Tom McDonnell: Corporate tax receipts under scrutiny

Tax receipts from pharma and ICT sectors which are underperforming relative to recent years may have implications for future Government revenues

Ireland’s corporation tax receipts reached an eye-watering €22.6bn in 2022.

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 and high-value employment from the US. 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 brought negative attention crashing down on Ireland. Such schemes have been ended although opportunities to minimise 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 distorted Ireland's GDP figures to such an extent that US economists dubbed the official Irish figures as leprechaun economics.

Previous attempts to reform global corporation tax rules via the OECD’s Base Erosion and Profit Shifting project, or Beps, actually benefited Ireland with very significant on-shoring of assets from full-fat tax havens in the Caribbean and other locations to countries with low tax rates, but which had some real economic activity and employment. These assets and the profits attributed to them had helped boost corporation tax receipts.

The OECD’s second attempt has two reform pillars: Pillar 2 established a global minimum corporate tax rate, at 15%, and Pillar 1 focused on the allocation of taxing rights between countries. Critics of the OECD process argue that it will be ineffective at tackling aggressive tax avoidance. Many global tax campaigners argue that an OECD-led 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 US seems unlikely to ratify the two pillars, at least under the current Congress, which effectively neuters the whole process.

Ireland’s corporation tax receipts reached an eye-watering €22.6bn in 2022. The receipts which had almost doubled in two years had brought in only €4bn in 2010. They are also highly concentrated: €13bn of the receipts last year came from the top 10 companies, and most receipts came from just two sectors, pharma and ICT. 

The extreme concentration of the tax base poses is an obvious 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 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 €11bn of the receipts are ‘windfall’ in nature. 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 the 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?

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Lower receipts in recent months compared with last year have heightened scrutiny on the corporation tax revenues. The pharma and ICT sectors are underperforming relative to recent years. This may have implications for future receipts. The Government’s move to a 15% tax rate may actually increase receipts in future years although a race to the bottom in other countries could increase competitive pressures. 

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. Any such measure would lead to a fall in corporation tax receipts to the Irish exchequer, 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 of countries could choose to adopt it. 

It's clear that the challenges and battles over global corporate tax avoidance will continue. Ireland would be wise to assume its current corporation tax yield is always contingent and temporary and to plan accordingly. 

Tom McDonnell is co-director of the Nevin Economic Research Institution, or Neri