Is Ireland’s corporation tax party over?

The €1 billion fall in corporation tax in August – to €1.7 billion from €2.7 billion in the same month last year – tells us two things. First, senior Government officials and analysts will now be closely watching the trend over the balance of the year and particularly in November, which is the biggest month for corporation tax. And second, the data has underlined the potential volatility of this revenue source, based on the fact that there are a small number of companies who are paying a large amount of tax.

What we cannot assume is that the August figures are the start of a trend. But they do raise key questions. Is the corporation tax party which has seen huge jumps every year since 2015 coming to an end, to be replaced by a more uncertain period?

1. The latest figures

August is not a big month for corporation tax. Most companies, with December year-ends, have already made their preliminary payments in June and will not make their final payments – intended to bring total payments to 90 per cent of their expected liability for the year – until November.

However, one of the State’s biggest corporate taxpayers – Apple – has a September year-end, or rather one of its key Irish subsidiaries, Apple Operations International (AOI), does. And so it would be expected to make tax payments to the Irish exchequer each year in March and August.

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While we can’t be sure, this would suggest that Apple was largely responsible for the unexpected jump in tax payments in August 2022. This left officials expecting a decline this year, but it appears that what transpired was more substantial than they expected.

The unanswered question was why Apple’s top-up corporation tax payment was lower this year. The company has faced challenges like the rest of the tech sector and revenues have fallen for three straight quarters, but international profits have held up. We don’t know, however, what profit is now being forecast for Apple’s key Irish arm, how much of this will be taxed in Ireland and what once-off factors might have been at play last year and this year.

AOI – the key Apple subsidiary based here – reported profits of $69.3 billion (€64.7bn) in the year to last September. While this was just slightly ahead of the previous year, the corporation tax bill jumped to $7.69 billion from $4.44 billion the year before. It is not clear why this happened – there was some speculation about the running down of tax allowances in Ireland – or why it might have reversed this year.

Overall, the profits of Apple as a corporation have held up and there is no obvious reason to expect an ongoing fall in its tax payments here over the next couple of years. But when you don’t know precisely why payments went up last year, or down this year, these things are tricky to judge. Nor do we know what other companies may have been involved in the August payments swing.

2. The November deadline

Most companies will make their top-up payments in November, the key month for indicating the trend in corporation tax each year. This will now be closely watched. In a reaction to the exchequer figures this week, Grant Thornton tax partner Peter Vale said that “the risk of weaker corporation tax receipts in the key month of November increases.” He also noted that poor November figures could erode much of this year’s planned budget surplus.

Profits of the big pharma firms did shoot up during Covid-19, due in part to money made from vaccines, so some fall off in profits and tax payments is possible here. Likewise, tech has had its well-aired challenges. So the November figures will be a vital indicator. After strong figures in June – when the first preliminary payments for the year were made by most firms – there had appeared to be little concern for 2022. That the final judgment for this will come after the budget package in October is not ideal for exchequer planning.

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3. The outlook for 2024

After 2015, the Republic went through seven years of soaring corporate tax revenues which took the total collected from €5 billion in 2014 to an estimated €24 billion last year. Returns were boosted by major restructurings by big multinationals after the first round of OECD tax reform. The resulting movement of intellectual property (IP) assets – licences, copyrights and patents – to Ireland may have been little more than paper transactions. But they mean a lot more profit is being booked in the State – rather than just moving through the country on its way to an offshore tax haven, as was typically the case previously. And in tandem with the move of IP assets here has come a big surge in physical investment, also increasing profits.

An international slowdown and even recession in some major markets is a threat for next year, due to its impact on corporate profitability. And Ireland remains exposed to company-specific factors in some of the really big tax payers. On the other side of the equation, the big firms are still generally reporting healthy returns. And tax allowances running down on IP assets moved here may expose more profit reported here to tax.

Ireland’s corporate tax rate is due to increase from 12.5 per cent to 15 per cent next year for companies with a turnover in excess of €750 million as part of the latest OECD tax plan – and that will be a significant boost to exchequer revenues. Other aspects of the OECD plan may cost Ireland revenue, but their implementation has been delayed.

4. Concentration of tax

The August returns highlight one of the key risks – Ireland is reliant on corporation tax payments not just from a small number of sectors, but from a small number of companies within those sectors – Apple, Microsoft and a couple of big pharma companies. The Department of Finance has consistently cautioned that the State relies on 10 big companies for half of all corporate tax revenue. However, work by the Irish Fiscal Advisory Council estimates that between 2017 and 2021 one third of all corporate tax was paid by just three big companies. Assuming this has continued, these three companies would be paying a combined €8 billion in corporation tax this year, or an average of €2.66 billion each. Multinationals, meanwhile, employ around one third of all employees and account for more than half of all employment taxes.

A key element of the risk here is that a lot of the tax does not relate to economic activity carried out in Ireland, but to the tax planning of big companies, whose financial structures could quickly change. The Department of Finance estimates that roughly half of the forecast 2023 corporate tax take of €24.3 billion could be classified as “windfall” in nature. The Fiscal Council puts it as between €10 billion and €15 billion, but says there is a lot of uncertainty around this.

5. Policy

The key policy requirement is not to use what may be temporary revenues to fund permanent spending increases. This risks leaving a hole in the exchequer finances if the tax revenues disappear – as happened after 2008 when property-related tax receipts collapsed. Having a significant exchequer surplus – forecast at €10 billion this year – provides some significant leeway. A key argument in Cabinet now will be what surplus to aim for next year, with once-off measures certain to chip away at the €16 billion that has been forecast.

The Fiscal Council raises another warning too. It is that a lot of the corporation tax revenue is effectively coming from economic activity conducted outside Ireland and so spending it here carries a risk of adding to demand and inflationary pressures.

For the Cabinet, as it considers the budget, the key issue is what it can expect from corporation tax in the years ahead. Due to the State’s economic history, we tend to see these things in the context of boom or bust. But perhaps the most likely outcome, after a more-than-doubling in revenue since 2020, is a levelling off, or a much more modest rate of growth. And in two or three years’ time there are dangers from the next phase of OECD reform, as well as other uncertainties about international and US tax policy. With income tax growth slowing too and spending pressures remaining, this would raise questions for whoever is in government over the next four or five years.