President Obama launched his offshore tax reform proposals last month with a briefing note stating that Ireland, Bermuda, and the Netherlands accounted for nearly a third of all foreign profits reported by US corporations in 2003.
These are precisely the profits Mr. Obama hopes to tax.
The three countries named in the memo did a shocked double-take: "Who, me?"
It was not an entirely ingenuous reaction. The president's intent to rein in offshore tax havens and close corporate tax loopholes was signaled long in advance.
Although the issue has remained relatively under the radar in the US, it's caused something of a furor in Ireland, where unemployment is skyrocketing, the budget deficit is deepening, and the banking sector threatens to disappear down a black hole left by the imploding property market.
More than 500 US firms employ 100,000 people directly in Ireland. In 2008, those firms paid more than $3.6 billion in corporation tax to the Irish government – 40 percent of the country's total corporation tax take that year. If the new rules were to prompt a mass exodus of US multinationals, as some analysts predict, the economy would effectively be almost entirely hollowed out.
The Irish press has reacted to the proposal with dismay, but more sober minds have since combed the president's statement and exhaled an uncertain sigh of relief. For Ireland, and for every other country with a substantial US corporate presence, deferral is the big issue. Existing law allows multinational corporations to defer reporting their foreign income to the Internal Revenue Service and to obtain US tax credits for paying foreign taxes.
The president stopped short of repealing the tax deferral law, but he proposes to prohibit businesses from receiving tax deductions for overseas investments until taxes are paid to the IRS on the profits gained abroad.
Beyond the brass plate
It's a situation that makes countries like Ireland, with a corporation tax rate of 12.5 percent, considerably more attractive as an export base than the US, with its 35 percent rate.
Pat Wall, a tax expert with the American Chamber of Commerce in Ireland and a partner with PricewaterhouseCoopers in Dublin, says existing tax rules are hideously complex. The president's proposal to reform deferrals would take in an estimated $60 billion over a 10-year period.
"To be honest with you, that's not a hill of beans," Mr. Wall says. "Don't get me wrong, anything that tilts the playing pitch against foreign investment has to be bad news for us, but I suppose to some extent we are lining this up against the worst-case scenarios that people were painting in the run-up to all of this."
Those worst-case scenarios included a complete end to the deferral system.
"That would have been Armageddon," Wall says. "What [Obama] is proposing is nuanced, and to be honest, you couldn't really argue with it. It's fair enough."
It's hard to find anyone with a beef against the majority of the tax reform proposals – closing loopholes, cracking down on the abuse of tax havens, and giving greater resources to the IRS. It's the possible impact on overseas operations with legitimate, nontax reasons for being there that has businesses antsy until the details are fleshed out.
"There is that sense that when people look at what are brass plate operations, they fail to distinguish how real the footprint of most of these multinationals is in Ireland, and how central their Irish operations are in terms of their global reach," says Austin Hughes, chief economist with KBC Bank in Dublin.
"The reason they're here is partly taxes, but also it's because Ireland is a very similar economic model to the US," Mr. Hughes adds. "American companies will find a workforce that is young, that is well skilled, that is – and this tends to be dismissed sometimes – English speaking. There are very significant cultural similarities and it's easy to do business here."
Ireland hopes to keep US businesses
Richard Bruton, deputy leader of the opposition Fine Gael party and the man many believe will someday serve as finance minister, says Ireland is scrambling to help keep US businesses from fleeing.
"It is worrying that [Obama] put us up there in the headlights," he says. "It demands a very high level strategy from government to analyze, anticipate, lobby, and to work with companies based in Ireland to help them maintain their Irish operations in the face of this new threat."
Could it backfire?
It's not just the Irish who have a lot riding on this. Britain fears that all of the financial jobs lost during the banking crisis will never return, but instead be repatriated to the US.
In India, another country which made it into Obama's briefing, the president of the Associated Chambers of Commerce and Industry, Sajjan Jindal, warned that the US could be the biggest loser in all of this.
Resorting to "protectionism tendencies will kill the spirit of competition and dilute spirits of World Trade Organization," he says.
It's a sentiment that echoes much of the criticism the measures have drawn in the US. The Business Roundtable, the National Association of Manufacturers, and the Silicon Valley Leadership Group are just three on a long list of irate business groups that have spoken out against the reforms.
Diplomatic jousting begins
The new rules won't become law until next year, which leaves the rest of this year for an intense diplomatic offensive. In that regard, it's worth noting that within a week of the release of the White House briefing, that provocative paragraph citing the Dutch, Irish, and Bermudans disappeared. Evidence of the president's susceptibility to diplomacy and lobbying?