Corporation tax windfall equivalent to €5,000 for every man, woman and child in the State

In the 12 months to the end of March this year, corporation tax has generated €24 billion. On per capita basis, that’s roughly €5,000 for every man, woman and child in the country. It’s also a figure that could pay for the construction of 96,000 social homes.

Despite repeated warnings about the potential once-off nature of these receipts, the concentration risk of having so few firms paying the bulk of the money and the inherent volatility of multinational earnings, which are plugged into an increasingly volatile global economy, receipts just keep going up. Just the other day, The Irish Times reported that two of Microsoft’s main Irish subsidiaries had between them paid about €2.7 billion in corporation tax last year.

In the first three months of this year, the tax generated €3.2 billion, a whopping 71 per cent increase on the same period last year. And remember last year’s figures marked a step change on the previous year with full-year receipts up by 50 per cent to a record €22.6 billion.

Corporation tax receipts for March alone amounted to €2.6 billion, €1 billion higher than the same month last year. Most of the receipts tend to flow in later in the year (June and November are big months). The bulge in March is significant and may be linked to Apple.

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The iPhone maker is one of a few companies with a fiscal year ending in September. Under Irish tax rules, corporate payments for a company with a fiscal year ending in September are due in March and August.

[ Microsoft sends ‘non-taxable’ €98 billion to US via little-known Irish firm ]

Apple Operations International, the Irish-based holding company for nearly all of Apple’s non-US subsidiary companies, has reported a significant increase in income in recent years, one which capital allowances have not kept pace with, meaning the company’s liability here has gone up considerably.

The tech crunch that has resulted in job losses globally has yet to hit Ireland’s tax base, but the current payments are probably based on activity conducted prior to the slowdown.

Between 2009 and end-2014, corporate tax receipts remained in a narrow range between €3.9 billion and €4.6 billion, averaging €4.1 billion for the six-year period. Since then, receipts have skyrocketed. The total this year will be close to six times the pre-2014 average. If ever there was a golden goose at the heart of the economy, it’s corporate tax.

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When we think of tax we typically think of money being withdrawn from the economy, but as economist Seamus Coffey told Newstalk Radio last week, corporate tax “is an injection” as the money is coming primarily from multinationals on the back of profits made elsewhere.

No one seems to have a handle on why it has surged to these levels, nor where the peak will be. “Given that we can’t fully explain why it has gone up, we don’t know whether it will stay up,” Mr Coffey said.

Increased multinational profitability is certainly part of the equation. Between 2015 and 2021, Ireland’s corporate tax base grew by about 125 per cent, from €6.87 billion to €15.3 billion. Over the same period, the pretax profits of 33 large US multinationals with operations in Ireland grew by the same amount (125 per cent).

[ Apple reports €63.5bn profit at main Irish subsidiary ]

The onshoring of intellectual property (IP) assets is another factor. Apple on-shored a big chunk of IP in Ireland in 2014-2015 amid a global outcry over multinational tax avoidance. Changes to the tax code in the US and in Ireland have also been cited as drivers. The exhaustion of capital allowances as per the Apple example is likely to have fuelled some of the recent surge.

The Department of Finance estimates that some €10 billion of last year’s haul is “windfall”, meaning it is potentially temporary – in other words dangerous to rely on or to tie in to day-to-day spending. It comes to this conclusion by assuming multinational profits grow at the same rate as the profits of indigenous firms and working backwards. The Irish Fiscal Advisory Council (Ifac) comes with up the same estimate through a different method. At best, both are stabs in the dark. We won’t know what the windfall element is until we reach some stable level.

We’ve been talking about a corporate tax windfall for eight years (since 2015 when the first big uptick in receipts materialised), but it’s only now the Government is coming up with a sensible plan for what to do with the excess.

Department of Finance officials are working on “a proposal for a long-term savings vehicle”, with Minister for Finance Michael McGrath expected to bring plans before Cabinet in the coming weeks.

The idea is to create a sovereign wealth fund possibly along the lines of the former National Pensions Reserve Fund, which would be actively managed to generate wealth for the State.

Up until now, the Government has been content to place some of the excess receipts in a rainy-day fund (some €6 billion has already been transferred to the National Reserve Fund). But this has been criticised as ad hoc and unstrategic.

[ Two Microsoft Irish subsidiaries paid more than €2.7bn in corporate tax last year ]

The Ifac wants the Government to establish a separate State pension fund, possibly funded though a 3.5 per cent hike in Pay Related Social Insurance (PRSI) to fund the State’s growing pension liability.

The Government’s decision not to increase the State pension age has added to the pensions time-bomb at the heart of the public finances. The Republic’s ageing population is expected to cost the exchequer an additional €7 billion-€8 billion in “standstill” costs by 2030.

It’s not clear – at this stage – whether the Government’s savings vehicle would incorporate Ifac’s proposals or be separate. Only time will tell whether this is a short-term windfall or a permanent boost to the State’s coffers.