#Budget18: Relying on corporate taxes to pay budget bills

The centrepiece of the budget was the unveiling of a hike in commercial property transactions from 2% to 6%. It will raise a lot of money – as much as €376m a year, writes Eamon Quinn

Cranes rise above the Dublin skyline. Picture: RollingNews.ie

In his budget speech, Finance Minister Paschal Donohoe hailed a budget that was making the most of limited resources but all while securing the goal of balancing tax revenues with spending plans.

Testing the truth of these claims could be sooner than many think. Any Finance Minister, never mind one heading into a possible election in the next 12 months, has ever been heard to say anything different about balancing the books.

The centre-piece of the budget was the unveiling of a hike in commercial property transactions from 2% to 6%. It will raise a lot of money – as much as €376m a year.

Mr Donohoe has put a lot on this single tax measure which is supposed to go a very long way to safely fund many more spending commitments in 2018, while keeping the budget within the EU fiscal rules.

This is something that should worry us because the Government is already relying on a thin wedge of tax revenues, namely corporation tax receipts, to finance tax cuts and spending pledges.

Mr Donohoe also announced an immediate cut to 80% in the allowances that firms can deduct for income-earning intangible assets.

This measure was well flagged and recommended by the Seamus Coffey report published in the weeks before the budget.

It will affect mostly large firms, whether Irish or foreign-owned, but is mostly targeted at multinationals which had transferred billions of intangible assets into Ireland in recent years amid the global drive against tax havens led by the OECD.

The reduction in allowances for intangible assets will boost the coffers by €150m a year. Mr Donohoe yesterday also cited the Coffey report for saying that the factors driving the increase in corporation tax receipts in recent years could be sustained over the next few years.

But the debate about corporation tax receipts shows a degree of disconnect between the contents of the budget and the detailed work and analysis that went into its preparation eralier this year.

The surge in corporation tax receipts has been the subject of several reports by watchdogs and by the Department of Finance itself.

As recently as July, in its Summer Economic Statement, the Government compared the pre-bust era and argued that the economy was now much more balanced. Both exports and consumer spending were making contributions to national prosperity in a process which it called the “diversity of growth”.

However, it identified what it terms as “concentration risks”.

Finance Department officials wrote: “In particular, it is noted that Ireland’s industrial base is concentrated in a number of high-tech sectors -- with the result that output and employment remain exposed to firm and sector specific shocks. This concentration is reflected in our corporation tax receipts--where the top 10 taxpayers contribute 37% of this tax.”

The department’s warning didn’t stop there. It noted that “while momentum in the economy remains strong, there are several clouds on the horizon. Perhaps the darkest cloud relates to Brexit and uncertainty attached to the post-exit nature of trading arrangements between the UK and the EU”.

Officials went on to cite the rise of the euro against sterling and the recovery in the eurozone that could bring closer the eventual rise in interest rates by the ECB.

Corporation tax receipts were also the subject of the report by the Comptroller & Auditor General (C&AG) published last month.

It noted that corporation tax receipts accounted for 15% of all tax receipts in 2016.

It showed that company tax receipts, after crashing in 2011 in the financial crisis, had now exceeded even the best year of the balloon years, and set a new record last year, contributing €7.35bn to Government coffers.

“In 2016, corporation tax was paid by over 44,000 taxpayers, but receipts were dominated by a small number of taxpayers, mainly multinational enterprises,” it said, with over a third of corporation tax receipts being paid by the top 10 firms.

“By comparison, around 7,000 companies in the UK - accounting for just under 1% of all companies paying corporation tax - are responsible for the payment of 54% of all corporation tax collected in 2015. The Department of Finance has pointed out that reliance on a small cohort of large corporation taxpayers is a risk that needs to be carefully managed,” the C&AG said.

And it revealed, that of the top 100 companies with the highest taxable income had an effective rate of less than 1% because “of the 13 taxpayers with an effective rate of less than 1% for 2015, they had availed either of double taxation relief to offset Irish corporation tax or of the research and development tax credit or of both”.

The Irish Fiscal Advisory Council (IFAC) also had concerns about relying on corporation taxes. In its June report, the watchdog said: “The Top 10 payers of corporation tax continue to play a substantial role, accounting for 37% of net corporation tax receipts in 2016. High concentration exposes these and overall revenues to volatility risk.

“Corporation tax has only accounted for a greater share of exchequer taxes than it currently does in two previous occasions in the past three decades--in 2002 and 2003. Furthermore, the recent share is far above the average share from 1984 to 2016 and higher than the average during the boom years from 200 to 2008.”

IFAC warned about corporation taxes playing “a disproportionate role” in volatility of Government revenues and that relying on “a small number of firms rises the risk” for this and all tax sources.

The latest budget has done little to lessen the risks identified by the watchdog.

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