Explainer: What are the risk factors for corporation tax?

The Government keeps saying corporation tax could be volatile, and that it will keep rising

The Budget showed that corporation tax now accounts for one in every four euro of taxation. Department of Finance officials, to emphasise the risk of this reliance, are now publishing separate figures showing what the exchequer finances would look like if what they calculate as the “windfall”, or vulnerable, amount of corporation taxes are netted out. And it’s not pretty. The Budget 2023 documents contained estimates that up to €9 billion of the €20 billion collected from corporate tax this year could be classified as “windfall” — subtracting this would turn an expected €1 billion budget surplus this year into an €8 billion deficit. But at the same time the department is forecasting that the corporate tax take will rise again next year to more than €22 billion.

So what are the risks?

1. A world recession

The international economy is slowing fast and this will hit the profits of the big players. Central Statistics Office data shows that the profitability of big international — largely US — companies with Irish bases increased by over 70 per cent between 2016 and 2020. More profits has meant more tax for the State — a lot more. If the world recession hits profits, then there will be less tax to be paid. The department’s forecast of a further rise in corporate tax next year suggest it does not feel this is an immediate threat, but it could well be a factor beyond next year.

2. Problems in key sectors

A previous Department of Finance analysis pointed out that the vast bulk of the big corporate taxpayers here are in the pharma, medtech and technology sectors. As such, Ireland is vulnerable if there are problems in these sectors. Lower consumer spending across Europe as the energy crisis bites will affect all sectors in time — for now, the pharma/medtech sectors look solid, while there are some signs of retrenchment in parts of the tech sector. This has led to hiring slowing a bit in the Republic, though many firms continue to recruit. It is one to watch in the months ahead.

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3. Problems in key companies

Ten big companies pay half of all corporation tax — and so their corporation taxes alone are responsible for one euro in every eight of total Irish tax revenue. Sources believe that three or four of the ten — led by giants such as Microsoft, Pfizer and Facebook — make up a significant portion of the payments. This leaves Ireland vulnerable to the fortunes of a few small “superstar” companies and to the decisions they make about how to structure their international businesses. A Department of Finance analysis pointed to examples of how, over time, fortunes of really successful companies could wane; for example Blackberry’s share of the mobile phone market fell from 21 per cent in 2009 to zero by 2016.

4. Changes in the rules

The international corporate tax rules are in flux, with countries trying to agree how to implement an OECD deal. Some of the most worrying dangers to the Republic would be averted if the OECD deal was implemented, though it could cost the State some cash. But some kind of partial implementation now seems possible, creating new uncertainties about how countries will frame tax policies and possible international conflict. These could cause problems for Ireland and play into decisions by big players to the State’s disadvantage. For example if some big multinationals moved their intellectual property (IP) — the right to sell products based on the patents, copyrights and so on — out of Ireland, it would be a big negative in the long term.

5. Or might corporation tax just keep in rising?

It might. The big jump in revenues coincided with the movement of IP rights to Ireland after 2015 in response to international tax rules. Many of the direct profits from this change were not taxes due to tax allowances — though a portion will have been in some cases. However this seemed to coincide with the a period of increased profitability and of other functions also moving here. The impact on the Irish exchequer has been extraordinary. And as the capital allowances on the original IP investments run out over the next few years, more profit may be exposed to tax here. This could offset the risks outlined above. A rise in the corporate profit tax rate to 15 per cent could also boost returns. But no one has been able to forecast what will happen up to now so we just don’t know.

Cliff Taylor

Cliff Taylor

Cliff Taylor is an Irish Times writer and Managing Editor