Tax expert says measures would hurt foreign multinationals with US affiliates and US companies that used ‘inversion’ deals to move their head offices overseas
Fri, Nov 3, 2017, 17:45
Barney Jopson in Washington, Dominic Coyle
US President Donald Trump speaks while holding up “Simple, Fair, ‘Postcard’ Tax Filing” cards as US house speaker Paul Ryan, a Republican from Wisconsin (left) and Representative Kevin Brady, a Republican from Texas and chairman of the house ways and means committee, react during a meeting in the Cabinet Room of the White House in Washington. Photograph: Olivier Douliery / Bloomberg
Tax experts and company finance chiefs were scrambling last night to make sense of an obscure provision of the US tax reform package that could impose a 20 per cent charge on funds moving between parts of a business in the US and abroad.
Big multinationals based in Ireland are among those that would be hit by a crackdown on what US authorities see as tax avoiders that shift corporate profits out of the United States under the measures unveiled by Republicans this week.
Company lobbyists in the US who initially cheered the plan to cut the corporate tax rate from 35 per cent to 20 per cent are growing anxious over an anti-avoidance provision that they warn could cause wider collateral damage.
Their concerns illustrate the challenges facing Republicans as they try to overhaul the tax code for the first time since 1986, reckoning with corporate lobbying, budget constraints and President Donald Trump’s demand for a bill he can sign by Thanksgiving.
Bret Wells, a tax expert who recommended anti-avoidance measures to Congress last month, said they would hurt two groups of businesses: foreign-owned multinationals with US affiliates and US companies that used “inversion” deals to move their head offices overseas.
The Republican tax plan would impose a 20 per cent “excise tax” on payments between affiliates of the same company, payments that are commonly made as international divisions trade materials, services and royalties for intellectual property.
Irish companies employ nearly as many people in the United States as US businesses do here. It is unclear how many businesses would be affected if the proposed reform is voted into law. Indigenous companies like Glanbia and CRH among others would likely face significant challenges under the measures.
However, none were in a position to comment last night as tax advisers sought more details of how precisely the measure would impact business here.
The measure is also likely to encourage companies that have relocated their domicile to Ireland by way of corporate inversions to look again at their position.
This would include medtech giant Medtronic, consumer health group Perrigo, and pharma businesses Alkermes, Allergan, Jazz Pharma, Endo Healthcare, Horizon Pharma and Mallinckrodt as well as the Johnson Conttrols automotive group.
Tax expert Peter Vale of Grant Thornton said it was too early to say definitively what impact the measures would have and whether what was being proposed was a return to the border adjustment tax abandoned earlier in the Trump presidency.
“It does look like it would be bad, possibly quite bad, but it is unclear just now. It’s also difficult to see how it would not also affect US multinationals,” he said. He added that it looked like the measures would aim, among other things, to persuade companies that had moved out of the US to bring their manufacturing operations back to the country.
“Yes, we have a new design to stop inbound, unwarranted deductions of expenses,” said Kevin Brady, the chief Republican tax writer in the House of Representatives, in response to a question from the Financial Times.
Without explicitly adopting Mr Trump’s “America first” rhetoric, Mr Brady, chairman of the house ways and means committee, has been pushing for ways to end perceived advantages he says the current tax code gives to foreign companies versus US corporations.
The excise tax would raise $155 billion over 10 years, according to Congress’s joint committee on taxation, curtailing what Republicans call the “erosion” of the US tax base and helping to pay for the sharp cut in the headline corporate tax rate.
Mr Wells, a professor at the University of Houston, said: “It’s a fairly expansive provision in the way it’s contemplated.”
He estimated that at present some companies could use tax-deductible payments between affiliates to shift as much as 30-40 per cent of their profits out of the US.
Lobbyists dispute the characterisation of multinationals as tax avoiders, arguing that such payments, also known as related-party transactions, are a legitimate and necessary part of internal supply chains that span the globe.
