Most forecasts relating to the Irish economy come with downside risks. Being a small, open economy heavily reliant on foreign investment has its occupational hazards. The exception to the rule is perhaps corporation tax, which seems to continually surprise on the upside.
Despite the warnings, the monthly wobbles, business tax receipts have in recent years exceeded even the most optimistic projections, mushrooming from €4 billion a decade ago to more than €23 billion last year.
This has placed the Government in the enviable position of being able to simultaneously preside over a giveaway budget, a strong surplus and set aside billions in a new sovereign wealth fund.
In normal times, these policy choices would have required difficult, perhaps impossible, financial trade-offs. Harold Macmillan’s famed line about the British public never having “it so good” could easily be directed at the Coalition.
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While our European peers worry about Covid-ravaged budgets and ballooning public debt levels, we’re wondering how to spend it.
The Department of Finance had been put on notice of a possible downturn in corporate tax receipts this year after the first quarter tally came in 25 per cent behind last year’s total for the same period.
This was forecast to get worse in May amid rumours pharma giant Pfizer would declare lower-than-expected taxable profits here on foot of a once-off restructuring charge.
In the end, receipts spiked again generating €3.6 billion in May alone, 30 per cent or €836 million up on the same month last year, leaving the Government on course again to hit its €24.5 billion end-year forecast.
One source said a higher than expected Microsoft payment might have made up for the Pfizer deficit but only the Revenue knows for sure. Much of the receipts from big tech (except for Apple) flow in June so we’ll have a better idea how things stand next month.
The current trend doesn’t preclude a sharp, negative shock. We’re bound to get one sooner or later. As Economic and Social Research Institute (ESRI) economist Kieran McQuinn noted at a conference in the past week, it’s a little like house prices 20 years ago, “every year people said they can’t keep going up and then they did but eventually they didn’t”.
But there are more reasons to suspect receipts will go up – even from this high point – rather than down. For one, the new OECD (Organisation for Economic Co-operation and Development) rules establishing a minimum 15 per cent tax rate for big multinationals introduced this year are likely to boost Government coffers
While the companies won’t officially be liable for the higher rate until 2026, it will be backdated to 2024. That means 2026 has the potential to see another step change in receipts.
Doubly so because the rate jump isn’t from 12.5 per cent, the Republic’s current rate of corporation tax, to 15 per cent as it appears on paper. The OECD reforms specifically state that the 15 per cent must be the minimum effective rate (most firms pay effective rates that are less the headline rate, hence the jump will be bigger).
Secondly, the mass onshoring of IP (intellectual property) here after 2015 was done with large capital allowances, most of which expire in the second half of this decade, meaning more tax revenue for the Irish exchequer.
All things being equal and mindful of the concentration risk of having so few firms accounting for such a large proportion of receipts, Ireland’s corporate tax take is likely to keep accelerating in the medium term. One source believes it could hit €30 billion by the end of the decade.
Ireland’s exposure to the OECD-led reforms has always been to “pillar one” of the process, which aims to reallocate taxing rights in favour of bigger countries (where more of the actual economic activity occurs) though it remains mired in political difficulties. The department believes, if adopted, it could wash away €2 billion of receipts currently generated here.
This potential slide is still a fraction of what we’ve gained over the past decade and overshadowed by what we stand to gain from the new minimum rate so much so that some in the Department of Finance, according to insiders, would be happy for Ireland to take a bigger hit from the OCED’s pillar one reforms so as to save drawing more attention to ourselves.
Ireland’s bumper tax position hasn’t gone unnoticed. It has strained relations with Brussels and Washington in the past. And now Ireland is without its main financial ally in Europe, the UK. There is a seam of officialdom here that would like to sail unnoticed on the tax front but that’s difficult when you’re on such a winning streak.
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