Business Irish

Friday 20 September 2019

Richard Curran: 'Time is almost up for corporate tax windfalls we grew to bank on'

Disaster: Corporation tax has generated huge revenues but an abrupt ‘supernova’ could see Ireland lose out
Disaster: Corporation tax has generated huge revenues but an abrupt ‘supernova’ could see Ireland lose out
Richard Curran

Richard Curran

Ireland's corporation tax windfalls of recent years are being seen as an increasing problem. How can landing a multi-billion euro windfall be seen as a problem as opposed to a stroke of luck, you might ask?

The cause for concern is that they are not being treated as a "windfall" or a "stroke of luck" but as something that is becoming an integral part of the exchequer's source of revenue every year.

This becomes a problem if the extra corporate taxes received in recent years dry up. Historically the corporate tax take represented 13pc to 15pc of the overall tax receipts. In recent years it has climbed to 18pc to 20pc.

Last year corporate taxes amounted to more than €10bn. For the first eight months of this year they were €4.9bn, around half-a-billion euro more than last year.

Few saw it coming that our corporate tax take would begin to sky rocket around 2015. It has doubled since then. Given that 40pc of it comes from a relatively small number of multinationals, there is always the possibility that it could fall through the floor and return to 2014 levels. If it did, the exchequer would find it had a €5bn hole in the books.

Former Central Bank governor Professor Patrick Honohan has believed for some time that Ireland's ability to attract multinational investment on the back of low corporate taxes is no longer a sustainable model. This view is widely shared.

But when I spoke to him last Saturday on 'The Business' on RTÉ Radio One, he went further. He said it could end abruptly like a "supernova explosion".

"This is not really a sustainable system", he said. "It has generated huge tax revenues in the last few years. It might be like the end of one of these stars that has a supernova explosion towards the end of its life."

Finance Minister Paschal Donohoe acknowledges this risk and says that is why he has been broadening the tax base through things like higher Vat on hospitality and changes to stamp duty and commercial property tax.

Prof Honohan's take is that we didn't see the rapid increase in the corporate tax take coming and it could just as easily vanish. What might the trigger be for such a supernova explosion?

There is a global effort to reduce corporate tax avoidance and get large corporations to pay more tax. Within the EU, the French in particular have proposed things like a digital tax and other measures which would see more tax paid in the country in which consumers purchase online goods and services.

The Irish Government has handled this threat well. It has referred everything back to the OECD which is undertaking a major programme looking at what it calls base erosion and profit shifting. Our Government knows that by sticking with the OECD, instead of just the EU, a wider selection of views will be taken into account, including those of the US, where many of the tech companies are based.

Being good corporate citizens by closing down unfair tax loopholes is one thing, but shooting ourselves in the foot because the investment just goes somewhere else is another.

However, there are a couple of developments that now suggest the outcome of the lengthy OECD process might not go as favourably as Ireland would have liked.

Pam Olson, a senior US-based tax consultant with PwC, said during the week that a global agreement through the OECD now looks more likely. The OECD is aiming to reach a political agreement on a major reform of corporate taxes by the end of this year, with the final details worked out next year. The latest proposals threaten Irish tax policies by trying to shift taxing rights to major markets and away from countries like Ireland where European headquarters are registered. This could result in multinationals paying less tax here. Another part of the proposals is about imposing minimum tax on corporate profits at a level yet to be decided. Depending on where that lands it could, in theory, threaten our 12.5pc tax rate.

Ms Olson went as far as saying that countries like Ireland may have to argue that aspects of the proposal are an "affront to sovereignty" because traditionally countries set their own tax rates.

This won't be a threat to sovereignty because nobody has the legal right to end our 12.5pc tax rate. The danger for Ireland comes from the political pressure to accept the final proposals that may be in the report.

Ireland cannot veto such a plan and others could go ahead without us, making Ireland look extremely isolated on what is increasingly seen as a social and moral issue.

Mr Donohoe has batted back EU concerns from the likes of France and Germany by saying it would be best to deal with this problem through the OECD. It then becomes much more difficult to reject an outcome to the OECD process even if it doesn't appear to go as we would have liked.

A recent study by the IMF and the University of Copenhagen found nearly 40pc of world Foreign Direct Investment (FDI) - worth a total of $15tn - "passed through empty corporate shells" and is therefore what it called "phantom" capital designed to minimise companies' tax liabilities, instead of going to productive activity. This activity is of course productive for the accountancy and legal firms that set up the structures, but it isn't doing much else. The authors of the study, Jannick Damgaard, Thomas Elkjaer and Niels Johannesen, told the 'Financial Times' these were vehicles for "financial engineering".

Ireland was not the biggest culprit according to this study, but it features prominently.

It concluded that nearly two-thirds of Ireland's inward investment is "phantom".

The issue here relates to what constitutes inward investment and what constitutes a "tax haven". Ireland is not Luxembourg and tech multinationals employ a lot more people in Ireland in productive activities than they do in Luxembourg. But the tens of billions in intellectual property that has moved to Irish registered companies is not creating commensurate jobs yet forms some of the basis for our surging corporate tax take.

The surge in the corporate tax take of recent years is under threat. It might not just peter out but suddenly switch off if new tax arrangements go against us. Pressure from the EU will be immense especially after the unprecedented support from European capitals on Brexit.

Our 12.5pc tax rate won't be abolished but it isn't the real problem. The real problem has been the other ancillary tax benefits on things like intellectual property. Several of the offending Irish tax structures have been abolished but the corporate tax haul keeps coming.

The Government can argue the extra money is being used to fund capital spending rather than current expenditure. Given that we must operate within EU budgetary rules, the extra cash helps us achieve budget surpluses or reduced deficits and therefore it is going into the overall exchequer kitty.

Surely it should have been used to fund a standalone rainy day fund or pay for genuine once-off investments like broadband or the National Children's Hospital.

Building roads and even schools is part of the ongoing capital requirements of a country with a growing population and should be funded from sustainable sources.

The jig is up on these extra corporate tax billions.

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