USA Losing Out on Global Taxes

Stupid is as stupid does.

I have been aware for years that Ireland was a tax haven that was the on-paper headquarters for many multinational corporations, depriving the United States of significant revenue. Inexplicably, I had never really considered the flip side of that. WSJ’s Max Colchester does so in “The Irish Government Is Unbelievably Rich. It’s Largely Thanks to Uncle Sam.”

The Irish government is rolling in clover like never before.

The country currently has so much money it pumps cash into not one but two sovereign-wealth funds. It is so flush that the budget watchdog doesn’t warn about not having enough money but rather that the government is spending so much that it could overheat the economy.

In Dublin, authorities are building what might become the world’s most expensive children’s hospital. There are plans for a motorway to link Cork and Limerick, new flood defenses in Shannon and floating wind farms off the south coast. Outside the parliament sits a new bike shed that cost half a million dollars, houses 36 bikes and doesn’t keep out the rain. The state is spending $10 million to get children off their phones at school, including mass-buying magnetic pouches to lock the devices away so they don’t get distracted. 

“The good times are back,” says Pat Woods, as he stretches his arms out over the red leather banquette of his pub, the Dame Tavern, in central Dublin. “Everything is flying.” Standing in a nearby street sucking on a vape, a local hairdresser marvels at what is unfolding. “The spending is wild,” he says. 

I was instantly reminded that the Biden administration had helped negotiate an international agreement to put an end to this practice. While I blogged about it at the time, I’d not kept up with how it was working out. Apparently, not so well.

Helping fund this largess is the U.S. tax system and an unexpected side effect of a global clampdown on corporate tax dodging. The U.S. government and the European Union spent the past decade changing laws and pressuring big multinationals not to book profits in offshore jurisdictions, such as the Cayman Islands, where they have no operations and pay no corporate tax. So now many U.S. companies are doing the next best thing: parking their international profits in low-tax Ireland where they employ some people and pay some tax. Among those known to use Ireland are Apple, Alphabet’s Google, Microsoft and Pfizer.

The report includes this graphic, which is interactive at the link:

So, obviously, great news for Ireland:

The result is a vast windfall for a country of 5.4 million people. Ireland, which now offers a headline 15% corporate tax rate to big companies compared with 21% in the U.S., expects in 2024 to have raked in 37.5 billion euros, equivalent to $39.6 billion, in corporate tax revenue, up from €4.6 billion a decade earlier. That works out at around $7,300 per person. In the neighboring U.K., corporation tax generated around $1,300 a head in fiscal 2024. 

A country that was once famed for mass emigration—and nearly went bankrupt 15 years ago following a banking crisis—is now importing workers to build everything from wind farms to houses amid surging demand, a shift in economic fortunes almost unimaginable a generation ago. “Historically Ireland had loads of people and no money,” says Seamus Coffey, chair of the Irish Fiscal Advisory Council. “Now we’ve loads of money and not enough people.”

Rather obviously, this is a huge problem for the United States and other countries who should, by rights, be collecting this revenue. Neither the intellectual capital nor the manufacture of these companies originates in Ireland.

President-elect Donald Trump’s election victory brings some uncertainty as to whether Ireland’s tax boom will continue. Trump has said he would cut the corporate tax rate for companies that make products in the U.S. to 15%, matching Ireland’s headline rate. Tax experts say it is too soon to say for sure what will happen, but if the Trump administration did entice U.S. firms to repatriate profits or intellectual property, the effect on the Emerald Isle could be dire.

Which, frankly, is their problem, not ours.

What interests me, though, is how we got here.

For decades the U.S. government hit U.S.-based multinationals with a 35% tax on their global profits. They only paid that full amount if they repatriated them to the U.S. So firms had an incentive to book profits abroad and keep them in separate accounts.

Ireland proved an attractive destination. Big pharmaceutical and tech companies built European headquarters here, where they benefited from seamless access to the EU and a 12.5% tax rate.

A tax play known as the “Double Irish” allowed global profits to be kept outside the U.S. and taxed at a minimal rate in tax havens.

Then in 2017, the Trump administration cut the U.S. domestic corporate tax rate to 21% and imposed a minimum 10.5% rate on worldwide profits regardless of whether they were repatriated. Four years later, Ireland bumped up its corporate rate to 15% to match the worldwide minimum brokered by the Organization for Economic Cooperation and Development.

Counterintuitively, this turned out great for Ireland.

U.S. businesses responded by shifting hundreds of billions of dollars in intellectual property, such as patents and research, out of tax havens and into their Irish operations. Irish tax law allowed them to defer the cost of buying in their own IP from tax havens against their future profits, allowing them to reduce their tax bills.

