In this blog, NERI Co-director, Dr. Tom McDonnell discusses tax receipts from the pharma and ICT sections which are underperforming and may have implications to future Government revenues.
Ireland’s corporation tax policy has long been the focus of fierce debate both inside and outside of Ireland. Internally, the policy is generally perceived as the central plank of an extremely successful industrial policy based on attracting Foreign Direct Investment (FDI) and high value employment from the United States. Externally, Ireland’s corporation tax policy has often proved highly controversial with accusations that Ireland is a de facto tax haven.
A number of schemes, for example the ‘Double Irish Dutch Sandwich’ and those that enabled companies to be stateless for corporation tax purposes, brought negative attention crashing down on Ireland. Both of these schemes have now been ended although opportunities for minimising tax payment still exist – not least through Ireland’s very generous treatment of capital allowances. The massive on-shoring of intellectual property assets from 2015 onwards distorted our GDP figures to such an extent that US economists dubbed our official figures as leprechaun economics.
Previous attempts to reform global corporation tax rules via the OECD’s Base Erosion and Profit Shifting (BEPS) project actually benefited Ireland with very significant on-shoring of assets from full-fat tax havens in the Caribbean and elsewhere to countries with low tax rates but at least some real economic activity and employment. These assets and the profits attributed to them are contributing to the ongoing surge in corporation tax receipts.
The OECD’s second attempt - BEPS 2.0 – has two reform pillars. Pillar 2 establishes a global minimum corporate tax rate – set at a low 15% - while Pillar 1 focuses on the allocation of taxing rights between countries. Critics of the OECD BEPS process argue that it will be ineffective at tackling aggressive tax avoidance due to the low minimum rate and the availability of carve-outs. Many global tax campaigners argue that an OECD lead process unduly suits the interests of richer countries and that genuinely inclusive tax reform needs to be put under the auspices of the United Nations. In any event, the United States seems unlikely to ratify the two pillars, at least under the current Congress, and this effectively neuters the whole process.
Ireland’s corporation tax receipts reached an eye watering €22.6 billion in 2022. This makes corporation tax the second-largest tax at 27.5% of receipts. Receipts have almost doubled in two years and were just €4 billion in 2010. They are also highly concentrated with 57% or €13 billion coming from the top 10 companies and 60% coming from the top 10 company groups. Most receipts come from just two sectors, namely Pharma and ICT. The extreme concentration of the tax base poses an obvious sustainability risk. Future receipts are highly dependent on the fortunes of a tiny number of companies – and of course these companies can always choose to move their revenue generating assets back out of Ireland if it suits their interests.
We don’t know whether or to what extent the elevated receipts are transitory but the Department of Finance considers, albeit with a high level of uncertainty, that about €11 billion of the receipts are ‘windfall’ in nature. Excluding these converts a 3% of output (GNI*) surplus in the public finances - €8.8 billion – into a 0.7% deficit. This explains why the Government was so keen to channel much of these receipts into a long-term savings vehicle rather than spend it all on public services or tax cuts.
Even so, the positive sheen from the surge in corporation tax receipts has masked the underlying and long-term weakness in our public finances as identified by the Commission on Taxation and Welfare. We probably wouldn’t have cut taxes by so much in the budget if it wasn’t for the large headline surplus.
What will happen in the years to come?
The Pharma and ICT sectors are underperforming relative to recent years. This may have implications for future receipts. The government’s move to 15% may actually increase receipts in future years although a race to the bottom in other countries could increase competitive pressure for FDI and for IP assets. Pillar 1 of BEPS 2.0 would see more tax receipts allocated to larger countries, although at the time of writing Pillar 1 is a long way off. A number of EU countries frustrated with the pace and direction of reform may try to resurrect the notion of a common consolidated corporation tax base, albeit in a new form – such a measure would lead to a fall in corporation tax receipts in Ireland as factors such as location of sales and employment become relevant for allocating taxes. While Ireland could veto such a measure at EU level a smaller cohort could choose to adopt it and this would impact Ireland anyway.
What is clear is that the challenges to and battles over global corporate tax avoidance will continue. As such, Ireland would be wise to assume its current corporation tax yield is always contingent and temporary and to plan accordingly.
This blog is an article by Dr. Tom McDonnell, NERI in the Irish Examiner on Sunday 5 November 2023.