Big business tax haul of €21bn enables Ministers to act from position of strength

Budget 2023: Corporate windfall allows funds to flow into welfare, tax and business support measures

A forecast €21 billion corporation tax haul from big business meant Paschal Donohoe and Michael McGrath came to Budget 2023 from a position of fiscal strength. Whether that record bounty endures is another question.

With more money than ever flowing into the State coffers from multinational companies, this is the jet fuel that enabled the two Ministers to cast money far and wide in welfare, tax and business support measures. Good times for the pharmaceutical, technological and financial sectors herald freedom of manoeuvre for the Coalition that it would not have otherwise.

True, the business-friendly corporation tax regime has long been a target for critics claiming it is too advantageous for legions of large international companies that make Ireland their European hub. But from this flows the Government’s ability to spend as households and business grapple with grave cost-of-living increases.

The danger is that over-reliance on a small coterie of very big business taxpayers leaves the State vulnerable to any downturn in their profit, on which corporation tax is levied, or any strategic change in the boardroom that would lead such companies to curtail any of their Irish activities.

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The lesson of 2022 is that conditions can change drastically. The very scale of the budget package reflects the acute strain bearing down on the economy from the inflation shock, soaring energy charges and rising interest rates. Although prices were already on a destabilising upward trajectory as the economy reopened after Covid, pressure intensified markedly once Russian president Vladimir Putin started to wage war on Ukraine.

Layer of vulnerability

That these events illustrate how quickly the dynamic can fundamentally change in a small, open economy such as the Republic’s is obvious. But there are implications here when it comes to the corporation tax haul, which is but one part of the double layer of vulnerability that arises from high dependence on multinationals. The other is the impact on the income tax base of high earners, many of them employed in such companies.

As the Department of Finance has warned repeatedly for years, a change of fortunes on either front would be very costly to the exchequer.

“In the event of a shock to the multinational sector, this would also result in a substantial loss to income tax receipts,” said the department in a recent report on taxation.

“As such, the concentration risk — where a relatively large share of income and corporate tax receipts arises in large multinational firms — is a significant vulnerability for the public finances.”

Budget 2023: What it means for businesses and taxpayers

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The “reliance on potentially transient, volatile revenues” was a key risk to the public finances, it added.

The department has been ventilating anxiety about the rising dependence on corporation tax since such revenues started rising in 2015 as recovery took hold after the last crisis. For all the warnings, the figures have continued to climb. Corporation tax comprised 11 per cent of all tax revenues in 2014. By 2021 the proportion had doubled to 22 per cent.

The latest official forecast, published on Saturday, suggests corporation tax revenue is on track to reach €21.05 billion this year. That represents a huge jump from €15.3 billion in 2021, itself a record that was 30 per cent higher than 2020 receipts and more than 40 per cent higher than pre-pandemic levels.

Revenue Commissioners’ data show that only 10 taxpayers paid 53 per cent of all corporation tax receipts in 2021. Ten years previously, the figure was closer to one-third. “This means that last year €1 in every €8 collected by the State is sourced from a very small number of highly profitable firms,” said the department. Beyond the 10 largest payers, the top 100 most profitable firms accounted for nearly €80 for every €100 of corporate tax received by the State.

All of this explains why a certain trepidation surrounds the corporation tax windfall. It is one thing for Ministers to spend money as it flows in, quite another to meet commitments if a slowdown sets in and funds evaporate.

Arthur Beesley

Arthur Beesley

Arthur Beesley is Current Affairs Editor of The Irish Times