On its face, this seems like, well, fraud. As we’ve discussed many times before, the very wealthy hire armies of top-notch attorneys and accountants that simply outsmart and outlast our regulators and the IRS. I would imagine that’s a thousand times more true of the likes of Apple.

Among the links in Colchester’s piece is to a February report in the paper titled “A New Global Tax Is About to Raise Billions. The U.S. Is Missing Out.

The 15% global minimum tax is here, and it is raising corporate tax payments—just not in the U.S.

Johnson & Johnson, Baxter International and Zimmer Biomet are all warning investors that the 2021 international tax deal will make them pay higher taxes this year as Switzerland, South Korea, Japan and European Union countries implement the accord.

U.S. companies that enjoyed single-digit tax rates in some foreign countries now must pay at least 15% in each. But even though Treasury officials were crucial in forging the international accord and President Biden has pushed to implement it, Congress hasn’t changed U.S. tax law to conform to it. Republicans generally oppose the global deal, contending that Biden administration negotiators gave away too much of the U.S. tax base.

So for now, the U.S. isn’t directly collecting any money from domestic or foreign companies because of the deal.

For fuck’s sake. I make no claim to expertise in global finance but the whole point of this action was to stop the race to the bottom in corporate tax rates. There would be no reason for US-based corporations to pretend to be based in Ireland or some other tax haven if they would pay the same rate regardless.

The corporate warnings mark the first concrete estimates of how the global minimum tax deal is affecting companies—and, by extension, governments—around the world. The agreement was backed by about 140 jurisdictions and hailed by their leaders as a crucial step toward reducing cross-border tax competition and making companies pay more to support governments.

Thirty-six countries have implemented the deal or have new rules in progress, and businesses with global revenues exceeding €750 million—equivalent to about $810 million—could pay new taxes on profits.

The Organization for Economic Cooperation and Development, which spearheads the minimum tax project, recently estimated that businesses altogether will pay additional taxes of between $155 billion and $192 billion annually, an increase of between 6.5% and 8.1% from current tax payments. Some analysts looking at company projections have said it could be lower.

The U.S. created a minimum tax on companies’ foreign income in 2017, but it applies to their global profits, not country-by-country as required by the international deal. The U.S. created a second minimum tax in 2022, but that, too, doesn’t align with other countries’ levies. China also hasn’t implemented the agreement.

I’m reasonably confident communist China will not become a replacement tax haven, particularly for companies whose chief value is their intellectual property.

This part, I must confess, is beyond my limited understanding of finances:

American companies are facing higher tax bills even though the U.S. hasn’t changed its rules. That is because the deal allows countries to make global companies operating in their jurisdictions pay at least 15% there. So Switzerland can make U.S. and Japanese companies pay 15% tax on their Swiss operations. 

In many cases, American companies have already maxed out U.S. foreign tax credits. So paying more abroad won’t reduce their U.S. taxes. Instead, they effectively will pay taxes in two countries on the same income. 

Meanwhile, the U.S. isn’t benefiting directly. The rules say countries can require that their home companies pay 15% in every country where they operate. So South Korea can ensure that a South Korean company pays 15% in the U.K., the U.S. and France. If it doesn’t pay enough in those countries—for instance, because U.S. research incentives lower its tax rate there—it must pay more to South Korea, not the U.S. 

How companies and countries are able to come to a mutual understanding of which revenues of a global corporation are earned and therefore subject to taxation in which country is beyond me. Especially since companies got away with claiming all their revenues were earned in Ireland for so long.

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James Joyner
About James Joyner
James Joyner is a Professor of Security Studies. He's a former Army officer and Desert Storm veteran. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Stormy Dragon says:

    Republicans consider missing out on tax revenue a feature rather than a bug

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  2. Kathy says:

    Republiqans don’t care where the rich don’t pay taxes, so long as they don’t pay taxes.

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  3. Michael Reynolds says:

    How companies and countries are able to come to a mutual understanding of which revenues of a global corporation are earned and therefore subject to taxation in which country is beyond me.

    Dude, I can’t figure it out at my micro level. I’ve been trying to parse the tax consequences of leaving the US. I am particularly stupid about such things, but when I talk to experts they don’t seem to understand it all, either.

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  4. Skookum says:

    At some point, surely, the income inequality and social upheaval caused by such taxing will be viewed by corporations as a threat to their operations and profits.

  5. DrDaveT says:

    You have to remember that the foundational principle of Republican policy is that government must never, under any circumstances, be perceived as accomplishing anything useful. Republicans won’t even vote to fund collection of the back taxes already owed; what makes you think they would ever vote for more tax revenue through any other mechanism?

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