The Tax Cuts and Jobs Act (TCJA) was enacted in December 2017 to much furore in the US and under the watchful eyes of the international tax community. Aside from adding to the growing list of post-BEPS tax acronyms, the measures introduced by the TCJA will impact how multinationals do business in and from the US, in particular with regard to the exploitation of intangibles. However, Ireland’s transparent, stable and BEPS-compliant tax offering remains competitive in this context and should continue to attract the attention of multinationals looking to expand business operations outside the US.
Exploitation of intangibles in Ireland
The provisions of the TCJA which apply to the taxation of intangibles are particularly relevant to Ireland given its status as the location of choice for holding intangibles for many multinational enterprises. In addition to a very competitive and BEPS-compliant tax offering, which includes a 12.5% rate on profits, a tax deduction for acquired intangibles and a modified nexus based patent box (ie, the KDB), Ireland also offers:
- access to the EU single market;
- a robust IP legal regime; and
- an established industrial infrastructure in financial services, technology and pharmaceuticals in particular.
Ireland remains highly competitive in this context notwithstanding the enactment of the TCJA.
Impact of the TCJA on intangibles
Ostensibly, the TCJA adopts a two-pronged approach to enhance the competitiveness of the US as a location for exploiting intangibles globally with the introduction of the following concepts:
(i) global intangible low tax income (GILTI) which aims to discourage the exploitation of intangibles in low tax jurisdictions outside the US; and
(ii) foreign-derived income attributable to intangibles (FDII) which aims to encourage the exploitation of intangibles inside the US.
Interestingly, intangibles in this context is broader than the conventional understanding of the term (and the OECD approved meaning) and effectively refers to the value drivers any company that records sales in excess of a 10% return on tangible assets is deemed to possess.
The impact of GILTI on multinationals with operations in Ireland will depend on the relevant facts and circumstances and will ultimately need to be assessed on a case by case basis. While each situation should be considered based on its own facts, in general it appears that Ireland’s tax regime should retain its competitiveness despite the application of GILTI in many instances because:
(i) Ireland’s headline corporate tax rate of 12.5% should not be unreasonably low for the purpose of GILTI; and
(ii) taxable profits in Ireland are based primarily on accounting profits and OECD transfer pricing principles.
The combination of these two factors may result in minimal tax leakage as a result of GILTI when a multinational enterprise has substantial operations in Ireland. The tax efficiency achievable in this context could enhance Ireland’s appeal as a destination for locating non-US intangibles (within the meaning of the TCJA) which are currently located in both higher and lower tax jurisdictions.
The FDII entitles US taxpayers to reduce the US tax applicable to returns on foreign sales and services in excess of a 10% return on tangible assets (i.e., the FDII) by way of a deduction. The envisaged effective tax rate of 13.125% (rising to 16.406% from 2026) applicable to FDII remains above the 12.5% rate applicable in Ireland to all trading profits (i.e., not just income from intangibles) without considering any US state taxes that may apply. Furthermore, the numerous commercial reasons for locating non-US value drivers in an onshore outside US jurisdiction like Ireland remain as compelling as ever.
The minimum effective tax imposed on certain US taxpayers by the base erosion and anti-abuse tax (BEAT) appears to be a new fact of life of doing business in the US. However, in addition to the international condemnation of the BEAT as being in breach of World Trade Organisation obligations, the BEAT also appears to be in breach of the Ireland / US double tax treaty (the Treaty).
The BEAT can apply notwithstanding that the payment made by the US taxpayer to its foreign associated company is at arm’s length. Moreover, Article 25 (3) of the Treaty provides that disbursements paid by a US resident taxpayer to a resident of Ireland must tax deductible under the same conditions as if they had been paid to a resident of the US. It remains to be seen how the BEAT will apply in this context in practice.
Interestingly, the enactment of the TCJA may actually herald the beginning of a new wave of international tax competition, given the unilateral nature of many of its measures and its departure from many of the OECD’s BEPS recommendations. The title of the TCJA is a far cry from the EU’s ‘Anti-Tax Avoidance Directive’.
The TCJA is unlikely to be considered as a game-changer for international business in Ireland and it may well be a case of business as usual. However, the uncertainty surrounding the application of the provisions of the TCJA which target taxpayers with multinational operations has placed such taxpayers in an invidious position. This uncertainty may ultimately inhibit the attempt by the TCJA to enhance the US as a destination for the global exploitation of intangibles.
The commercial reasons underpinning the traditional US / non-US IP split operating model remain unchanged. In this context, Ireland has arguably become more attractive as a destination for locating key value driving intangibles given the certainty and stability underpinning Ireland’s tax regime and the substantial nature of the Irish economy.