What are the corporate tax risk factors? – The Irish Times

The budget showed that corporate tax now accounts for one in four euros of taxation. Treasury officials, to underscore the risk of this reliance, are now releasing separate figures showing what Treasury finances would look like if what they calculate as the ‘sheath’ or vulnerable amount of corporate taxes were deducted. . And it’s not pretty. The 2023 budget documents contained estimates that up to €9 billion of the €20 billion collected this year in corporation tax could qualify as “windfall gains” – subtracting that amount would turn an expected budget surplus of 1 billion euros this year into a deficit of 8 billion euros. But at the same time, the ministry expects corporate tax revenue to rise again next year to more than 22 billion euros.

So what are the risks?

1. A global recession

The international economy is rapidly slowing down and this will affect the profits of the big players. Data from the Central Bureau of Statistics shows that the profitability of large international – mainly American – companies with Irish bases increased by more than 70% between 2016 and 2020. More profits mean more taxes for the state – much more . If the global recession hits profits, there will be less tax to pay. The ministry’s forecast of another corporate tax hike next year suggests it doesn’t see this as an immediate threat, but it could well be a factor beyond next year.

2. Problems in key sectors

Previous analysis by the Department of Finance pointed out that the vast majority of large corporate taxpayers here are in the pharmaceutical, medical and technology sectors. Thus, Ireland is vulnerable to problems in these sectors. Declining consumer spending across Europe as the energy crisis will hit all sectors in time – for now the pharma/medtech sectors look solid, while there are signs of a downturn in parts of the technology sector. This has led to a slight slowdown in hiring in the Republic, although many companies continue to hire. This is to be monitored in the months to come.

3. Problems in key companies

Ten large corporations pay half the corporation tax – and so their corporation taxes alone are responsible for one in eight euros of total Irish tax revenue. Sources believe that three or four of the ten – led by giants such as Microsoft, Pfizer and Facebook – account for a significant share of payments. This leaves Ireland vulnerable to the fortunes of a few small ‘superstar’ companies and the decisions they make about how to structure their international business. A Department of Finance analysis gave examples of how, over time, the fortunes of truly successful companies could decline; for example, Blackberry’s share of the mobile phone market fell from 21% in 2009 to zero in 2016.

4. Rule Changes

International corporate tax rules are in flux as countries try to agree on how to implement an OECD agreement. Some of the most worrying dangers for the Republic would be avoided if the OECD agreement were implemented, even if it could cost the State money. But some sort of partial implementation now seems possible, creating further uncertainty about how countries will design tax policies and possible international conflict. These could cause problems for Ireland and affect the decisions of the big players to the detriment of the state. For example, if some large multinational corporations moved their intellectual property (IP) – the right to sell products based on patents, copyrights, etc. – outside Ireland, this would be a big negative in the long term.

5. Or could corporation tax continue to rise?

It could. The surge in revenue coincided with the transfer of intellectual property rights to Ireland after 2015 in response to international tax rules. Many of the direct benefits of this change were not taxes due to tax relief – although some were in some cases. However, this seemed to coincide with a period of increased profitability and other functions also moving here. The impact on the Irish Treasury has been extraordinary. And as capital cost allowances on initial IP investments run out over the next few years, more profits could be exposed to tax here. This could offset the risks described above. An increase in the corporate income tax rate to 15% could also boost returns. But no one has been able to predict what will happen so far, so we just don’t know.