State may see another surge in corporate tax from new 15% rate, says Ifac

Irish Fiscal Advisory Council chairman casts doubt on Government’s €2 billion loss forecast

Irish Fiscal Advisory council chairman Sebastian Barnes.

Irish Fiscal Advisory council chairman Sebastian Barnes.

 

Ireland may benefit from another surge in corporation tax despite having to give up its prized 12.5 per cent rate, the chairman of the Irish Fiscal Advisory Council (Ifac) has said.

Instead of losing €2 billion a year as the Government has forecast, Ireland could benefit directly from the recent global agreement on tax, which will involve a new minimum rate of 15 per cent, Ifac chairman Sebastian Barnes.

“If the number of companies doesn’t change very much and the base stays the same you could be looking at a big increase in revenue,” he told the Oireachtas Committee on Budgetary Oversight.

Receipts

Mr Barnes also noted that receipts from the business tax were being driven by increased levels of profitability, which has continued during the pandemic.

He was responding to a question from Sinn Féin finance spokesman Pearse Doherty, who queried whether the Government’s forecast for a €2 billion a year loss was fit for purpose.

The estimate was drummed up by the Department of Finance two years ago when the OECD forged agreement on the reallocation of taxing rights in favour of bigger countries.

However, it was not changed in the wake of agreement on a new minimum rate of 15 per cent, which effectively does away with Ireland’s prized 12.5 per cent rate.

According to the latest exchequer returns, corporation tax receipts are now running at €13.5 billion for the year, €2.8 billion or 25.8 per cent above profile, and are on course to hit a record €14 billion this year.

Even with the predicted loss, the department expects revenue from the business tax to keep on rising to €15 billion by 2025.

In his opening address, Mr Barnes warned that the Government’s climate and healthcare plans will be severely curtailed without tax increases or spending cuts elsewhere.

He called on the Government to clarify how major commitments around Sláintecare – the Government’s main healthcare reform plan – and climate actions fit into its budgetary plans.

Sláintecare costings have not been updated since 2017 while there is no estimate of the budgetary cost of implementing the Climate Action Plan, Mr Barnes said.

“The space left over for additional current spending implied by the Government’s plans will be limited in the years ahead unless there are offsetting spending cuts elsewhere or tax increases,” he told the committee.

The Government’s budgetary forecasts out to 2025 suggest it will have approximately €1.6 billion per year for additional spending measures over and above already-committed increases in it current and capital budgets.

Services

The council estimates that about €1.1 billion of this will be needed just to maintain the existing level of services and benefits, what it calls the “stand-still costs”. That leaves just €500 million for climate change and healthcare reform.

“Any additional spending beyond this level would require either tax increases or reduced spending in other areas to be consistent with the Government’s strategy,” Mr Barnes said.

In his address, he commended the Government for sticking to its planned €4.7 billion budgetary package for 2022.

He also praised the Government for supplying more credible spending forecasts for the general running of services into the future; and for introducing a spending rule that seeks to limit core spending increases to an average of 5 per cent annually.

He, however, cautioned the Government’s overreliance on corporation tax receipts to fund public services should be addressed, noting one-in-five euros of tax receipts were from corporation tax in 2020.

“To deal with these risks, the council assesses that the Government should allocate corporation tax receipts above what is forecast for a given year to the Rainy Day Fund,” he said.

“This would potentially include any increase due to the rise in the minimum corporation tax rate to 15 per cent,” he said.