issue in some ways, as the article points out, the current push by the US to crack down on foreign countries for the temerity of setting low taxes affects individuals. The US corporate rate is far too high; it needs to be drastically cut and simplified. Root and branch tax reform in the US is an urgent priority, both on the company side, and on the personal side.)