The State’s reliance on a small number of multinational companies here for corporation tax poses a risk, the Department of Finance’s chief economist has warned.
John McCarthy said that, from a policy perspective, the concentration of corporate tax receipts in a relatively small number of sectors and firms “is, as always, a concern”.
Mr McCarthy was speaking at the Oireachtas Budgetary Oversight Committee meeting on Wednesday.
“The dominance of the multinational sector in our national accounts has been well documented; figures produced by the Revenue Commissioners show the dominance of large firms in corporate tax receipts also,” said Mr McCarthy.
“Last year, the top 10 payers accounted for 37 per cent of total corporate tax receipts. The department has consistently highlighted this concentration as a risk in recent years,” he said.
One-off increase
He said in 2015, corporation tax receipts rose by nearly €2.3 billion, an increase of 50 per cent but it appeared the increase was a one off.
“Figures from the national accounts show an increase in the corporate tax base of a similar magnitude that year. Even after allowing for depreciation, net operating surplus rose by over 30 per cent in 2015,” he said.
“One factor behind the large increase in receipts would appear to be the increased liability arising from the fact that losses accumulated during the crisis are now being exhausted.
“On this basis, it would appear that the increase in corporate tax receipts was a one-off, step-change in the level of receipts,” he said.
Mr McCarthy said corporation tax receipts rose last year “by a more modest 7 per cent”.
He said more research on the State’s reliance on corporate tax receipts is needed.
He said former minister for finance Michael Noonan had asked chairman of the Irish Fiscal Advisory Council Seamus Coffey to undertake a review of the sustainability of receipts.
The report is due to be submitted to the new Minister for Finance, Paschal Donohoe, at the end of this month.
“A key policy failure during the bubble period was to increase expenditure and reduce direct taxation on the basis of revenues that proved transitory,” Mr McCarthy said. “While it is probable that these corporation tax receipts are not in fact transitory, it is prudent to adopt a cautious approach.
“In this regard, the role of the so-called expenditure benchmark is crucial in that it reduces the probability that windfall tax receipts are used to finance expenditure.”
Mr McCarthy said it was crucial that “the medium-term objective of a balanced budget in structural terms” is achieved next year.
He said it was important to build up “fiscal safety buffers” as the economy improved, including a “rainy-day fund”.
“Targeting a debt-to-GDP ratio of 45 per cent from the mid-part of the next decade is an important part of this. As is the so-called ‘rainy day’ fund which is to be established from 2019 onwards, that is once the budget is balanced in structural terms,” Mr McCarthy said.
He said these policy issues were under review and updates on them would appear in the summer economic statement.
