Economy
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Has Ireland wasted what may prove to be a temporary corporate tax boom?

Warnings about corporation tax now falling on deaf ears as receipts roll in

We’re now almost totally desensitised to warnings about corporate tax. The inherent danger of having such a big chunk of the State’s income hanging on the fortunes of 10 large firms – they account for nearly 60 per cent of receipts – has been highlighted in report after report, but it’s not obvious anyone is listening anymore.

Not when the numbers are so consistently large and so consistently above profile. The €15.3 billion in corporation tax receipts that flowed into the exchequer last year was higher than what the Government – as recently as October – thought it would be getting in 2025. It was 30 per cent up on the previous year and nearly four times the amount collected in 2014.

Warnings about the highly concentrated, potentially volatile nature of the tax is a difficult sell in the context of such a windfall. Those who tried to puncture the rosy narrative around property prices back in the boom were also dismissed and painted as cranks.

Irish-based subsidiaries of US software giant Microsoft reportedly paid $3 billion (€2.77bn) in corporate tax here last year, approximately one sixth of the total. The switch to working from home during the pandemic accelerated demand for the company's cloud-based computing services and its new Office 365 platform. The scale of its global operation is illustrated by the fact that two Irish-based Microsoft entities each paid a €30 billion dividend to their US parents last year.

Massive dividend

These eye-watering numbers are mirrored in the accounts of Apple, Facebook and Google, which use Ireland as a pitch into Europe, the richest consumer market in the world.

We're reaping a massive tax dividend as a result. But you would be foolish to presume we can bank on it indefinitely. Global foreign direct investment (FDI) morphs and shifts. It's not a question of if we have a reversal but when. The Department of Finance said as much in the Stability Programme Update last week, referring to "an almost-certain fall in corporation tax revenues" somewhere up the line.

Several large multinationals operating in Ireland are understood to be fast-tracking revenue from future years in order to pay their corporation tax liabilities “on today’s terms” in advance of the shift to a minimum global rate of 15 per cent agreed as part of the recent OECD-brokered deal. The frontloading of future tax liabilities could make the falloff in receipts here even steeper.

And then there’s the question about what we’ve got to show for this eight-year tax bonanza. Since 2014 corporation tax has exceeded forecasts by an average of €1.2 billion a year but most of it has been used to plug holes in the health budget. Health overruns have averaged €800 million a year.

In its report in November the Irish Fiscal Advisory Council warned that "many of the health overruns in recent years are long-lasting. For example, the overruns reflected permanent staff increases or current spending elsewhere".

So while the spending overruns in health are permanent, the extra corporation tax receipts are less certain. The council’s concern is that “the reliance on potentially temporary revenue sources poses risks. If revenues like unexpected corporation tax receipts disappear, long-lasting spending overruns would lead to larger government deficits, unless those costs are offset by new tax-raising measures or savings elsewhere.”

Mistake

The big mistake was not putting these super-normal receipts into some sort of rainy day fund. As the Norwegians said of their oil, corporate tax is not due to increased production in any ordinary sense, but from a transformation of wealth. There will always be political pressure to use it to increase domestic spending.

Plans for a fund here never seem to get off the ground precisely because there is always a reason not to save: Brexit, Covid, the cost-of-living squeeze. One of the reasons Norway set up its oil fund was to remove the receipts from the maw of these pressures. Unfortunately much of the additional revenue generated by corporate tax here has now vanished into the budgetary ether.

The looming problem for Government is that the tax tide may go out just as spending pressures ramp up. In a recent submission to the Commission on Taxation and Welfare, the Department of Finance warned of a potential €13 billion hole in the public finances by 2030.

It claimed age-related spending and health service needs may add €7 billion to annual costs, while up to €6 billion in taxes may be lost as the economy shifts away from fossil fuels and with expected decreases in corporation tax.

The Irish economy has grown by more than 50 per cent since 2014 – incidentally when the corporate tax boom started – principally as a result of a spike in investment and employment in the private sector. The surge has created more than 400,000 jobs.

Infrastructure and public services have not kept pace, hence the pressure to spend more. Despite the urgent and unprecedented nature of the current crises, the financing of everyday services and the building of better infrastructure is arguably the biggest fiscal challenge facing the State.