Nancy McLernon, president of OFII, a trade group for foreign companies in the US, said: “We’ve got to be very careful as we craft major tax legislation that might disproportionately impact international companies because US companies can be hit by retaliatory measures as a response.”
France is pushing for the EU to agree a new turnover tax on US tech groups to make it impossible for companies such as Apple and Google to cut their tax bills by moving profits between countries.
The Republican excise tax would have a limited effect on US tech companies. Although they use IP royalties to shift profits out of the US, their ability to do so is constrained by a provision of existing law that does not apply to foreign-owned companies.
One lobbyist said the excise tax would affect other US businesses, arguing it would hit carmakers importing components from their own factories in Mexico and retailers bringing in clothing from affiliates in China.
He said it recalled an earlier Brady proposal for a levy on imports – a border adjustment tax – which was killed by an outcry from importers. “In my view this is a border tax-lite proposal because you are taxing material being brought in to be sold in the US,” the lobbyist said.
A summary of the excise tax proposal from Mr Brady’s committee says “current law incentivises and subsidises the shift of American jobs overseas because additional functions performed abroad allow for greater deductible payments from US corporations to their foreign affiliates”.
It continues: “The provision would eliminate the US tax benefit afforded to multinational companies . . . by imposing full US tax on those profits irrespective of where they are booked.”
Mr Brady said the excise tax was “one of the areas we invite the most feedback in, because it’s a combination of some traditional ideas that have been talked about in the past with some new approaches”.
The Republican bill, which House speaker Paul Ryan says will also save money for middle class families, is due to be amended by lawmakers next week before a vote in the House. If it passes, it will then go to the Senate, where members are likely to want to make their own revisions.
OFII and other trade groups said they were still evaluating the impact of the bill as a whole. – Additional reporting The Financial Times Limited 2017
Figure lower than expected in October but unemployment ticks down to 4.1%
Fri, Nov 3, 2017, 14:54
The release of October’s figures comes a day after Donald Trump announced a new tax plan.
The US economy bounced back in October from a dramatic slump in hiring in the wake of two devastating hurricanes, the labour department announced on Friday.
The US added 261,000 new jobs and the unemployment rate ticked down to 4.1 per cent.
In September, the US shed 30,000 jobs – the first loss in seven years – as hurricanes Harvey and Irma held back hiring in Texas and Florida. The leisure and hospitality industry was hardest hit by the hurricanes in September, shedding 111,000 jobs.
October’s figure was still lower than analysts had expected, perhaps reflecting the continued impact of the storms.
September was the second month of disappointing growth in the US jobs market. In August the economy added 169,000 new positions, below the 180,000 that had been expected by economists.
But at 4.1 per cent the unemployment rate is now at lows unseen since December 2000.
The release of October’s figures comes a day after Donald Trump announced a new tax plan that he has pledged will create more jobs in the US.
The plan, which will deliver big cuts for business and the wealthy as well as more modest cuts for the middle class, will provide “the rocket fuel our economy needs to soar higher than ever before,” Trump said.
On Wednesday, ADP, the private payroll supplier, said the private sector added 235,000 in October.
Mark Zandi, chief economist of Moody’s Analytics, which helps compile the report, said: “The job market rebounded strongly from the hit it took from Hurricanes Harvey and Irma.
“Resurgence in construction jobs shows the rebuilding is already in full swing. Looking through the hurricane-created volatility, job growth is robust.”
Latest figures show number of people signing-on dropped by 2,400 in October
Fri, Nov 3, 2017, 11:17
Updated: Fri, Nov 3, 2017, 11:55
The latest register tallies with the current decline in headline unemployment, which fell to a nine-year low of 6 per cent on Tuesday. Photograph: Christinne Muschi/Bloomberg
The number of claimants on the Live Register continues to tumble in tandem with the pick-up in employment.
The latest monthly figures show the number of people signing on dropped by 2,400 (-1 per cent) in October, bringing the seasonally adjusted total to 246,900, its lowest level recorded since September 2008.
While the register is not a measure of unemployment, as people with part-time work can be entitled to benefits, it reflects conditions in the labour market.
