Why do we have a corporate tax windfall and will it end?
You can never have too much of a good thing, the saying goes.
Except, it seems, if that good thing is corporate tax.
This week, questions have again been raised about Ireland’s growing reliance on taxes stemming from the profits of companies operating here, especially large foreign companies.
First by the Ministries of Finance and Public Expenditure and Reform in the Summer Economic Statement (SES). They warned that the government must be aware of the “very real possibility” of a drop in corporate tax revenue, which now constitutes a substantial and growing part of the public purse.
Commenting on the SES, the Irish Tax Advisory Council (IFAC) said strong corporate tax revenues “should not be relied upon to fund permanent increases in spending”.
It came just over a month after IFAC warned it was now “urgent” for the government to reduce its reliance on corporation tax.
The third note of caution came from the Central Bank which, in its summer quarterly bulletin, described the current high levels of corporate tax as “the main risk to our public finances”.
The red flags have once again reignited a debate about whether or not we are overly dependent on what could prove to be a volatile revenue stream, in a manner similar to our reliance on property tax proceeds during the Celtic Tiger.
How dependent are we on corporation tax?
The simple answer is quite dependent.
Last year, €15.3 billion was taken in by income via corporate income tax, while ten years ago the comparable figure was just €3.5 billion. euros.
In fact, so far this year the Treasury has levied 3 billion euros more in corporation tax than it did in the same period last year – a 53% increase – which , if maintained for the second half, will bring the take to around 20 billion euros. .
As a result, these receipts now represent almost €1 out of €4 collected.
And if that weren’t enough, about half of that revenue comes from just ten large companies.
“In other words, this means that €1 out of €8 collected by the state comes from an exceptionally small number of companies, a concentration risk which represents a clear vulnerability for public finances,” the Economic Statement states. of summer.
Where does all this extra tax come from?
Pinpointing exactly what is driving the corporate tax windfall is not straightforward, but experts say there appear to be a number of factors at play.
In a sense, Ireland has become a victim of its own success, attracting so many of the big US multinational players here in areas such as big pharma, medtech, IT, and more.
As a group, they have large and (in many cases) growing operations here that have been particularly successful in recent years, meaning they pay a lot of corporation tax on their high profits.
Add to that the changes to the US tax code in recent years that have shifted profits to Ireland.
“American companies were doing all of this with Bermuda and the Cayman Islands and the United States went to eliminate and shut that down in hopes that companies would write big checks to the United States,” said Seamus Coffey, economist and master. lectures at University College. Cork.
“Well, one consequence is actually that they write big checks to Ireland.”
There are also the effects of the OECD Base Erosion and Profit Shifting process, which started in 2013 and eventually led to changes in how and where tax is paid. tax by many companies.
“The central thesis of the OECD is to keep companies away from tax havens where they have no substance and put profits where they have substance,” said Feargal O’Rourke, managing partner of PwC Ireland. .
“And now we’re seeing that coming home because all of the American multinationals are now restructured and some have brought their intellectual property back to the United States… some have brought it here, some have brought it somewhere else.”
So not only do many of the approximately 1,700 multinationals operating here derive large profits from their Irish operations, but a larger share of those profits are now recognized and taxed in that jurisdiction.
“It’s a combination of good times and restructuring,” Mr O’Rourke said.
A third factor is that within our corporate tax profile there is a strong bias towards large multinationals, like Apple for example, which by its own admission pays more tax in Ireland than any other individual or organization.
Together, these are the main reasons why our corporate tax levies have skyrocketed in recent years.
Why might the deal end and what is the likelihood of it happening?
It is not easy to predict what will happen to corporation tax.
“If it’s driven by external factors, well, you just don’t know how reliable it is,” Seamus Coffey said.
But generally speaking, there are a number of ways corporate tax revenue could take a sudden and severe drop in the short to medium term.
The first is the risk of a global economic slowdown caused by the war in Ukraine, supply chain difficulties, the energy crisis, inflationary pressures, rising interest rates and all the other issues that arise currently.
This could hit the profits of multinationals and force them to cut spending, undermining corporate tax take.
That scenario does not seem unlikely, given warnings this week from IMF chief Kristalina Georgieva that she could not rule out the possibility of a global recession next year, although its severity is uncertain.
The second concern would be if one or more of the 10 or 20 large multinationals here decided to move operations or assets elsewhere, moving profits and taxes with them.
“Most of them have very strong, long, deep presences here,” Feargal O’Rourke said.
“But that’s just the law of large numbers. If any of them decide that over the next few years Ireland is to be less important in its overall overall structure, well then Irish tax revenue will drop. disproportionately.”
A third possibility is further changes to the US tax code that would encourage US multinationals to transfer their profits there instead – but that seems unlikely.
“The Biden administration moved very aggressively on corporate tax early in its tenure, but it completely slipped off the agenda,” Coffey said.
A fourth trigger could be the implementation of the OECD’s latest global tax deal which will force Ireland’s corporate tax rate to rise to 15%, but could mean less tax is paid here by multinationals based here who sell throughout Europe.
The Ministry of Finance concluded that it could cost 2 billion euros per year, but in reality, until it happens, no one can be too sure.
If it is not implemented, which remains a real possibility, then there is a wider risk of a trade war, where Europe starts implementing digital taxes and the US retaliates – a sequence of events that could also impact corporate taxes.
What Mr. O’Rourke says should concern us less is the prospect that assets such as intellectual property, which have been moved here as a result of the BEPS process, will be moved elsewhere in the near future.
“Moving IP isn’t something you do every year or two,” he said.
“It was quite a seismic change, once the Trump Tax Cuts and Jobs Act came in 2017 and then the OECD proposals, it’s almost a once in a while kind of generational structural change .”
“There’s not a tax manager that I know of in these American companies who doesn’t say great, it’s done, I don’t have to think about it for the rest of my career, it will be my successor’s job. .”
What would it mean for fiscal arithmetic if we didn’t have all that corporate tax?
In the Summer Economic Statement, the departments indicated that in a hypothetical scenario in which corporate tax revenues remained unchanged at pre-pandemic levels, deficits would have been in sight for this year. and the next.
They calculate that the magnitude of these deficits is somewhere in the region of -1.5% of GDP and -1.25% of GDP, respectively.
In monetary terms, this translates into a shortfall of up to 7 billion euros.
While Central Bank and IFAC modeling suggests that up to €8 billion in corporate tax last year was windfall or excess, given real growth in modified national income.
If all or part of this were to be removed from the overall public expenditure budget, it would have enormous consequences.
What can and should we do about it then?
The clear message from all the experts is that we need to do two things.
The first is to ensure that windfall corporate tax revenues are not rolled into current expenditure in any way, so that if they were to disappear, the repercussions would not affect day-to-day services.
The finance minister has argued that this is already happening, with the corporation tax surplus from last year and this year being spent on one-time and capital expenditures.
The other thing we need to do, IDA stressed last week, is to ensure that Ireland’s economic and social environment remains business-friendly, so that large multinationals and others want to continue to invest and stay here.