The Exchequer reported an end of year budget surplus of €1.9 billion ($2.8 billion) for 2017, with a year-on-year improvement of €2.9 billion. However, these figures do not mean that the government is out of the red as it still expects to be running a small deficit of 0.3% until the end of 2018.
Nevertheless, as part of a trend in recent years, Ireland’s 2017 tax revenues were above target with corporate tax revenue amounting to €8.2 billion – more than double the corporate tax receipts in 2016. Many economists and news reports attributed the budget surplus to the increase in corporate tax receipts as the country returns to economic growth, which has in turn seen public spending rise by 4.6%.
“There was an increase in income tax, VAT and corporation tax, each between €800 million and €900 million,” Fintan Clancy, partner at Arthur Cox, told International Tax Review. “Due to its relatively smaller size the corporation tax percentage increase (11%) was slightly larger than the percentage increase in VAT (7.1%) and income tax (4.4%).”
“My personal view is that corporation tax receipts above a certain threshold, e.g. when receipts exceed 10% of total tax receipts, should be treated as windfall gains and used to pain down public debt,” Dan O’Brien, chief economist at the Institute for European and International Affairs, said.
As the international tax landscape is undergoing a number of changes, a revenue buffer could be beneficial for Ireland as it adapts to measures in the BEPS project and the end of the double Irish structure. These factors have already had an impact on the Irish tax system.
O’Brien’s comments could hold a warning for the Irish government too. If Facebook’s decision to amend its tax model are viewed in light of the changes other multinationals are making in response to legislative and regulatory developments, the country’s comfortable tax revenues could be shaken.
The Facebook option
Last month, Facebook announced it is overhauling its tax arrangements in Ireland and adopting a local selling model and pay tax where its profits are made. This could have serious consequences for the Irish tax model.
If other high-tech companies follow the example of Facebook, there is concern that the Irish budget could see its corporate tax receipts start to shrink. “There is excessive concentration risk now,” O’Brien said. “If, say, the tech sector changes its tax practices there could be a significant hole in the public finances.”
“The pressure on these companies in particular is becoming irresistible,” he added. “One way or the other more change will come.”
“There are three things operating here. The double Irish structure, as is well known, is going to disappear in 2020, so companies like Apple have already reacted,” George Bull, senior partner at RSM UK, told International Tax Review. “These companies need an alternative to the Irish arrangement because it is going to change. That’s factor number one.”
“Factor number two: we have the public perception that Facebook does not pay enough tax in the jurisdictions where the company is active and I think the public pressure is quite high,” Bull continued. “Factor number three: there is a move by various countries to introduce different forms of withholding taxes on digital platforms and there is clearly a threat to the tax status of those revenues. Then you have BEPS on top of this.”
Since Ireland has a minority government it’s unlikely that there will be much of a domestic push to reform the tax system, however, the country is vulnerable to international pressures. The BEPS project and the EU’s Anti-Tax Avoidance Directive have been driving changes in recent years.
“The Irish government has closed down or is phasing out the more egregious loopholes already and is complying with the OECD BEPS process,” O’Brien said. “It will not support the proposal on the table in Brussels for a common consolidated corporate tax base and is committed to exercising its veto to prevent the current proposal from being enacted.”
At the same time, the Irish authorities are keen to maintain a positive relationship with the business community and the economic recovery is unlikely to be scuppered by these international changes. It may be uncertain how Ireland will be affected, but this does not necessarily mean the results will be negative.
“It is difficult to predict how Brexit, BEPS and US tax reform will interact for Ireland,” Clancy said. “The net effect is hard to determine, but my anticipation is that Ireland will have a smaller number of investments, but they will be bigger investments and will generate greater employment, particularly at senior levels.”
Tax benefits from job creation
Although the role of corporate tax receipts shouldn’t be downplayed, the growth in tax receipts in recent years may reflect the fact that multinational companies are expanding and taking on more employees. More people in employment offers individuals a higher purchasing power, thus generating more tax revenue from income and consumption.
“Multinationals make an enormous real contribution to the Irish economy. Figures out this week show that they increased employment levels by 5% last year,” O’Brien said. “Around twice the rate of employment growth in the wider economy. They account for one in eight private sector jobs.”
Clancy added: “The percentage increase in employee taxes is 8.6% which seems to indicate that there are more people working and that the multinational corporate sector is expanding employment and wage levels quicker than the domestic sector.”
Ireland has seen its tax revenue increase thanks to its economic rebound and this suggests that the Irish tax model has staying power should circumstances beyond its control change drastically. But there is still the risk of companies choosing new arrangements that hurt government coffers. As businesses adapt, the government will need to be prepared to change with them.