The latest register tallies with the current decline in headline unemployment, which fell to a nine-year low of 6 per cent on Tuesday.
On a seasonally adjusted basis, the register showed a monthly decrease of 1,400 males and 1,000 females in October. The number of long-term unemployed people on the Live Register at the end of October 2017 dropped to 101,590, a decrease of 3.6 per cent on the previous month, and an 18.6 per cent decrease on the same month last year.
“Today’s figures together with the unemployment rate of 6 per cent also published this week, reflect the continued improvement in the Irish economy which, in turn continues to give employment and creates jobs,” Minister for Employment Affairs Regina Doherty said.
“This Government will continue to focus on driving the economy and providing better opportunities for people while at the same time ensure that it helps those citizens who are most vulnerable,” she said.
The Minister also reminded jobseekers on the Live Register who may wish to take up seasonal work – for up to 12 weeks duration – between now and the Christmas /New Year period that their claim for Jobseeker’s Allowance or Benefit would resume immediately after their work finishes.
Powell – a Fed governor since 2012 – emerged from a shortlist that included the outgoing chairman Janet Yellen
about 4 hours ago
U.S. President Donald Trump announces Jerome Powell as his nominee to become chairman of the US Federal Reserve
Jay Powell was named by President Donald Trump as his nominee to serve as the next chair of the Federal Reserve, as he moved to make his mark on the world’s most powerful central bank.
The news ends months of speculation ahead of the end of Janet Yellen’s first term as chair in February. The post of Fed chair is subject to Senate confirmation.
The 64-year-old Mr Powell has been a serving Fed governor since 2012. A centrist on monetary policy, he is known as a pragmatic and down-to-earth official with private sector and government experience. A trained lawyer and former partner at private equity firm Carlyle, he also served in the Treasury under former president George H W Bush in the 1990s.
Ms Yellen issued a statement congratulating Mr Powell, noting his “seriousness of purpose”. “I am confident in his deep commitment to carrying out the vital public mission of the Federal Reserve. I am committed to working with him to ensure a smooth transition,” she said.
US financial markets remained unchanged on the news, after equity markets struggled for traction earlier in the day as investors parsed details of the sweeping tax reform bill. The dollar index, which measures the US currency against a basket of peers, was down 0.1 per cent at 94.7, having hit a five-session low at 94.41 earlier in the day. The yield on 10-year Treasuries was at 2.35 per cent, after moving slightly lower when the tax plan was unveiled, to sit just under the 2.4 per cent mark crossed last week when the more hawkish John Taylor, of Stanford University, was seen as a potential candidate.
In advance of the decision the US dollar was trading marginally lower on Thursday, amid a sense that Mr Powell is more dovish on monetary policy than some of the other candidates.
The president has the power to significantly reshape the Fed, with multiple seats on the powerful board of governors up for grabs. The early departure of Stanley Fischer as vice-chair last month opened up an additional vacancy, in addition to two other posts that are vacant.
Mr Trump made the first change in his tenure earlier this year when he named Randal Quarles to be the Fed’s first vice-chair for financial supervision, putting a voice for pared back Wall Street oversight in the Fed.
Some Republicans are hoping Mr Powell will also be more amenable to easing financial regulatory burdens than Ms Yellen, who was closely aligned with the more hardline approach taken by former governor Daniel Tarullo.
The deliberations over the role of the chair have been marked by intense speculation, stoked by people within Mr Trump’s orbit who have been pushing favoured candidates.
The president has appeared to relish the suspense, releasing an Instagram video at the end of last week declaring that the US public was anxiously awaiting his decision and that they would be impressed with his nominee. In a recent meeting with Republican senators, Mr Trump even took a straw poll of whom they would prefer as Fed chair.
In choosing Mr Powell, the president has spurned calls for disruptive change from some Republicans in favour of stability at the US central bank. The decision reflects an awareness at the White House of the sensitivity of all matters relating to the central bank, and comes as a marked contrast from Mr Trump’s attacks on the Fed during the 2016 presidential election campaign.
