Ireland is unlikely to experience any major fall-off in corporation tax revenue as a result of changes to the way multinationals are taxed and may, contrary to predictions, benefit from the changes, the Economic and Social Research Institute (ESRI) has said. It also predicted that business tax receipts would increase as the capital allowances used by these firms to reduce their tax bills run out.
Despite a raft of warnings about the potential impact of OECD-led reforms on Ireland’s business tax base and a prediction by the Department of Finance that the State could lose up to €2 billion in receipts per year, the institute said the changes were unlikely to have a “negative impact” provided they did not prompt multinationals to relocate out of Ireland.
The OECD’s two-pillar global tax reform agenda seeks to minimise the ability of big corporations to shift profits between jurisdictions while imposing a 15 per cent minimum rate, over and above Ireland’s 12.5 per cent.
Several scenarios
In its latest quarterly analysis, the ESRI assesses the potential sensitivity of Irish corporation tax receipts to the proposed changes under several scenarios based on what the final changes and calculations turn out to be and whether other tax breaks such as R&D tax credits and Ireland’s Knowledge Development Box, for instance, allow firms to reduce their headline liability.
“All of the scenarios result in either an increase or no decline in the CT [corporation tax] intake due to the proposed OECD reforms,” the ESRI analysis concluded. Even if the proposed 15 per cent rate was implemented, this would see “very large” increases in CT receipts here of up to €3 billion on 2020 levels even after the loss to Ireland from the shift in taxable rights away from small countries envisaged under pillar one of the reforms.
Even in the worst-case scenario, which allows for a reduction of 20 per cent in the trading profits for these “top-earning companies” with some withdrawing intellectual property assets from Ireland, corporation tax receipts would still see a small increase.
‘Company-specific risk’
Overall, the ESRI predicted that big multinationals are likely to pay more tax on the back of increased profitability and as capital allowances, which allow companies reduce their tax liability or bill, run down.
Still, it did caution that the potential of big firms moving out of Ireland “while unlikely, exposes the exchequer to idiosyncratic company-specific risk”. It is difficult to assess how likely that scenario was and “policymakers should be aware of the need to remove the concentration risk from the Irish tax take”, the think tank added.
Corporation tax receipts are expected to be in the region of €21 billion this year and €23 billion in 2023, surpassing VAT as the second-largest income stream for the Government. Anxiety around the concentration risk of having just 10 big firms accounting for such a large portion of the tax base prompted Minister for Finance Paschal Donohoe to set aside €2 billion this year and €4 billion next year in a new reserve fund.
In its latest analysis, the ESRI said Government tax revenue was expected to continue to grow for the rest of 2022 and 2023 on the back of increased employment and “hence public debt ratios are expected to continue to decline”.
It said it was expecting the Government to register a surplus of 0.3 per cent in 2022 and a further surplus of 1.2 per cent in 2023. “Both of these forecasts allow for the significant package outlined in Budget 2023 to assist households and businesses with the expected increase in energy costs,” it said.
