Risks associated with downturns are almost always a part of the financial predictions for Ireland’s economy. Such risks come with the territory, given that Ireland is a small, international economy that is significantly dependent on overseas investment. The key exception seems to be the corporate tax, which has been consistently exceeding expectations.
Contrary to numerous financial warnings, there has been a significant increase in the corporate tax revenue in the past years, rocketing from €4 billion a decade ago to over €23 billion last year. This has put the Government in a fairly advantageous position as they can simultaneously manage a dispensing budget, a robust surplus, and reserve many billions in a new sovereign wealth fund.
During regular economic cycles, these policy decisions would have demanded substantial, even insurmountable, monetary trade-offs. The popular saying by Harold Macmillan about Britons never having had it so good could readily apply to the Coalition.
While their counterparts in Europe are tackling issues connected to pandemic-hit budgets and skyrocketing public debt, Ireland is contemplating where to invest its wealth. Due to the lower than expected corporate tax receipts during the initial 2021 quarter, the Department of Finance had to prepare for a possible decline. This situation was expected to worsen in May, with predictions of decreased taxable profits at Pfizer, one of the world’s largest pharmaceutical companies, which was restructuring.
However, as it turned out, the receipts surged, generating €3.6 billion in May alone. This represented an increase of 30 percent or €836 million from May of the previous year. This left the government on track to reach its year-end prediction of €24.5 billion.
An anonymous source stated that an above-expected payment from Microsoft might have offset the deficit from Pfizer, though the actual details are only known by the Revenue. The bulk of the big tech receipts, excluding Apple, are usually received in June, so a more complete picture will be available next month.
ESRI economist Kieran McQuinn, during a recent conference, highlighted that this trend does not mean a sudden negative impact is out of the question. Drawing parallels with the housing prices two decades ago, he stated, “Each year there were assertions that the prices couldn’t continue to rise, and yet for a time they did, until they eventually didn’t.”
There are several reasons to expect an increase in revenues, even at this advanced stage, rather than a decrease. The enforcement of a new 15% minimum tax rate on major multinational businesses under the rules set out by the Organisation for Economic Co-operation and Development (OECD) this year is forecasted to bolster government funds significantly.
Although corporations will not officially owe the augmented rate until 2026, it will retrospectively take effect from 2024; implying a potential surge in income in 2026. Crucially, this is not an increase from Ireland’s current corporate tax rate of 12.5% to 15% as it may initially seem. The amended OECD regulations stipulate that this 15% constitutes a minimum effective rate, resulting in a bigger jump as most firms pay less than the headline rate.
Another factor affecting revenues is the large scale domestication of intellectual property after 2015, facilitated by sizeable capital allowances that will mostly expire in the latter half of this decade. As a result, the Irish treasury is set to gain additional tax income.
Barring unforeseen circumstances, the concentration risk posed by a small number of firms contributing a large percentage of income, leads to expectations that Ireland’s corporate tax revenue will continue on an upward trend in the mid-term. One source has suggested the possibility of it reaching €30 billion by 2030.
The perceived risk in Ireland’s case with respect to the OECD-led reforms has always been tied to Pillar One of the process, which aims to redistribute taxing rights in favour of nations with a significant economic presence. However, due to existing political complications, despite the potential loss of €2 billion in existing revenues, it’s contended that the benefits of the new minimum rate far outweigh this. As a result, some finance department insiders believe Ireland accepting a greater impact from OCED’s Pillar One reforms may divert additional scrutiny.
The lucrative tax regime in Ireland hasn’t escaped attention. It’s caused previous friction with both Brussels and Washington. With the UK, widely regarded as Ireland’s primary financial partner in Europe, gone, navigation through this field becomes more challenging. There’s a faction within the government who prefer to go unnoticed regarding taxes, but it’s hard to maintain a low profile when your success is so evident.