Under Mr Powell the gradualism pursued by Ms Yellen when it comes to rate rises is unlikely to change suddenly, and nor is the Fed’s policy of slowly but steadily reducing the size of its $4.5tn balance sheet. The central bank on Wednesday stayed on course towards a further interest rate rise in December, with further rises expected in the new year.
He has supported Ms Yellen’s arguments that the Fed is unlikely to be in a position to lift rates very far given slower potential growth and low inflation. One consequence is that the central bank is likely to have little rate-cutting firepower when the need to lower borrowing costs next arises.
Ms Yellen last month spelt out the implications of that view in a speech in which she argued for the Fed to be willing to fire off new rounds of quantitative easing, as well as steering the markets with forward guidance, if the US economy hits a new downturn.
The nomination will make the former lawyer the first Fed chair without an extensive background in economics since G William Miller in the late 1970s. Mr Powell, who regularly commutes to the Fed by bike, was born in the Washington DC area and earned a law degree at Georgetown University in the 1970s.
Married with three children, Mr Powell worked at the Treasury under Mr Bush before going to Carlyle. He joined the Fed’s board in 2012 after being nominated to the post by Barack Obama.
Among the other candidates whose fortunes waxed and waned in the race were two Stanford University academics: John Taylor and Kevin Warsh. Both have been critical of the Fed’s quantitative easing programme, which swelled its balance sheet to $4.5tn, and have been seen in markets as potentially more hawkish than Ms Yellen.
Gary Cohn, the National Economic Council director, enjoyed an early run at the job before falling from favour after criticising the president’s response to the Charlottesville protests.
Ms Yellen was also interviewed for the job. The decision not to give her a second term would mark a break from precedent by Mr Trump.
Mr Bernanke, a George W Bush appointee, was reappointed by Mr Obama. Alan Greenspan, who was first appointed by Ronald Reagan, won reappointment from George HW Bush, Bill Clinton and George W Bush.
– Copyright The Financial Times Limited 2017
Cliff Taylor: It is unclear whether latest US tax plan will clear Congress
about 4 hours ago
US president Donald Trump shows samples of the proposed new tax form. Tax proposals emanating from Brussels appear to carry much more danger for Ireland.
The latest tax plans from the US administration suggest one thing clearly. It is that the greatest threat to Ireland in terms of corporate tax changes comes not from the United States but from this side of the Atlantic. Tax proposals emanating from Brussels appear to carry much more danger for us than those coming from Washington, even if it remains unclear in either case what change will actually be agreed and implemented.
The proposals published on Thursday by House Republicans in the US include a cut in the headline rate of US corporation tax to 20 per cent, from 35 per cent now. The high existing rate of US corporation tax – one of the highest in the industrialised world – is blamed for encouraging US firms to invest overseas when they expand into offshore markets, rather than serving these new markets from the US.
The lower rate, if implemented, would encourage firms to invest more in the US and a bit less overseas. While this might trim the flow of investment by US multinationals overseas, it is unlikely to lead to a major reduction, as companies continue to spread their investments to serve international market.
Peter Vale, tax partner at Grant Thornton, pointed out that the headline Irish rate at 12.5 per cent would remain significantly below the new US rate of 20 per cent. Meanwhile the addition of state taxes would increase the actual headline rate for many US firms closer to 25 per cent.
Vale added that the detail of what emerges will be closely watched by US multinationals with major operations here. The US is changing to a largely territorial system of company tax – focused on collecting profits booked in the US – but will also levy firms in the US who do not pay a minimum rate abroad.
How these rules are constructed will have an impact on the tax affairs of US companies here, including those who have recently moved major intellectual property assets to Ireland. In acting to disincentivise companies to locate operations in tax havens, the rules could be of some benefit to Ireland, Vale said.
Among the measures proposed are a special incentive rate of 12 per cent to encourage companies to repatriate to the US funds held offshore at the moment. In some cases these funds will have been moved through Irish subsidiaries as part of an international chain which left much of the money subject to very little tax to date.
