Key question is whether tax flood is just temporary or permanent
Published 02/12/2015 | 02:30
Corporation tax receipts for the year came to €4.6bn in 2014. By October this year, receipts had already exceeded that, with the expectation that the full-year receipts will be around €6.5bn with the Budget projecting growth in receipts in 2016 of 10 per cent. In a little over a year, the corporation tax numbers built into the Budget arithmetic have increased by €2bn.
This unexpected surplus is equivalent to half of all receipts from the Universal Social Charge but a key question is whether these flows are temporary or permanent.
Two weeks ago, the chairman of the Revenue Commissioners, Niall Cody, wrote to the Minister for Finance with some analysis of this unexpected bounty.
While the Revenue Commissioners know where the surplus is coming from, the reality is that they don't know why we are getting it.
This is because most companies have so far paid only preliminary tax for 2015 based on internal calculations and won't be filing their complete full-year returns with the Revenue Commissioners until after their year-end.
We do know that most of the payments are down to a very small group of companies.
In the first 10 months of last year, the top 10 highest payers of corporation tax pumped €1.3bn into the national coffers.
In the first ten months of this year, the top 10 payers have contributed €2.5bn.
These payments account for 60pc of the surplus this year - though it is true that corporation tax payments are up for all company sizes.
There has been little evidence on the ground of hugely increased corporate profits. The reasons are somewhat hidden.
It is likely that the multinational corporations (MNCs) are reorganising their structures and activities in advance of proposed changes to the rules for international taxation coming from the OECD's BEPS project.
Companies in the pharmaceutical sector have been making increased use of 'contract manufacturing' with third parties in other countries.
It is also possible that the introduction of measures such as the UK's Diverted Profits Tax has had unintended consequences in countries like Ireland.
Finally, many of the US MNCs price their exports in dollars, which have experienced a large appreciation relative to the euro in recent times.
Even if their activities are generating the same dollar profits, this must get converted into euro to calculate their Irish tax bill and the exchange rate movements means this get converted into a larger euro amount and hence a larger corporation tax bill in Ireland.
The analysis of the Revenue Commissioners is that they expect around 85pc of the surplus collected this year to be repeated in 2016.
There is no consolation in their analysis for those looking for confirmation that the receipts will continue into 2017 and beyond.
The danger is that if these factors can cause corporation tax receipts to flood in over a very short period, there can also be a reversal of the revenues in a similarly short period.
Therefore caution should be practised. There are two reasons for this.
The first is because these revenues may indeed turn out to be temporary. The second is, that even with these extra revenues, we are still running a government deficit.
The recent round of income tax cuts and expenditure increases are not being financed by these extra revenues.
They are being financed by borrowing. We are choosing to increase government debt for tax cuts and expenditure increases that are not necessary to stimulate a rapidly expanding economy but may, it seems, be necessary to win an election. That is not the Government's fault; it's ours.