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With corporate tax risk comes legislative opportunity

The Parliamentary Budget office’s website page explains itself as an independent and specialist unit within the Houses of the Oireachtas Service that is a key source of economic and budgetary intelligence. It recently published an analysis of corporation tax revenue growth which highlights the risks behind that tax head.

We’ll get into some of those risks in a moment but let’s set the scene with some of the report’s statistics. It notes that despite major international tax initiatives, Ireland's corporate tax (CT) receipts have continued to grow. Further, from 2014 to 2022 there was a very fast increase in those receipts, with growth averaging 23% per year during the period, before stabilising in 2023. The point of reliance on Foreign Direct Investment is made clearly as the report notes that foreign MNCs paid 86.5% of CT receipts in 2022; further their employees paid about one-third of all income tax receipts in 2020 despite the fact they account for just 20% of private sector employment.  

The report continues that a large number of domestic companies do not make significant profits noting that in the period from 2004 to 2018, the number of companies with no tax liability exceeded the number of companies with a positive tax liability. Page 2 of the report notes that “…there are concerns that the state is too reliant on this highly volatile tax head”.

On that note the report outlines the list of seven risks affecting Ireland’s CT yield, four of which are marked as high, one as medium and two low risk. The high-risk ones comprise (1) Concentration risk: The proportion of CT paid by the top ten firms. (2) Firm-level risk: The performance of individual firms; (3) Infrastructure risk: Adequate infrastructure is important for attracting and expanding business operations and (4) International tax reform risk: International tax changes could impact Ireland's attractiveness to MNCs.  

Taking concentration risk for a moment. The report points out that there is a level of “churn” in the top ten taxpayers. It continues that this level may be less regular amongst the top five or six taxpayers and the report notes that it’s unclear if the replacement and replenishment of major taxpayers or the ‘pipeline’ of incoming FDI companies partially offsets or significantly mitigates the level of concentration risk.  

Earlier I referenced the report’s point that a large number of domestic companies don’t make significant profits with the report looking at the period 2004 to 2018. The report rightly notes that tax liabilities are affected by the use of tax depreciation on assets, losses, deductible trade charges (this can comprise certain royalties etc) and corporate group relief giving the example that if a business makes a significant capital investment or incurs losses during a recessionary period then these factors may reduce its taxable income in subsequent years. But we need to make our tax system as attractive as it can be to ensure that the next company that goes super-nova starts its going viral journey here.

This is the time of the year where many organisations will be sending in their pre-budget wish lists to the Minister to make the tax system better that it was before. One of the key issues facing corporate founders is access to funding. The idea, the will and the drive may be in abundance but no cash then no flow. I’m a part of Scale Ireland’s steering group and its 2024 ‘State of Start-Ups Survey’ (with data drawn from a record 340 founders and CEOs of tech start-up and scaling companies) notes that almost 80% of respondents felt it difficult or very difficult to attract capital. That result remains unchanged from last year.  

Regular readers of this column will know my view that tax reliefs giving access to cash such as the Employment Investment Incentive Scheme (EIIS) need to be made as simple as possible. Helping David company’s grow into Goliaths can only be done with the right team and that’s why share based renumeration including the Key Employee Engagement Programme should be made simpler. Making our tax system simpler for borrowing costs would be a major step forward.  

But back to Budgetary Office report. One of the other high risks towards our CT receipts is the risk of International tax reform.  Regular readers of this column will know of the OECD Base Erosion and Profit Shifting (BEPS) process that is ongoing. Pillar two, being the galactically complicated effective 15% rate of tax on companies, was recently enacted here and the report notes that it may reduce the competitiveness of Ireland as a place to do business and may also lead to greater levels of international competition in relation to subsidies and tax credits. That said, on the other side, the report notes that the effective 15% rate will also be implemented in other business friendly jurisdictions such as Bermuda and Hungary, which previously had 0% and 9% CT rates respectively.

The report also references OECD’s Pillar one which according to the report is “still some years away from being agreed and implemented”. However, this is all about reallocating the profits of large multinationals from home countries jurisdictions to market countries. The report explains the proposal as “shifting a share of up to 20%-30% of profits to locations where sales to end-customers occur” which it notes would benefit large countries. Pillar one is and should be on the watchlist given the potential for allocating profits away from here.

My professional life flashed before me when the report does a re-run of the tax changes I watched and advised upon in the past ten or so years, being the phasing out of hybrid structures, the EU anti-Tax avoidance Directive, the OECD BEPS process so far. It concludes “While many of these changes were expected to reduce MNC activity and therefore the allocation of profits in Ireland, thus far the opposite has occurred”. Pessimism has been curtailed in the past but like the Phoenix it can rise again so we should also look to the domestic opportunity.  

Please note this article first featured in the Business Post on Sunday, 7 April 2024 and was re-published kindly with their permission on our website.