The US plan is far from done and dusted. Despite leaving the top rate for income taxpayers unchanged at just under 40 per cent, it is already being attacked for benefiting the rich and as yet it is unclear whether it will clear Congress and if so what compromises will be made. However, some of the earlier proposals to target specifically firms importing goods into the US and favour exporters – which could have significantly affected the flow of outward investment from the US – have been shelved. This is welcome from an Irish viewpoint.
So while the US plans could change the dial a little for some multinational planners, the bigger threat would appear to come from EU proposals. A plan to introduce a common corporate tax base – which could later lead to centrally collected taxes – is being advanced.
And a separate plan to levy digital companies on sales in big markets has also been proposed by the big EU countries, led by France, It is far from clear whether either of these proposals will fly, but by fundamentally altering the way corporations are taxed they offer far more threat to the Irish exchequer – and to future investment flows – that do the latest proposals emerging from Washington.
Lawmakers to announce sweeping overhaul that does not lower top rate for the rich
about 6 hours ago
Barney Jopson Washington
US president Donal Trump is seeking his first major legislative victory with plans to to slash the corporate tax rate to 20 per cent while maintaining the top rate for the richest Americans as part of a sweeping tax overhaul
Republicans have set out plans to overhaul the US tax system radically, seeking to win over businesses and middle-class Americans as they attempt to secure a first major legislative victory for Donald Trump’s turbulent presidency.
But despite cutting the top corporate tax rate from 35 per cent to 20 per cent, the proposal provoked a backlash from business, with the US Chamber of Commerce saying “a lot of work remains to be done”.
The small business lobby said it was not receiving enough help, estate agents said home values were threatened, and big borrowers complained of being penalised. Multinationals also face higher-than-expected tax on offshore earnings.
The White House is pinning its hopes on tax reform as its best chance to retain Republican control of Congress next year amid the instability of the Trump presidency.
The tax plan, which delivers on a Republican pledge to cut the corporate rate from one of the highest levels in the developed world, contains mixed results for the wealthiest Americans.
Paul Ryan, the Republican speaker of the House of Representatives, described the plan as relief for “people living pay cheque to pay cheque”, saying the typical family of four would save $1,182 a year on their taxes.
Kevin Brady, chairman of the tax-writing ways and means committee, said the bill would increase the deficit by $1.5tn over 10 years – within the threshold that would enable Republicans to pass it with no Democrat support.
Party leaders began the task of selling the plan to their members, triggering a high-stakes phase of horse-trading and furious corporate lobbying on Capitol Hill, ahead of a vote in the House of Representatives next week.
The plan says companies with offshore cash piles led by Apple, Microsoft and Google-owner Alphabet would face a 12 per cent tax – a higher rate than previous proposals to help pay for other rate cuts. Offshore earnings already reinvested would be taxed at 5 per cent.
Irish tax experts said that the latest US proposals were broadly along expected lines, but that the detail of whatever emerges will be important for companies here.
Peter Vale, tax partner in Grant Thornton, said that the headline Irish rate of corporation at 12.5 per cent would remain well below the proposed US rate of 20 per cent, which when state taxes are included would rise to 25 per cent in many cases. The key for Ireland, he said, was to remain the most competitive location for US companies looking at Europe.
The National Federation of Independent Businesses, a small business lobby group, said it could not support the bill, expressing concern that 85 per cent of small businesses, which are structured not as corporations but as so-called “pass through entities”, would not benefit from the proposed lower 25 per cent rate aimed at them.
For individuals, the bill curtails Americans’ cherished ability to deduct mortgage interest costs from their taxable income, denying the tax break to people buying new homes worth more than $500,000.
The proposal sent share prices of the country’s largest homebuilders lower and prompted William Brown, president of the National Association of Realtors, to say the bill confirmed the property sector’s worst fears. “Eliminating or nullifying the tax incentives for home ownership puts home values and middle class homeowners at risk,” he said.
