Ireland is unlikely to see a major drop in corporation tax revenue as a result of changes to the way multinationals are taxed and could, contrary to forecasts, benefit from these changes, says the Economic and Social Research Institute (ESRI). He also predicted that business tax revenues would increase as the capital cost allowances used by those businesses to reduce their tax bills were exhausted.
Despite a series of warnings about the potential impact of OECD-led reforms on Ireland’s corporate tax base and a prediction from the Department of Finance that the state could lose up to £2 billion euros in revenue per year, the institute said the changes were unlikely to have a “negative impact” provided they did not incentivize multinationals to relocate out of Ireland.
The OECD’s twin-pillar global tax reform program aims to minimize the ability of large companies to shift profits between jurisdictions while imposing a minimum rate of 15%, in addition to Ireland’s 12.5%.
In its latest quarterly analysis, ESRI assesses the potential sensitivity of Irish corporation tax revenue to proposed changes under several scenarios depending on what the final changes and calculations will be and whether further tax relief such as R&D tax credits and Ireland’s Box knowledge development scheme, for example, allow companies to reduce their overall liability.
“All scenarios result in either an increase or no decrease in CT [corporation tax] due to the reforms proposed by the OECD,” concluded ESRI’s analysis. Even if the proposed 15% rate were implemented, it would result in ‘very significant’ increases in CT revenue here, of up to €3bn over 2020 levels, even after Ireland lost the displacement taxable rights of small countries envisaged under the first pillar of the reforms.
Even in the worst case scenario, which allows for a 20% reduction in the trading profits of these ‘highest earning companies’, with some removing intellectual property assets from Ireland, corporation tax revenues would still suffer a slight increase.
“Company specific risk”
Overall, ESRI predicted that large multinationals are likely to pay more taxes due to increased profitability and that capital cost allowances, which allow companies to reduce their tax liability or bill, will exhaust.
Nevertheless, he warned that the potential for large companies to leave Ireland “although unlikely, exposes the Treasury to company-specific idiosyncratic risk”. It is difficult to assess the likelihood of this scenario and “policymakers should be aware of the need to eliminate the risk of concentration in Irish tax levies”, the think tank added.
Corporate tax revenue is expected to be around €21 billion this year and €23 billion in 2023, surpassing VAT as the second largest source of revenue for the government. Concern over the concentration risk of having just 10 large companies accounting for such a large chunk of the tax base prompted Finance Minister Paschal Donohoe to set aside €2 billion this year and €4 billion euros next year into a new reserve fund.
In its latest analysis, ESRI said government tax revenues are expected to continue to grow for the remainder of 2022 and 2023 thanks to rising employment and “as a result, government debt ratios are expected to continue to rise. to lower”.
He said he expected the government to run a surplus of 0.3% in 2022 and another surplus of 1.2% in 2023 due to rising energy costs,” he said.