Government ministers had a nervous weekend. Everyone knew that the November corporation tax figures, due last Tuesday, would be an important moment in the life of the Coalition. After three weak months, fears of a further decline in November – when most big companies pay a large amount of their tax for the year – were in the air. By Tuesday morning, a few hours before the figures were published, there was a palpable air of relief around and it was clear that the worst had been avoided. But the big jump in the figures – to €6.3 billion this November from €5 billion in the same month last year – was still striking. After an autumn wobble, the public finances were suddenly back on track.
So what exactly happened? How did this all come as a surprise?
Tax affairs of companies are confidential between them and the Revenue. And even then the Revenue has to wait each year to see what is submitted, even if there is some toing and froing beforehand. Add this to the fact that perhaps 40 per cent of corporate tax revenues comes from just three companies – and more than half from the top 10 – and you can see that the whole edifice is based on narrow foundations. Unpredictable swings in payments from one or two big companies can make a big difference.
In hindsight, the tax affairs of two companies seem to have been responsible for the fall-off in earlier months – though of course we are speculating here based on the different times at which some big firms make their payments. Apple has been reorganising parts of its operation and this was one hit to the figures. A fall-off in tax payments from Pfizer, which had made huge profits during Covid-19, was another negative, affecting the October data.
Corporation tax should come in roughly on target this year – and that despite some overspending, the overall public finances should be on target too
Tax experts had felt similar trends might be affecting other companies. But it appears not. Profits in the tech sector are bouncing back after the cutbacks during 2022, and pharma trends seem generally solid. Technical factors relating to tax reliefs running out may also have been a factor – meaning more profit was exposed to tax. It all combined to give a strong outcome. And this means that corporation tax should come in roughly on target this year – and that despite some overspending, the overall public finances should be on target too.
Surely we can see from the activities of these companies in Ireland how much tax they should pay?
Actually, no. A key reason why big firms such as Microsoft, Pfizer, Apple, Google and so on pay so much tax here is that they route most of the profits they make outside the US through international headquarters in Ireland. And the Irish exchequer gets a slice of tax from this. This in turn is not popular in other countries, with leading French economist Thomas Piketty accusing Ireland of “siphoning the tax base of others” – in other words, collecting taxes that should be paid in other countries.
We can get some indication of multinational tax payment trends from the international results companies publish for their investors. But they do not yet break down in these reports what tax they pay in different countries – though new obligations in the years ahead will make them do so to some extent. So Irish tax payments can be altered by, say, the fortunes of the latest iPhone, the success of Microsoft in selling its new AI-based products around the world, or the production schedule of Pfizer’s latest drug.
It is also influenced by the corporate structures these companies use. Corporate reorganisations since 2015 – when changes in international tax rules led to big changes – have been hugely to Ireland’s benefit. Since then, Ireland’s corporate tax take has risen from €6.8 billion annually to €23.5 billion. Even since before the pandemic in 2019, the corporate tax take has doubled, an extraordinary growth rate.
Where has all the money gone to?
The annual overperformance of corporation tax has left the Government with significant leeway over the past few years – which it needed through the pandemic and the cost-of-living crisis. Ireland has spent some of the cash and saved some.
The surge of revenue has allowed the Government to engage in what the Fiscal Advisory Council called an “everything now” approach of ramping up investment, increasing day-to-day spending and cutting tax all at the same time. The normal trade-offs – the need to pay for higher spending via increased tax – have been put on hold. It has also meant the budget has moved significantly into surplus and that cash has been put aside for future years, with plans to put more in these long-term funds in the years ahead.
The surge in State spending, which higher corporate tax revenues have helped to pay, for is sizeable. Since 2015, annual corporate tax revenues have gone up by around €16 billion. To take just one example from the spending side, health spending over the same period has risen by more than €9 billion – and it will be a bit more when the final sums for 2023 are added up. The Irish State has grown – adding €30 billion in total annual spending (including a few billion counted as one-off spending) since 2019 alone. And corporation tax, up €12.5 billion since 2019, has helped pay the bills.
What does it mean for next year?
The stronger trends in November give some confidence about the economic outlook for next year. However, a point worth noting now is that despite the strong November revenues, corporation tax will just meet target this year, rather than soaring ahead again. With domestic economic growth slowing and spending pressures remaining, the budget in October next year may not afford the opportunity of another €14 billion package, as we saw this year.
Next October is a long way off, of course. But for all the parties polishing their election manifestos, this week’s figures are important. They signal that it is ‘game on’ in terms of promising goodies to the electorate
There will still, on current trends, be cash to spare, but if the Coalition lasts until next autumn, Budget 2025 will still be an intensely difficult exercise to get right. Already, the fiscal council, the budget watchdog, is yapping at the Government’s heels, saying it risks repeating the mistakes of the past by spending and cutting taxes by too much in the good times, risking trouble when the economy slows. Minister for Finance Michael McGrath has fired back, saying the Government got the balance right, giving people some more cash in their pockets while still keeping the exchequer finances in the black and putting money aside for the future.
If it does make the next budget, the Coalition will have to decide how to make its pitch to the electorate. Assuming the figures remain okay, more modest tax reductions can be anticipated, alongside increased spending on welfare, housing, health and education. The real question will come, however, over whether the Coalition wants to extend the once-off supports such as energy credits, which the fiscal council criticised for not being targeted.
Next October is a long way off, of course. But for all the parties polishing their election manifestos, this week’s figures are important. They signal that it is “game on” in terms of promising goodies to the electorate and more investment in the years ahead. A bad set of figures would have raised genuine fears that the magic money tree, which has supported the exchequer over recent years, was wilting. In the event, the real message of recent months may be a more subtle one – that huge volatility and swings may happen in this tax heading, even if the level of receipts remains well ahead of pre-pandemic levels. Ireland has bet heavily on tech and pharma and is reaping the rewards, but also running the risks.