Tax writers largely stuck with a controversial proposal to limit the ability to deduct state taxes paid from their federal taxes, saying people would only be allowed to write off state property taxes up to $10,000 – another blow to the rich.
Chuck Schumer, the Democratic Senate minority leader, attacked the bill, singling out the partial elimination of the state and local tax deduction, which he said would hurt many of his New York constituents.
“What we are seeing today is a plan that exacerbates the unfairness and inequality in our tax code,” Mr Schumer said.
The top rate of personal tax would stay at 39.6 per cent but some well-off Americans would benefit from increasing the income rate at which it kicks in. Mr Brady backed down on a plan to limit tax-free contributions to 401(k) retirement savings accounts.
For companies, while the party is nominally ending US taxation of future foreign earnings, tax writers proposed measures that would result in a 10 per cent tax on some foreign profits – a level likely to provoke corporate resistance.
The proposal also reins in companies’ ability to deduct debt interest payments from their tax bills, a break that is vital to sectors including real estate and private equity, but seeks to maintain the benefit for small companies.
The Build Coalition, which represents businesses that rely on the debt interest tax break, said the proposal “would harm the global competitiveness of businesses across all sectors of the US economy”.
Grover Norquist, an influential conservative advocate for lower taxes, said: “The tax reform bill is a tax cut and a jobs bill. Growth. Growth. Growth. Long overdue. Great news for taxpayers and those left behind by eight years of slow growth under Obama.”
– Copyright The Financial Times Limited 2017
Latest exchequer numbers suggest public finances are back on track
about 6 hours ago
Minister for Finance Paschal Donohoe. Stronger-than-expected corporation tax receipts have been making up for shortfalls in income tax and VAT. Photograph: Dara Mac Dónaill
The Government’s finances are back on track with the latest exchequer returns showing tax receipts ahead of target for the first time this year.
The figures for October, published by the Department of Finance yesterday, show the Government collected just under €39 billion in taxes for the first 10 months of 2017.
Tax receipts had been running below profile since the start of the year largely because of a weaker-than-expected trend in income tax, although this has been blamed on a tax-modelling error within the department.
Either way, the gap between actual and projected tax receipts has now been bridged with stronger-than-expected corporation tax receipts making up for shortfalls in income tax and VAT.
Overall, tax revenue is 6.2 per cent or €2.28 billion higher than in the same period last year. Corporation tax generated €5.4 billion for the Government during the 10-month period, which was €216 million or 4 per cent ahead of the department’s forecast.
Income tax, the Government’s largest tax stream, came in 1 per cent or €153 million below profile at €15.2 billion while VAT, which reflects consumer spending, generated €11.2 billion, which was also 1 per cent or €118 million below target.
Monthly VAT receipts for October were €82 million or 29 per cent worse than expected, which the department blamed on higher-than-expected repayments.
A spokesman said the below-par performance in VAT is likely to unwind in November when the self-employed file their tax returns.
Excise duty, the other main tax head, performed strongly, generating €4.9 billion, which was 1 per cent above profile, but this was linked to the stocking-up of tobacco products in advance of the introduction of plain packaging.
The latest returns resulted in an exchequer surplus of €326 million compared with a deficit of €2.4 billion for the same period last year, with the improvement attributed to the recent AIB share sale.
Expenditure for the 10-month period was €36.7 billion, which was 1 per cent or €386 million below profile but 5 per cent or €1.7billion up in year-on-year terms.
“Corporation tax continues to prop up much of the growth in our tax receipts, with October again a strong month. While positive, we can’t ignore the longer-term threats to our corporate tax base, with the EU in particular seeking changes that would adversely impact smaller countries such as Ireland,” said Peter Vale, tax partner with Grant Thornton.
“Longer term, an increase in tax revenues from wealth taxes, such as property tax, would act as a hedge against a fall in the corporate tax take. For the moment, however, such a move looks unlikely and we have to hope that the proposed EU changes lose momentum so that corporation tax continues to outperform,” he said.