Tuesday 21 May 2019

Dan O'Brien: Corporation tax: who pays what as reform calls grow

One of the usual suspects in large-scale tax avoidance — Google — was reported last week to have kept €16bn in global earnings out of the jurisdiction of any country to avoid tax. Irish-registered companies were allegedly involved. Photo: Bloomberg via Getty Images
One of the usual suspects in large-scale tax avoidance — Google — was reported last week to have kept €16bn in global earnings out of the jurisdiction of any country to avoid tax. Irish-registered companies were allegedly involved. Photo: Bloomberg via Getty Images
Dan O'Brien

Dan O'Brien

The year has hardly begun and corporation tax is already in the news. One of the usual suspects in large-scale tax avoidance - Google - was reported last week to have kept €16bn in global earnings out of the jurisdiction of any country to avoid tax. Irish-registered companies were allegedly involved.

Last Wednesday, the Department of Finance published figures on Government revenues, which included corporation tax. Yet again, receipts from taxes on profits vastly exceeded forecasters' expectations, coming in half a billion euro ahead of projections, to exceed €8bn for the first time ever. In growth terms, receipts rose by 12pc, double the Department's expected rate of increase.

There will be much more about the taxing of profits in the news in 2018, including the risks associated with the State's growing dependence on this revenue stream. Other relevant issues will include how a just-enacted US tax law will impact on American companies' operations in Ireland.

How the debate in Europe evolves will also make it on to front pages of newspapers, for two reasons.

First, some countries want new rules on profits included in a slated redesign of the institutional architecture around the euro due to be discussed by heads of government at an EU summit later in the year.

Second the backlash against big-tech - for a variety of reasons - is only going to increase as the main players continue to see their revenues and market power grow. How to squeeze more from them in tax will be up for discussion in Brussels.

With so much focus on the issue over the past week and so much more to come in the year ahead, I had a rummage in the Revenue Commissioners' databank to see who pays corporation tax here.

The most detailed numbers are a little dated - extending only up to 2015 - but the good news is that there were more companies than ever in existence, according to the Revenue Commissioners' corporate case numbers. In 2015 there were more than 61,000 corporate entities filing returns, above the pre-recession peak by around 2000.

The less good news is how concentrated revenues are. The revenue commissioners provide a detailed breakdown of the number of companies paying different amounts of corporation tax, along with the total amount of tax paid according to amounts paid. As the accompanying charts show, just over 500 companies paid 87pc of all profits tax revenue in 2015 (and the top 10 payers alone accounted for 40pc).

Companies paying corporation tax bills of €100,000 or less, which accounted for more than half of all tax cases in 2015, paid just 1pc of all revenue raised.

Another not so positive feature is the fact that 16,000 companies, or more than one and four, were loss-making or made zero profits.

As it happens, and perhaps surprisingly at first glance, a similar proportion of companies were unprofitable even before the recession struck. That is probably explained by inactive companies which don't trade but have not been formally wound up (it is sometimes joked that companies are like kids, easy to acquire but hard to get rid of).

What is very different from the pre-recession period are cumulated losses.

In the years before the crash companies were collectively carrying forward around €5bn worth of losses at the end of each tax year. In 2015 that figure had multiplied almost fiftyfold, to €220bn. More than half of this was concentrated in the banks, which will be able to use these past losses against future corporation tax liabilities for many years to come, and that is despite the taxpayer bailing out the banks. It is also despite the fact that those same banks are now among the most profitable in Europe because they are giving customers, both savers and borrowers, a bad deal on interest rates.

According to a Revenue Commissioners paper* the finance and insurance sector racked up profits of €26bn in the year before last. That made it the second most profitable by sector.

The same paper also highlights the role played by the manufacturing sector in corporate tax payments. Not only did manufacturers make by far the biggest combined profit in 2015 - at more than €55bn - they more than doubled their profits on a year earlier.

This is of a piece with the 'Leprechaun economics' event which took place in that year and caused GDP to jump 26pc. That, in turn, was likely caused by accounting changes in pharmaceutical companies, a sector which accounts for well over half of all manufacturing output in Ireland.

Despite the huge size of the manufacturing sector's profits all companies in that sector paid only €1.8bn in corporate tax 2015, something that has helped fuel the tax avoidance controversy. That is a controversy that will rage as intensely as ever in 2018.

More clarity needed on PRSI 'income TAX'

Last week much coverage was given to the figure of €50.7bn that was the amount the Department of Finance collected in tax. But this is only a partial picture - many others parts of the government system collects taxes and charges of various kinds. Together, these additional receipts raised from individuals and businesses come to almost half as much again as the €50bn that goes straight to the Exchequer.

Among the biggest sources of revenue is pay-related social insurance (PRSI). People paid more than €8bn in this tax last year. It is not included in the Department of Finance's numbers because the money goes to the Department of Social Protection.

But as social insurance contributions give those who pay them almost no additional benefits that non-payers don't get, unlike in many continental countries, it is, in effect, income tax.

Although the mandarins of Merrion St make this clear in their Fiscal Monitor publication each month, more media attention is paid to the old Exchequer Returns figures, which exclude PRSI. This continues to lead to considerable public confusion.

The Department of Finance needs to up its communications game so that this confusion is eliminated once and for all.

*https://www.revenue.ie/ga/corporate/ documents/research/corporation-tax- returns-2016.pdf

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