Government finances need to be kept in surplus to guard against the risk of a bigger-than-expected fall-off in corporation tax revenues, Minister for Finance, Paschal Donohoe has warned.
Speaking ahead of a policy discussion between Fianna Fáil and Fine Gael next week, Mr Donohoe warned that the risks to corporation tax may be greater than already allowed for in official revenue forecasts.
Tax reform is being discussed under the auspices of the Organisation for Economic Co-operation and Development (OECD). The discussion involving more than 120 countries may culminate in new rules for the taxation of corporate profits, particularly those of the big tech multinationals. Ireland is home to the international headquarters of many such companies.
All the major political parties drew up their pre-election manifestos in the light of Department of Finance forecasts aiming to keep the budget in surplus and also build in a €2 billion fall in corporation tax revenues in the years ahead. However, with major demands on spending in areas like housing and healthcare, it remains to be seen what plans emerge from any talks on government formation.
Speaking at the Irish Tax Institute annual dinner in Dublin on Friday evening, Donohoe warned that "one thing we can be certain of is that the current high levels of corporation tax cannot be relied on in the long term."
Start to kick in
Revenues surged to €11 billion last year and Donohoe said he expect a further increase, but then subsequently a decline as the OECD reforms, if agreed, start to kick in.
Department of Finance forecasts allow for a decline in these revenues of €2 billion by 2025. But Donohoe warned that the decline could be greater and that estimating the cost to the Exchequer of one aspect of the OECD plan – a minimum corporate tax rate – was particularly difficult. For this reason, he said, it was important to deliver on the target of building up the budget surplus to €4 billion by 2021, to provide an additional buffer. This can be achieved while at the same time putting extra spending into key priority areas, he said.
No minister for finance could ever meet all the tax and spending demands, he said. He added that he was “ particularly struck by the manner in which some influential voices both during and since the election have advised me to both mitigate the corporate tax risk by running surpluses while also advocating very significant and unfunded increases in the size of the State”.
While Mr Donohoe did not identify the “influential voices”, Ibec, the business lobby group, has been vocal in calling for a bigger role for the State to solve key infrastructure and social problems.
The Minister warned that it is “a circle which is impossible to square and a debate that therefore requires a greater sense of reality”.
While the OECD tax process would carry costs for Ireland’s exchequer , Mr Donohoe said he continued to believe it was the best way forward, as the alternative was countries taking unilateral action, threatening uncertainty and global tensions. However, he said he remained to be convinced about the proposals for a minimum corporate tax rate, “which go beyond the objective of addressing the tax challenges of digitalisation”.
