Report warns of ‘potential over-reliance’ on business tax receipts

Foreign multinationals accounted for 82 per cent of corporation tax receipts last year, according to a new report by the Department of Finance. The report warns that the State's "potential over-reliance" on business tax receipts poses a "significant risk" to the public finances.

It noted that corporation tax generated a record €11.8 billion for the exchequer in 2020, up 70 per cent on five years ago, and accounted for 20 per cent of the Government’s total tax take.

The top 10 largest firms accounted for just over half the revenue generated, while 82 per cent came from foreign multinationals, the report said.

“The potential for over-reliance on excess or windfall corporation tax revenue has been identified as a risk to the stability of the public finances since the period of extended growth began five years ago,” it said.

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Although there was high growth in business tax receipts last year, the end-year figure was some €500 million below the revised forecast published in October’s budget, the report said.

“This arose from a larger-than-anticipated shortfall in October, which, although not replicated in the remaining months of the year, served to highlight the volatility and unpredictability inherent in corporation tax receipts, which are dominated by a handful of large, highly profitable multinational firms,” it said.

“Corporation tax revenues provided a welcome boost to the public finances, but simultaneously highlighted the risks associated with the concentration of receipts amongst a relatively small number of large foreign-owned payers,” it said.

Tax reforms

It also warned that international tax reforms could reduce Ireland’s corporation tax base by up to €2 billion, suggesting the loss could be even higher depending on what is agreed.

Ireland has yet to sign up to international tax reforms being proposed by the Organisation for Economic Co-operation and Development (OECD), which envisage a global minimum rate of at least 15 per cent, something the Government here opposes. Ireland's corporate tax rate is 12.5 per cent.

In its report, the department noted that overall tax revenues last year fell by just 3.6 per cent “notwithstanding a once-in-a-century global pandemic”. This compares with a fall of nearly one-third during the 2008 financial crisis.

The resilience of income tax – the single largest tax revenue source – was a key factor behind this resilience, it said. While employment fell sharply last year, the shock to the labour market was concentrated in sectors that are relatively income-tax poor, the report said.

“The resilience of aggregate tax receipts in 2020 meant that Government had at its disposal greater resources to fund the necessary policy interventions to support households, businesses and the health sector through the pandemic,” it said.

“Put another way, the Irish State did not have to borrow as much as other countries as our tax system did more of the heavy lifting,” it said.

Publishing the department's report, Minister for Finance Paschal Donohoe said the Covid-19 pandemic and associated public health measures had a relatively muted impact on overall taxation receipts – relative to the impact on the labour market – largely due to resilience in income tax.

“This is attributable to the progressivity of the income tax system and the sectoral nature of the Covid shock, with the most affected sectors dominated by employees towards the lower end of the wage scale and that were, as a result, largely outside the income tax net,” he said.