WARNING signs are beginning to show that the Irish economy is going down a similar cul de sac in terms of tax receipts to that of the boom years of the Celtic Tiger era – and we saw what that led to. Over a decade ago, the economy’s reliance on stamp duty receipts from property transactions was unhealthily high and ultimately proved unsustainable, especially as the overall tax base then was far too narrow.
Now, we’re in a situation where there seems to be an over-reliance of corporation tax receipts from multi-nationals, which is not a healthy scenario, when one considers that the receipts last year were €8.2bn, which amounted 16% of total tax receipts of €50.8bn. The Public Accounts Committee (PAC) has been looking into the matter and last week issued a report on its conclusions and made a number of useful recommendations, which the government would be well advised to take on board.
Three sectors of the economy account for around 70% of the total corporation tax receipts – financial and insurance activities, manufacturing (including pharmaceutical manufacturing), and information and communications. As is already well known, the big concern, repeated by the PAC, is that the Top 10 payers of corporation tax contribute 37% of this tax, ‘leaving this component of the public finances exposed to idiosyncratic shocks creating a concentration risk.’
This is especially serious in the light of threats beyond our control, such as tax changes that President Donald Trump could impose on US companies here or any nasty fall-out from Brexit. On the surface, it looks like we haven’t learned much from the mistakes of the past – the tendency of putting all our eggs in the one basket – and we still need to broaden our tax base more.
Many of the multi-nationals seem to be, legally, getting away with paying quite a low effective tax rate with not all being charged the full 12.5% rate. Figures for 2016 revealed that 13 of the 100 companies with the highest taxable income had an effective tax rate of less than 1%, reflecting the use of significant tax credits and reliefs, in particular double taxation relief and research and development tax credits.
The PAC has justified concerns about the length of time some companies are allowed carry forward losses to offset their tax bills, having been informed that the €214bn carried forward at the end of 2016 comprises actual trading losses and unused capital allowances. It recommended that some time restrictions on losses forward should be introduced to help increase corporation tax receipts on an annual basis, even though this could reduce the value of the State’s investment in certain institutions.
Meanwhile, the Irish appeal against the decision taken by the EU over the €13.1bn it calculates Apple got in State aid by way of corporation tax not levied on transactions, drags on and its outcome will be interesting in terms of the perception of Ireland as a tax haven, especially among our EU partners, most of whom are critical of our regime. While the corporation tax receipts are welcome and a significant part of our overall tax take, some find it annoying that we allow ourselves to be used in this way by large international corporations, especially as a work of research, entitled ‘The Missing Profits of Nations,’ published by academics from the universities of California, Berkley and Copenhagen, revealed that, in 2015, some €90bn in profits was funnelled through Ireland to avoid paying tax elsewhere.
Such practices, while legal, are hardly moral and – at some stage soon – we need to examine our collective consciences about the part Ireland plays, having become a central hub for global tax avoidance for major corporations. Socialist TD Paul Murphy did not put too fine a point on it when he declared that Ireland had won ‘the race to the bottom’ in terms of tax avoidance, depriving other countries of tax revenue that could fund vital public services.
He said that, ‘if corporate profits were taxed correctly in Ireland there would be billions more to invest in services like health, education and housing.’ However, while the government here would be unlikely to look this corporation tax gift horse in the mouth, it should still take a step back and examine the bigger picture and the wider implications of the current tax regime.
First and foremost, the government needs to heed the PAC’s recommendation that the Department of Finance should carry out a review of the corporation tax system and bring forward proposals to address the risk associated with its highly-concentrated nature. This should be done with some urgency if we are to avoid the costly mistakes of the past and stop storing up trouble for ourselves in the future.