Is the era of runaway corporate tax receipts really over?

What did the Minister for Finance say on corporate tax?

At the Fianna Fáil think-in, Michael McGrath warned that the era of runaway corporate tax receipts was over. Ireland has benefited from an explosion in these receipts in recent years. They have risen from €4 billion in 2015 to a forecast €24 billion this year, greatly benefiting the exchequer and helping Ireland’s budget to move into strong surplus. McGrath chose his words carefully, saying that the rate of growth in this key tax heading was likely to slow, even if the timing of this was unclear. He did not, however, predict lower revenues.

Why is he doing this?

August receipts for corporation tax were down €1 billion on the same month last year, a decline of over a third. There had been an unexpected jump in August 2022 so some decline was anticipated, but the extent of it surprised Government officials. This puts a lot of focus on November, the key month for corporate tax payments. This comes after October’s budget and McGrath will use this in negotiations with Cabinet colleagues, warning that a cautious approach is essential.

So is the news in November likely to be good or bad?

We just don’t know. McGrath also points to the global economic slowdown, which is likely to lower profitability – and thus tax liabilities – in at least some of the big companies. Profits in the pharma sector, for example, were boosted through the Covid-19 pandemic and may fall back. He also referred to a fall-off in exports from Ireland, particularly in the pharma sector. We will see in November whether this knocks on to lower profitability and thus lower tax.

[ Era of runaway increases in Ireland’s corporation tax receipts is over, McGrath says ]

What about the outlook for the next few years?

Since 2015, Ireland has benefited from major corporate restructuring and strong profit growth from some big firms with their international bases to boost tax receipts.

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Looking ahead, there are pluses and minuses. The pluses are that the big companies remain profitable and will pay tax at a higher rate next year – 15 per cent up from 12.5 per cent. Also, as key tax allowances run down more of their profits may be exposed to Irish tax.

The negatives are the international slowdown and unpredictability about the implementation of some other OECD tax changes, or even EU or US reforms, which could affect Ireland negatively. Ireland also remains reliant on the fortunes of a few big companies. A string of agencies have warned that because a significant portion of the payments are based on tax planning, rather than activity undertaken in Ireland, the exchequer is vulnerable to decisions made by a few big firms.

And what does this mean for the Exchequer?

Higher corporate tax has paid a lot of bills in recent years, allowing successive governments to push up spending and still keep the budget moving into surplus. If corporate tax receipts were to stabilise around current levels, it would remove a bit of flexibility but still be a good result, given their massive growth. A sharp fall in corporate taxes would change the outlook more dramatically.