LIKE THE LAST barflies ushered out of the pub long past closing time, for a second it looked like Ireland’s party was coming to an end.
After years of surging corporate tax revenues, with each year yielding more billions than the last, the tax take went down in August. Then again in September. Then again in October.
The importance of corporate tax to Ireland has been hammered home plenty, but it’s still hard to overstate. Receipts in the category amounted to €22.6 billion in 2022, a massive rise of about 50% compared to the year before.
Ireland recorded a surplus of €5 billion during the year – but if corporate tax had just been flat, there would have been a €5.5 billion deficit instead. Not ideal for a government with an election looming and a host of major infrastructure problems to deal with.
November is regarded as the most important month for corporate tax returns. After receipts dropped three times in a row, fears were high of an unlucky number four.
Cue damp armpits in government buildings.
But then the November results arrived. And they were good – very good.
Some €5 billion of corporate tax came through in November 2022. Officials likely would have been pretty happy with a repeat performance. Instead, the take was €6.3 billion – far ahead of what had been expected.
Suddenly, again all was right in the world. It brought Ireland’s corporate tax so far in 2023 to about €22 billion and means this year’s take will be higher than the last, as has been the case for every year since what feels like forever.
But what is going on? Why did the tax go down between August and October and why the sudden surge again in November?
Not much detail is published around tax figures, so it’s hard to say exactly, but we have a fair idea. Ireland is massively reliant on a small number of companies for its corporate tax, with just 10 companies accounting for over half of the receipts in 2022.
So if just one of those has a slightly poorer year, it can have a big impact on Ireland’s finances.
That seems to be what happened in the weaker months. For example, the fall in October may have been due to one large pharma company such as Pfizer, often cited as one of the state’s largest taxpayers, reporting a rough trading period. Recent analysis from the Irish Fiscal Advisory Council (IFAC) singled this out as a possible explanation, saying profits in the pharmaceutical sector “are moderating as Covid vaccine demand declines”.
Then the better November figures were likely due to the still-strong performance of tech giants such as Apple and Microsoft, the state’s two biggest taxpayers in previous years.
But despite the scare and repeated warnings about volatility, it looks like Ireland’s corporate tax take will stay strong – at least in the relative short term.
Ireland is where many big companies locate much of their intellectual property (IP) for their European operations. This contributes to much of the money flowing through their Irish operations and much of the tax take for the Irish state.
Much of this IP was moved over almost a decade ago when generous tax breaks were on offer. Those reliefs are due to expire in the coming years, which could lead to even more money for the state.
The other key reason identified is the incoming 15% tax rate, which is being introduced across most developed countries as a way of cracking down on international tax avoidance.
Many of these nations, especially in Europe, resent Ireland for what they see as syphoning off tax which should be going to them, with this being a contributing factor behind the new 15% rate.
Ironically then, it could further help Ireland.
The new 15% rate will come into force from 2024. With a lag on when taxes are paid, the first effects of this are expected in 2026.
Analysis from IFAC estimated that if the higher rate had been in force in 2021, Ireland would have collected an extra €2.2 billion, a pretty significant increase on the €15.3 billion which was actually collected that year. With the state’s corporate tax take much higher now, the benefits could be even greater.
But as has been pointed out many, many, many times, the potential for all of this to change very suddenly is very real.
Just how exposed we could be was again underlined in the IFAC analysis. It found business taxes are more concentrated than ever. Just three companies paid a whopping 43% of Ireland’s total corporate receipts. This compares to 2020, when the three biggest firms accounted for 30% of the total tax take.
In 2023, it took almost 200,000 companies to make up the remaining 57%, with it likely being that seven of the remaining top 10 taxpayers make up a large part of this.
Ireland’s booming corporate taxes are often referred to as a ‘windfall’ – ie, an unexpected gift which is unlikely to repeat itself.
But receipts have consistently risen year on year. The prediction is that this will continue for a few more years at least, with the government forecasting corporate taxes to rise to almost €26 billion by 2026.
There is then a question of when a ‘windfall’ stops being a windfall and is just normality.
But the IFAC analysis around how reliant the state is on a handful of firms and the August to October jitters should serve as a warning.
They both reiterate how the state’s fortunes could change in a flash. A few bad years for a few big companies is all it would take.
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