Is Ireland’s Tax Shelter Loss America’s Gain?

Here’s a theme that could make some headlines in the 2016 presidential race:

Ireland will phase out a tax loophole that multinationals use to save billions of dollars under sweeping changes to its corporate tax structure announced in Tuesday’s budget, the first in seven years without new austerity measures.

With one eye on an election in 18 months’ time, Finance Minister Michael Noonan also unveiled plans to cut the income tax burden on low and middle income earners frustrated by Ireland’s uneven recovery from the global crisis, changes that will benefit workers at foreign as well as domestic companies.

Ireland, which left a European Union/IMF bailout programme only last year, is enjoying an economic resurgence that the euro zone has held up as proof that austerity policies can work.

One of the biggest themes that the left has been harping on is corporations keeping money (i.e., earnings earned overseas) to avoid United States taxes. As a reminder, the United States has the highest corporate tax rate for developed countries in the world. Interestingly enough, Ireland’s corporate tax rate is a mere pittance: 12.5%, compared to the United States’ 39+%.

What’s going on here?

Well, the reason why companies like Apple set up a tax avoidance scheme like this is because the IRS takes the position that the income earned by United States citizens anywhere in the world is subject to federal income tax. Corporations, in the eyes of the IRS, are people (my friend).

I’m certainly no Irish politico, but it seems like the powers that be in Ireland want to “end” austerity and, in order to make that a reality within the EU constraints, they need to increase revenue. They are doing so by ending the so-called “Double Irish” loophole, which allows a company to get a favorable tax rate if they set up shell subsidiaries in Ireland:

Among the most criticised parts of the Irish tax code is the complex corporate structure whereby a multinational can channel untaxed revenues to an Irish subsidiary, which then pays the money to another company registered in Ireland that is tax resident elsewhere, usually in a tax haven such as Bermuda.

From January, Irish-registered firms will automatically be deemed to be tax resident in Ireland, bringing Irish law in line with U.S. and British rules. Companies already incorporated in Ireland will have until 2020 to comply with the new rules.

Of course, this assumes that the corporations don’t decide to pull their operations from Ireland in response. Will they? It’s hard to say. Corporations, such as Apple, will need to crunch numbers and decide whether it’s economically viable to cease the “Double Irish” scheme and set up a corporate structure in another jurisdiction with lower taxes (such as Asian countries like Singapore). If it is, expect them to do this, as money goes to where it is treated best.

Here’s where the opportunity is: cut the corporate tax rate and offer a tax holiday for offshore profits.

People like John Huntsman, Jim Pethokoukis, and others have long discussed reforming the corporate tax code and have even suggested a repatriation holiday–giving companies a year to bring home to the United States money earned overseas for a reduced (or 0%) income tax rate.

Rather than talking about “fair share” and taxing corporations even more than they are now, candidates for President in 2016 should take the opportunity to welcome home corporate money to reward shareholders, expand operations (which includes hiring employees), and generate tax revenue. Incentivizing corporations to repatriate overseas profits will create a real–and private sector–economic stimulus.

As always, free markets are better markets.