Up to 60% of corporate tax take may be temporary, fiscal council warns

As much as €9 billion or 60 per cent of the Government’s corporate tax take may be “temporary”, meaning it cannot be counted on in the future, the Irish Fiscal Advisory Council (Ifac) has said.

In its latest report, the financial watchdog said the Government’s over-reliance on volatile and vulnerable corporation tax receipts posed a significant threat to the public finances and needed to be reduced as a matter of urgency.

It suggested the Government could unwind this over-reliance by rebuilding the so-called rainy day fund or by paying down debt.

The council estimated that, since 2014, the State has collected some €22 billion in corporation taxes, including €6-€9 billion from last year’s €15 billion total, “beyond what can be explained by the domestic economy”.

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In other words, these receipts do not stem from additional activity in the Irish economy but from additional multinational profits washing through Ireland. The council warned that a substantial portion of the “excess” revenue has now been absorbed into permanent spending, including on health.

“This raises the risk that potential reversals of these receipts in future could lead to sharp increases in borrowing requirements to fund recurrent commitments,” it said.

Corporate tax is now almost on a par with Vat as the second-largest source of revenue for the State. It accounts for almost €1 in every €4 collected in tax.

However, some 50 per cent of the total comes from 10 large multinationals, including tech giants Apple, Microsoft and Google, which have major European bases in Ireland.

While business tax receipts have risen sharply in recent years, they could still be subject to sharp reversals, Ifac said in its report. “They are more volatile than other major taxes; prone to larger forecast errors; concentrated in a handful of companies; and they are exposed to changes in the global tax environment,” it said.

“By funding current spending with corporation tax receipts, the Government risks having to adjust current spending down to set the public finances on a sound footing should receipts fall,” it said.

Ifac chairman Sebastian Barnes warned that “if a couple of major companies at the same time decided to restructure their activities for some reason – because they got taken over or had a better idea of how to organise themselves – this could have a major impact on the Irish economy”.

Changes to the international tax landscape could have a similar impact, he said.

In its report, the council notes that the Government’s estimate for the potential losses owing to international tax changes – originally put at €2 billion – has not been updated in the wake of the agreement to impose a global minimum rate of 15 per cent.

In its recent Stability Programme Update, the Government forecast that corporate tax receipts would continue to grow in the coming years, reaching €18.4 billion by 2025.

Corporation tax growth is expected to moderate after two turbo-charged years of profitability gains, mainly from information and communication technologies (ICT) and pharmaceutical sectors, the Government said. However, it also noted “an almost-certain fall in corporation tax revenue” at some point in the future.

In its latest fiscal assessment report, the council also said the Government faced a delicate balancing act in managing high inflation, protecting poorer households and delivering on major policies.

“Energy and food-price increases have taken inflation to the highest rate in a generation. Further price rises and tightening financial conditions could herald a global downturn,” it said.