DUBLIN (Dow Jones)--Ireland faces yet another potentially damaging blow to its faltering economy after U.S. President Barack Obama announced plans late Monday to cut overseas tax benefits for U.S. multinationals.
The White House said it proposed to cut tax benefits for those U.S. corporations that invest overseas and use some of their forecasted revenue to gain tax credits for investment in research and development.
Obama's tax plans could - in a worst case scenario - spell more trouble for Ireland's attractiveness as a destination for foreign investment, which was crucial in the emergence of the so-called Celtic tiger.
Economists say Ireland is already battling for its economic survival. When it comes to maintaining U.S. foreign direct investment, it needs it now more than ever.
In a briefing note, the White House cited Ireland as one of three small countries, alongside the Netherlands and Bermuda, as accounting for about one-third of all foreign profits by U.S. multinationals in 2003.
Obama said in a speech late Monday: "We will stop letting American companies that create jobs overseas take deductions on their expenses when they do not pay any American taxes on their profits."
"For years, we've talked about shutting down overseas tax havens that let companies set up operations to avoid paying taxes in America," Obama said. "That's what our budget will finally do."
This comes at a critical time for Ireland, which has been caught in a maelstrom of a banking industry on the verge of collapse, rising unemployment, a property market crash and plummeting tax receipts.
The small, open economy was the first in the euro zone to slide into recession and looks set to be the worst-performing economy in the euro zone this year, as the government tries to plug the hole in public finances.
Deputy Prime Minister Mary Coughlan told state broadcaster RTE Radio Tuesday that Ireland had brought "consistency" to its system for R&D tax credits and advised a "proportionate response" to Obama's speech.
Coughlan said that Ireland had "very fine" lobbyists in Washington but, once the lobbying by government representatives on Capitol Hill is done, "at the end of the day the Hill will make the final decision."
Ireland hosts the European headquarters of major U.S. firms, including Microsoft Corp. (MSFT), Intel Corp. (INTC), Dell Inc. (DELL), Google Inc. (GOOG), Hewlett Packard Co. (HPQ) and International Business Machines Corp. (IBM).
None of these companies were available to comment Tuesday, but Pat Wall, Chairman of the Dublin-based American Chamber of Commerce Tax Committee, said, "U.S. multinationals here are significant employers."
Around 500 U.S. multinationals pay about EUR2.5 billion in tax yearly, and about 2% of the workforce directly or 100,000 people directly, more than the population of Bermuda, he said. Ireland's population is 4.1 million.
U.S. firms export around EUR83 billion of products and services from Ireland and contribute about EUR13 billion in expenditure to the Irish economy in terms of payrolls and goods and services employed in their operations, Wall said.
He said IDA Ireland - the state body charged with securing crucial new foreign direct investment, the Department of Finance and representatives from the Irish Embassy in Washington will all lobby hard on Capitol Hill until the proposals become law in 2011. "The rules have changed for everybody," he said.
IDA Ireland said the country faces a period of uncertainty over the next 12 to 18 months as details of the U.S. tax proposals emerge.
IDA Chief Executive Barry O'Leary told Dow Jones Newswires that U.S. multinationals in Ireland, which has a 12.5% corporate tax rate, have more substance than "holding companies" in the Netherlands or "tax havens" like Bermuda.
O'Leary also said Obama's proposals are unlikely to involve a blanket ban on U.S. companies' ability to defer paying U.S. tax on profits earned in Ireland, but will focus more on measures like tax deductions for expenses.
He also pointed out that Ireland was not categorized as a "tax haven" by the Organization of Economic and Cooperation and Development. Likewise, the Dutch Ministry of Finance said the Netherlands was not known as a tax haven.
The Netherlands' Ministry of Finance spokesman Marcel Homan told Dow Jones Newswires the government was "surprised" by Obama's statement as the Netherlands is known for its "average tax regime." He said the Dutch ambassador in Washington will ask the U.S. government for clarification.
The Netherlands is an important base for holding companies from the U.S. But American companies also employ over 200,000 people in the country, which has a population of around 16.5 million.
In 2007, American direct investment from holding companies in the Netherlands were $254.5 billion on a historical-cost basis, according to the U.S. Department of Commerce. This accounts for nearly 70% of total U.S. direct investment in the Netherlands in the same year.
Despite its relatively low corporate tax rate, Ireland faces a loss of competitiveness and foreign investment, even without the latest blow from the U.S., as companies seek out lower cost economies in Eastern Europe and Asia.
Dell Inc. said earlier this year it was moving its Irish manufacturing operations to Poland by early 2010, a cost-cutting measure that would result in the loss of 1,900 Irish jobs - about half of the computer maker's Irish work force.
Ireland's National Competitiveness Council has highlighted problem areas for the country which include productivity, labor and energy costs, increased business regulation and overall infrastructure quality.
Obama's speech comes as Ireland faces its most serious economic crisis in the history of the state, with some economists forecasting the worst economic contraction in any industrialized country since the 1930s.
The Economic and Social Research Institute, an independent think tank, forecasts that Ireland's economy will contract by around 14% over the three years from 2008 to 2010 and sees unemployment hitting nearly 17% next year.
ESRI, one of the organizations consulted by representatives from the International Monetary Fund on their annual visit here last month, sees a general government deficit at 12% of gross domestic product in 2009. Ireland needs every penny it can get. The Irish government said late Tuesday it posted a budget deficit of EUR7.3 billion for the first four months of 2009 versus a deficit of EUR3.7 million for January to April 2008. Dermot O'Leary, an economist with Goodbody Stockbrokers, said Obama's tax plans smack of protectionism. "With Ireland waiting on a trade boost to provide a stimulus to recovery," he said, "these announcements are not welcome."
-By Quentin Fottrell, Dow Jones Newswires; +353-1-676-2189; quentin.fottrell??dowjones.com (Maarten Van Tartwijk in Amsterdam also contributed to this article.)
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