Will soaring corporate tax revenues save the Irish exchequer in 2020?

Tax payments by Ireland’s businesses were way ahead of schedule in May – again.

The story of the last few years, of returns boosted by massive payments from a small number of big companies is continuing, despite expectations that it might start to fade.

It was the main reason why taxes in the month of May were slightly ahead of last year, despite a collapse in VAT and excise duties.

Crucial tax figures for June will give a better pointer. But recent figures from the Central Statistics Office also give us important information – a key factor behind the tax surge, the extraordinary influx of intellectual property (IP) investment into Ireland, has continued.

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More tax will flow into the exchequer in the years ahead as a result.In a tweet Brad Setser, a senior fellow at the Centre for Foreign Relations, a US think tank, commented: " Basically, the US did a massive tax reform, and it is now clear who won – Ireland . . ." Let's look at why.

1. The figures

Corporation tax of €2.56 billion was collected in May, €1.224 billion ahead of last year . For the year to date this leaves revenues from this year at €3.466 billion, €945 million ahead of the target set when the Department revised the figures in April, after Covid-19 hit.

The overshoot, the department said, resulted from “large payments from a small number of firms.”

"The May figures "were surprising good but related mainly to companies with a June 2020 year end – in other words with only a small portion of their year affected by Covid, " said Peter Vale, head of international tax at Grant Thornton.

“June figures – which will contain the first instalment of payment for the majority of firms with a December 2020 year end – will thus be a crucial indicator.”

There is a lot at stake. Corporate taxes make up around one euro in every five collected in tax – and another big overshoot this year could make the official predictions of a €10 billion drop in tax revenue for 2020 look too pessimistic.

It is too early to call it. The acid test will come late in the year, said Feargal O'Rourke, managing partner at PwC, when final corporate tax payments are made in November and vital self-employed tax returns come in.

The self-employed returns, with taxpayers having the option to base payments on 2020 expected income – certain to be way down for many – could be vulnerable. The other big tax collector –VAT – suffered a 35 per cent fall in May on the same month last year and revenues will continue to suffer here, too.

2. The IP story

Intellectual property (IP) is the brainpower behind big products – the patents, copyrights, trademarks and licenses behind the development, design and marketing of products like the iPhone, services like those provided by Facebook and Google or new drugs from the pharma sector.

It has been at the heart of the global chain of tax avoidance by big multinationals for years. Now multinational structures are changing – and Ireland is again at the centre of this story.

Under the old regime, the one facilitated by the double Irish tax scheme, companies located their IP in offshore tax havens like Bermuda and the Cayman Islands, or , in the case of Apple, had a company which had no tax residency at all.

By charging their international operations for the use of their IP, they swept billions in the resulting royalty payments through their international headquarters, often based in Ireland – using double Irish structures – and then out to the tax haven companies.

There the cash could generally rest untaxed unless they decided to return it to the US.

Two things have changed this. First international tax changes agreed by the OECD after a 2015 report ( under the Base Erosion and Profit Shifting or BEPS programme ) led to changes in tax laws and made it much more difficult for big multinationals to use brass plate companies in offshore tax havens to stash profits. Ireland announced the abolition of the double-Irish tax scheme, based on moving money through Ireland and out to tax havens around this time.

It ended for new entrants on January 1,2015 but companies already using it were given until the end of this year to phase it out.

The second key factor was a change in US tax law at the end of 2017 which exposed worldwide income of the big US players to a minimum level of tax and led to a sweeping changes in the taxation of IP.

3. IP moves

Multinationals had to decide how to restructure their operations in the light of the OECD moves – and more recently the US changes. Many of the companies with existing operations in Ireland decided to moved the IP for their international operations to this country.

These companies have a significant presence on the ground here – and a key part of the new OECD-led rules is that IP must be located where the companies have substantial operations.

More recently ,some uncertainty about the future of US tax rules also seems to have pushed firms to use Ireland, along with the fact that for many there remains some savings in locating IP offshore and possibly making a small top-up tax payment in the US having paid taxes here, as compared to returning their IP to the US.

This means that the massive payments relating to the use of IP now come to Ireland as the assets are “ housed” here – the money no longer moves through here and out to offshore havens. Because the companies can claim tax allowances on the massive initial investment in bringing the IP here, much of this money is sheltered from tax for a period.

The allowances can be used for up to 15 years, but generally are used for between seven and ten years. In some cases structures involving inter company loans to fund the initial “investment” in the IP here appear to future reduce the tax bill.

Despite the allowances, the scale of the assets moved here and the associated rise in activity is boosting tax revenue.

For the earlier IP moves here, which came in 2015 and 2016, all profits can be sheltered by allowances, though in some cases this may not be the best strategy for the company.

For IP moved here after October 11th,2017, a maximum of 80 per cent of the resulting trading income can be sheltered in any year. In some cases associated investments are also believed to have led to more profits being declared in Ireland. Whatever the precise reasons, corporation tax revenues here are benefiting significantly, as we have seen in recent years.

What Setser dubbed the “ Irish-shoring” on US IP assets came in two waves, one in 2015 and 2016 – including Apple’s move of its IP probably valued at over €200 billion – and a second since late 2018. The companies involved are in all the main sectors here where US companies operate – pharma, tech, hardware, software, digital services and medical devices.

O’Rourke of PwC says that some companies waited until closer to the end of the phase out period for the double Irish structure at the end of this year before moving– but that the rate of movement of IP into Ireland will now slow sharply. Companies have made up their mind on their future structures.

The latest CSO figures for national income and the balance of payments show that a surge of IP moves into Ireland in 2019 as the second wave took off continued in the first quarter of 2020. While much of the exact data is not released for confidentiality reasons, the CSO said that total investment in the economy of over €50 billion in the quarter was boosted by IP moves.

The IP moves also show up in import data – service imports rose by €33 billion to €88 billion. This new wave should support corporate tax payments this year and next.

These big moves distort the Irish investment and import data, but largely net off in terms of GDP calculations. Setser pointed out in his tweets that the scale of moves involved here, around 1 per cent of euro zone GDP , means that these have a significant impact on the breakdown of euro data for services and investment.

4. The long-term impact

For Ireland, the location of IP here should support tax revenue in the years ahead , according to Vale of Grant Thornton. When capital allowances run out, then income earned by this IP should be exposed to tax – though in some cases companies may develop newer IP for fresh products and services too, leading to more investment and more allowances.

How this plays out against other moves ,which may hit Ireland in terms of international tax reform, is hard to call. OECD members are discussing moves to move some taxing rights to countries where major multinationals sell their products and also discussing a minimum corporate tax rate.

Both of these could damage Ireland, as could EU moves to restart talks on a common EU corporate tax base, especially if it collects tax centrally ( is consolidated, in the jargon.) If the flow of IP into Ireland further boosts cororpoate taxes, the controversy is set to grow.

But for this year, fears about Ireland’s over-reliance on corporation tax will be put to one side. Put simply, we need the money.