Analysis: while corporation tax returns have surged in recent years, there are several risks associated with depending on this windfall

Corporation tax is a tax charged on profits and gains made by companies. The returns to the Exchequer for this tax have generally increased since 2000, but have been volatile. Receipts trended upwards from about €4bn to over €6bn from 2000 to 2010. As company profits fell during the Great Recession of 2008 to 2012, corporation tax followed, falling back below €4bn. The largest increases have happened since 2014, when revenues were about €4.6bn. By 2016, they exceeded €7bn, and net receipts crossed the €10bn level during 2018.

By this stage, questions were being raised about the sustainability of this level of tax revenues. The growth continued, with receipts of close to €12bn in 2020. Last year, corporation tax revenues grow by close to 30% to over €15.3bn. To give a better idea of the scale of these tax revenues, the 2021 figure is over €3,000 per person and €6,000 per worker, based on five million people and 2.5 million workers.

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From RTÉ Radio 1's The Business, Dan O'Brien from the Institute of International and European Affairs on the Central Bank's warning over Ireland's over reliance on corporation tax

So why have these tax receipts grown so much? One reason is that changes to tax laws around the world have encouraged multinational firms to locate more of their profits in Ireland. There was a very substantial upward level-shift of profits in 2015.

A second reason is that corporate profits in general have been strong in recent years. Gross trading profits are now close to €200bn. Another reason is that Ireland has been successful at attracting many multinational firms in such growing and profitable sectors as tech, finance and pharmaceuticals.

Although it is positive that economic activity, incomes, employment and tax revenues have and are rising in Ireland, there are several risks associated with the surge in corporate tax receipts. Due to this growth, corporation tax has become a more significant tax, representing a larger and larger share of overall tax revenues. It has overtaken excise duties, and moved into third place, just slightly behind VAT (€15.4bn) and income tax (€26.75bn).

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From RTÉ One's Six One news, RTÉ Economics Correspondant Robert Shortt on the Exchequer figures showing a surplus at the end of March 2022 of €200m

According to OECD data, corporate tax revenues in Ireland in 2015 were 11.2% of total taxation, higher than the 9.2% OECD average. By 2018, the figure was 14.2% of taxes, compared to the 10% average across the OECD. The Revenue Commissioners report that corporate taxes represent nearly 23% of tax receipts in 2021. It is a risk that a potentially volatile revenue source now represents nearly a quarter of tax revenues. It is not easy to cut public spending, so revenue sources that are reasonably steady across the economic cycle are preferred.

The second risk is that corporate tax receipts are heavily concentrated in foreign firms. The share of tax paid by foreign firms has increased, as the export-focused sector has performed better than the domestic economy. The experience during the pandemic highlighted this two-speed economy. As the tourism, hospitality and retail sectors struggled, many exporters and multinationals thrived.

In 2021, the breakdown was 80% tax paid by foreign multinationals, 9% paid by Irish multinationals, and 11% paid by domestic firms. Although many foreign firms have operations here for decades, and have established deep connections with the labour market and suppliers, the fact remains that foreign direct investment is inherently mobile.

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From RTÉ Radio 1's The Business, Seamus Coffey from UCC on the implication of Ireland signing up for the OECD's tax reforms

The third risk is that corporate tax receipts are concentrated in a small number of firms in five sectors of the economy. These sectors are manufacturing, administration and support services, technology, finance and insurance, and wholesale and retail. More concerning, the top 10 companies paid over €8bn in 2021, which is 53% of net receipts. The top 100 paid over €12bn, which is 79% of net receipts. A situation where the corporation tax from just 10 companies finances most of public expenditure on education is not sensible. The fourth challenge is that Ireland faces losing up to €2bn in corporate taxes under the OECD's reforms of the worldwide corporate tax system, known as the Base Erosion and Profit Sharing (BEPS) project.

The Irish Fiscal Advisory Council, an independent body that assesses the public budget and the fiscal stance, has repeatedly warned about these risks and they estimate that the Exchequer has gained about €22bn of "excess" corporation tax. The danger is that the Government has become reliant on these receipts to fund increases in day-to-day expenditure. For example, the HSE added 12,000 staff during the two years of 2020 and 2021. General government spending rose sharply due to the pandemic and politicians are using possibly temporary excessive revenues to finance permanent increases in public spending.

What can be done to reduce these risks? One solution is to set aside some of the excessive corporation tax receipts into a rainy day fund. Economic theory suggests that there should be a fixed rule to set aside excess receipts above a certain threshold to make the commitment to save excessive receipts more credible.

In June 2019, the Oireachtas passed a bill that allows for the creation of a Rainy Day Fund, and for the Minister of Finance to transfer €500m per annum into the fund between 2019 and 2023. However, all of the Rainy Day funds were returned to the Exchequer within a year of establishment to deal with the costs of the pandemic. The Government argued that supporting employment and incomes in the short run took priority.

The Fiscal Advisory Council notes that our dependence on exceptional corporate tax receipts is now baked into the annual public budget, and there is no plan to reduce this dependence. The Minister responded that these taxes are financing important public investment, and facilitating an expected budget surplus in 2022. He promised to examine the over-reliance on excess receipts in time for Budget 2023.

It is difficult to expect politicians, who naturally are focussed on short-term issues and staying in power, to resist the temptation to spend extra revenues. Other than hoping for them to be sensible with the public finances, the best idea seems to be to establish a fixed formula in law to force them to be prudent by saving excess corporate tax receipts in the rainy day fund.

The views expressed here are those of the author and do not represent or reflect the views of RTÉ