Despite the warnings, Ireland’s tax boom is getting boomier

UK chancellor Jeremy Hunt effectively buried Britain’s failed “Trussonomics” experiment on Thursday by cutting spending and raising taxes. Even with the U-turn, the UK government must borrow at rates that are on average one percentage point higher than those charged to the Irish Government. Put another way, creditors view Ireland as a safer bet than the UK.

We could exhaust ourselves examining the reasons for this, but there’s one simple explanation: the UK is a fiscal mess while Ireland is swimming in corporation tax receipts. The latest edition of the US trade journal Tax Notes contains an assessment of Ireland’s corporate tax trajectory and what’s driving it.

It notes that between 2009 and end-2014, corporate tax receipts here remained “in a narrow range” between €3.9 billion and €4.6 billion, averaging €4.1 billion for the six-year period. Since then, receipts have skyrocketed. The total this year will be six times the pre-2014 average, approximately €26 billion, it claims. This is €5 billion more than the Department of Finance’s own €21 billion forecast.

“When data for the important month of November is published in early December, we’ll know with a much higher degree of certainty whether 2022 corporate tax receipts are on track to reach our projected total of €26 billion,” the report says.

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The disparity between the two forecasts is something of a head-scratcher. Recent noises from the department suggest its projection might be on the low side and the final tally might be closer to €22 billion, but nowhere near €26 billion. It could be that the Tax Notes analysis is overestimating by applying the 70 per cent growth rate seen in the January-September period on a pro-rata basis for the year as a whole, which gets you to €26 billion.

Either way, the Government tax coffers are bulging.

If you want to know how the Government is managing to fund a near-record €11 billion budget giveaway, run a budget surplus and place €2 billion in a rainy-day fund all at the same time, while other countries are floundering financially in the wake of the large outlays on Covid and a sharp hike in borrowing costs, look no further than corporate tax.

However, the main premise of the Tax Notes analysis is not the size of the windfall but what lies behind it. For years, analysts have linked the surge to the on-shoring of intellectual property (IP) assets here in the wake of a clampdown on multinational tax avoidance and changes to US tax law.

The report dismisses that thesis, noting that companies have used generous capital allowances to write down the cost of these transfers. The real driver, it claims, is corporate profitability. It shows that between 2014 and 2021, changes in the level of corporate tax receipts correlate almost exactly “with changes in the profits of IP-rich tech and pharmaceutical multinationals in Ireland”.

Between 2015 and 2021, Ireland’s corporate tax base grew by approximately 125 per cent, from €6.87 billion to €15.3 billion. Over the same period, the pretax profits of 33 large US multinationals with operations in Ireland grew by the same amount (125 per cent).

“The close temporal relationship in the movement between US multinational worldwide profit and Irish tax receipts through 2021 can be interpreted as more than a coincidence: rising corporate profits explain the rising Irish tax receipts,” it concludes.

This temporal relationship, however, breaks down in 2022 as the profits of US multinationals with operations in Ireland have – in the main – remained stable or declined while corporate tax receipts have jumped another 70 per cent.

The report offers what it describes as two scraps of information by way of explanation. According to the Companies Registration Office, Apple Operations International, the Irish-based holding company for nearly all of Apple’s non-US subsidiary companies, reported a significant increase in income but that deductions for capital allowances did not keep pace, meaning Apple’s tax liability here went up.

Another clue is that the surge this year was particularly pronounced in March and August. Apple is one of a few companies with a fiscal year ending in September and, under Irish tax rules, corporate payments for a company with a fiscal year ending in September are due in March and August. Not for the first time, Apple appears to be at the centre of Ireland’s corporate tax narrative.

The Tax Notes report was penned just as the tech sector crunch was emerging, and it seems reasonable to assume that this will negatively impact receipts here.

On the dilemma of what to do with greater-than-expected receipts, a dilemma faced not just by Ireland but by several US states, it says: “The temptation to use excess revenue on permanent programmes should be repressed. Caution requires these unexpected funds to be channelled into rainy-day funds and capital projects.”

While it highlights the risks – US multinationals may adopt new planning strategies “that leave Ireland out in the cold” – it suggests “those worries may never materialise” and that the tax paid by big multinationals could increase as capital allowances end. In other words, the boom could get boomier.