Corporation tax D-Day looms over State’s budgetary arithmetic

Tuesday has – all of sudden – become a make-or-break day for corporation tax and by extension the Government’s budgetary arithmetic.

The Department of Finance will publish exchequer returns for November, the biggest corporate tax month of the year (it accounted for more than €5 billion in receipts last year).

Revenue from the business tax has fallen for three consecutive months on the back of a slowdown internationally and a fall-off in demand for medicines and vaccines in the wake of the pandemic, which has dented the earnings of pharmaceutical firms here.

The €1 billion plunge in October’s corporation tax figure, which represented an annual decline of 45 per cent, was more significant than the falls in September and August, as it appeared to point to a trend.

It also pushed corporation tax receipts into negative territory for the year to date.

Any company with a December financial year-end – which is the most common – will be making a preliminary tax payment in November, that’s why it’s the biggest month.

The November data will tell us – unequivocally – how big the reversal is. Before the budget, the department trimmed its forecast for corporate tax for the year to €23.5 billion. That would be still be ahead of last year’s record haul of €22.6 billion but it looks optimistic.

The sequence of budget surpluses expected in 2024, 2025 and 2026 are heavily predicated on big corporate tax takes and they will come under pressure if the fall-off in receipts is significant.

Ireland has experienced an explosion in corporate tax since 2015, with receipts rising from just €4 billion to €22 billion last year, on the back of increased multinational profits and the onshoring of assets here.

How else do you think the Government is presiding over giveaway budgets while simultaneously putting cash in rainy-day funds and running large budgetary surpluses? Typically these things involve difficult political trade-offs.

Despite repeated warnings about the potential once-off nature of corporation tax receipts, the concentration risk of having so few firms paying the bulk of the money and the inherent volatility of multinational earnings, which are plugged into an increasingly volatile global economy, receipts have – until now – surprised on the upside.

Finance ministers Michael McGrath and Paschal Donohoe have continually warned that corporate tax is painting “an artificially positive picture of the public finances”.

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The key point is whether we suffer a cyclical downturn in revenue because of the changed economic environment or something more structural involving companies leaving Ireland. With so few companies accounting for the lion’s share of receipts, the latter poses a bigger threat.

Of course a drop in receipts due to the poor performance of companies here is a worry but it’s not a disaster. It is part and parcel of being a small open economy, housing significant volumes of multinational investment.

“Further weak figures for November will not necessarily signal an end to Ireland’s record of strong corporation tax receipts,” says Peter Vale, tax partner with Grant Thornton Ireland.

“To date, there have been no obvious signs of large multinational groups shifting either significant functions or valuable intellectual property away from Ireland. With intellectual property a key element of the ‘windfall’ portion of our corporation tax receipts, any transfer of IP [intellectual property] from Ireland would significantly erode the tax take,” he says.

While global tax reforms, spearheaded by the Organisation for Economic Co-operation and Developmentm (OECD), have been identified as a threat to Ireland’s corporation tax base, Vale says we will probably benefit from the changes at least in the short-term.

“The increase in the effective tax rate to 15 per cent will only serve to increase our corporate tax take, with no evidence to date of a shift in behaviour following the rate increase announcement,” he says.

“The OECD proposal to shift a portion of taxing rights to market jurisdictions would have an adverse impact on Ireland but there is a long way to go before there is a global consensus on these proposals, with the US in particular looking unlikely to implement such changes in the near future,” Vale says.

“An improvement in global economic conditions should see the trajectory of corporation tax receipts return to positive territory. There are no signs at this point that the windfall element of our corporation tax receipts is in jeopardy,” he says.

The Irish Fiscal Advisory Council (IFAC) publishes its annual assessment of the budget on Thursday. It, too, is expected to downplay the impact of this fall-off in corporate tax revenue while linking it to developments in the pharmaceutical sector.

The budgetary watchdog is also expected to say that corporate tax volatility wouldn’t be a problem if the Government stuck to its recently adopted – but continually broken – 5 per cent spending rule.

The spending rule limits annual increases in Government spending to 5 per cent, viewed as a sustainable rate for the economy. It was adopted in 2021 but has been broken every year since.

In recent reports, Ifac has noted that the Coalition’s revised budgetary plans would see the national spending rule “repeatedly breached” every year out to 2026, with net spending €4 billion higher in 2026 as a result.

Until now, these sorts of spending deviations, including near continual overruns in health, have been facilitated by a bigger and bigger corporate tax pot. But are we now – as Donohoe said recently – at a “moment of change”?


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