S&P: Corporation tax hike will weigh on Irish public finances

Although the longer-term outlook for new foreign direct investment is 'uncertain', the ratings agency believes that 'most' multinationals will not relocate out of Ireland.

Finance minister Paschal Donohoe recently agreed to sign the OECD deal that will see our corporation tax rate rise to 15%.

The overhaul of the way multinationals are taxed around the world will weigh on Ireland's exchequer, should there be no offsetting measures, an S&P report has stated.

The ratings firm stated that the Government has become "increasingly reliant" on the significant amount of tax revenue it raises from large companies. 

The S&P report is the first international assessment since the Government formally dropped its opposition and, along with most of the 140 countries in an OECD talks process, signed up to a 15% tax rate for large companies generating annual sales at a €750m threshold. The 12.5% rate will still apply for smaller firms, however. 

S&P said in its report: "The OECD tax agreement is likely to put pressure on Irish public finances", noting that corporation tax revenues account for 20% of all Government tax revenues, with a small number of big companies accounting for the lion's share of the revenues.  

It also stated that the new tax of 15% will hit the profits of Irish banks, although the increased rate "will not impinge on most of their business customers, who will fall below the revenue threshold".

S&P cites the Government's estimate for a €2bn annual hit to corporation tax receipts in its own assessment.  

As a result, we believe that the implementation of the OECD corporate tax agreement may dent Ireland's Government revenues and fiscal balance in the absence of offsetting budgetary measures," S&P said. 

It said the 15% rate is still much lower than the eurozone average of 21%, and Ireland will still have other competitive advantages to lure foreign investments, even though "the longer-term outlook for new foreign direct investment is more uncertain". 

"Most" multinationals will not relocate head offices out of Ireland, it added. 

Despite the Covid economic storm, corporation tax receipts last year amounted to almost €12bn, as the profits of pharma and computer multinationals based here continued to increase. 

Corporation tax receipts amounted to only €4bn eight years ago.   

Some Irish tax experts believe Government tax revenues will not lose out, and indeed could gain from the OECD overhaul. Others point out that the big countries could return with measures in the future to further dilute the offerings of low corporate tax regimes like Ireland's.