Paul O'Donoghue

IT ALL KICKED off on Wednesday – Trump’s Tariffs(™), Liberation, lots of bold pronouncements and grand statements.

The upshot – there will now be tariffs of 20% on most imports into the US. Tariffs are explained here, but essentially, they’re taxes.

Notably, it seems the pharmaceutical industry has been spared. At least for now, the Irish government is assuming the US will revisit the issue.

But for now, as this sector accounts for a massive chunk of Irish exports to the US, this could change the picture significantly around how much our trade will be hit.

To go back a bit – we’ve heard repeatedly that Ireland will be the EU country worst impacted by these new taxes.

But impacted – how?

There’s a few ways.

One, the higher taxes hit the production of companies which are here and sell to the US. This causes production in Ireland to become more expensive, business takes a hit, and there’s a knock-on impact on the Irish economy. When think tanks talk about Ireland’s GDP or production being negatively impacted, this is what they mean.

Then, there’s the potential impact on future investment, which mostly relates to jobs. Trump has repeatedly said he wants US companies based in Ireland to shift their operations to the US instead.

It’s unlikely the US companies already here will move their production abroad. Many of them have invested years and billions in Irish manufacturing operations and plants.

But there is a real concern that they will stop expanding. And other US companies which don’t already have operations in Ireland might be less likely to set up here. This is what headlines about tariffs ‘costing Ireland 80,000 jobs’ refer to.

Most experts don’t expect mass layoffs here as American companies move Irish operations to the US. Not to say it’s impossible, just that it’s unlikely. But fewer new jobs in the future – that’s very possible.

Although if pharma companies are exempt, the impact on Ireland may not be nearly as dramatic as feared.

Corporate tax

Then, there’s a threat which has perhaps not got quite as much public attention. But, it’s the one which could materialise fastest – what will the tariffs do to Ireland’s corporate tax take?

As explained previously, Ireland relies on its massive corporate tax haul to pay the bills in things such as the ever-expanding health service budget. Without it, Ireland’s finances would be in the red.

Initially, the connection between the tariffs and corporate tax may not be clear.

Yes, tariffs could hit companies producing goods in Ireland. So they report lower profits, and we get less tax.

To take a very simplistic view: A 20% tariff, so 20% lower profit. So 20% lower corporate taxes, right?

Theoretically, it’s possible. But, that’s not actually the main concern for Ireland. The real worry is that the tariffs will discourage profit shifting.

Ireland’s corporate tax take has boomed in recent years in part because of US companies moving more of their profits here.

Our corporate tax take has skyrocketed from €4.6 billion to €28 billion in a decade.

As explained previously, while businesses are doing better now compared to 10 years ago – not to that extent.

Much of the country’s corporate tax comes from companies declaring profits from their European, or entire non-US, operations in Ireland. We then collect a slice of the profits, which adds up quickly with the boom in US tech and pharma.

Intellectual property

A key part of how multinational companies move money around like this is with intellectual property (IP).

IP covers things like software patents or brand trademarks – which are valuable assets for tech and pharma businesses.

Companies can move their IP to a low tax jurisdiction, such as Ireland, and route sales through there through techniques such as transfer pricing.

The nitty gritty of how this works is too complicated to get into without doubling the length of this article. Those interested can read more here.

But the important thing to know is that moving IP essentially gives a company control where they declare their revenue and profits. Many US companies have moved their IP to Ireland in the last decade, fuelling our corporate tax boom.

The European Central Bank recently found that so many companies have moved their IP to Ireland in the last few years, that it has actually distorted data across the EU.

Ok, so what do tariffs have to do with IP?

Essentially, the concern is if the multinationals have to start paying 20% tariffs on profits they’re shifting to Ireland, it will become less attractive to move that money here.

Then, just as the IP was moved into Ireland, it could be moved out again. To a lower-tax jurisdiction, or one less impacted by tariffs.

While earlier we mentioned how companies have shifted their European IP to Ireland, the truth is that these multinationals are incredibly secretive about how they operate.

The IP they move around can cover their European business. But it can also apply to an American company’s ‘international’ operations – basically all of their trading outside of the US.

Could they move elsewhere?

The entirety of the EU is impacted by 20% tariffs. But look at somewhere like, say Singapore for example. The country is already a popular destination for IP. It also faces 10% tariffs instead of the higher 20% in the EU.

Say for argument’s sake multinationals moved their IP from Ireland to Singapore. This could hugely dent Ireland’s corporate tax take as companies shift less profit here, costing the state billions per year.

Feargal O’ Rourke, the chair of the Irish state’s foreign investment body, IDA Ireland, was asked about this at a conference in UCD during the week.

He thinks it’s unlikely that US companies will move their IP out of Ireland for two reasons.

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One – tax.

Ireland charges an exit tax of 12.5% on the movement of assets such as IP. As many of these are likely worth multiple billions, US companies would have to pay a hefty upfront fee to move their IP.

That could be ok to do as a once off. But Trump’s presidency will only last for four years. Multinationals might figure it’s better to take short-term pain of 20% tariffs, which could be gone relatively quickly, rather than the cost and hassle of moving their IP.

Two – Ireland is just a good location for many of these companies to hold their European or worldwide IP. This is for a few reasons.

First off, Ireland is a natural entry point to the EU market for a lot of these businesses.

Then it’s worth recognising that lots of multinationals do have legitimate operations here employing thousands of people.

This makes it much easier to justify shifting profits here compared to a 0% tax haven where they only own a brass plate, like the Cayman Islands.

Tying into that point, Ireland is viewed as a ‘legitimate’ jurisdiction, which means there’s less incentive to move IP out of it.

“It’s easy to get [IP] out of a tax haven. Not so easy to get it out of a mainstream [country], whether it’s Ireland, Netherlands, wherever, without paying an exit charge,” O’Rourke said.

A happy accident

These points all make sense, and O’Rourke is likely correct that 20% tariffs themselves may not be enough to trigger a mass IP exodus. Particularly with pharma being unaffected (for now).

But it’s also worth keeping in mind that, while Ireland encouraged the practice, the wave of US multinationals shifting IP here was also something of a happy accident.

Amid an international crackdown on zero-tax havens like the Bahamas, low-tax legitimate jurisdictions were favoured. Ireland particularly so, for the reasons above.

While the sums may still justify keeping IP in Ireland right now, 20% tariffs start to alter the maths.

Trump also changed the corporate tax code during his first term. Similar moves could impact the equation again for US multinationals shifting profits here.

It’s tough to call how this will all play out, and Ireland may get lucky.

But the fact that the state’s finances are so reliant on corporate assets which can – theoretically at least – fairly quickly be relocated abroad should be a massive worry.

Particularly with an administration aimed at doing just that – getting American companies to move assets back to the US.

The stakes are high for Ireland – we’re playing with fire.