A Tad Out

Nov 25, 2019

Sunday Business Post, 24 November 2019

A few months ago I attended a briefing from the UK revenue authority, HMRC, about their projected tax receipts. In one particular area of debt recovery, we were told their estimates were going to be “a tad out”. It turned out that for a revenue authority collecting almost £700 billion per annum, a “tad” meant a staggering £1 billion.

For most types of tax, the UK tax take dwarfs the Irish tax take by a factor of ten or more.  Missing a target by €1 billion or more in Ireland would be considerably more than just a tad. But according to a research paper published last week by two Department of Finance economists, that’s how much our estimates of corporation tax receipts have been wrong.  And not just for one year, but on average for five years in succession.  That comes to the price of three children’s hospitals. So how did the estimates go so badly wrong?

As a general rule, tax receipts are directly tied to economic performance. If the economy grows by 1%, tax receipts can be expected to grow by 1%, all else being equal. This rule of thumb seems to break down when it comes to corporation tax, and may partly explain why a government group has been established to work out a new methodology for the increasingly dark art of estimating the tax take.

Estimating tax receipts is important for two reasons. One has to do with prudent economics, and the other has to do with prudent politics. An overestimate of tax receipts that don’t ultimately materialise means that there will be an exchequer shortfall.  That doesn’t make for prudent economic management.

Equally serious, however, is an underestimate of the amount received.  Politicians like to spend what they have and underestimates mean that the political system can’t deliver as much to voters as it should.  It particularly annoys backbenchers in marginal constituencies when largesse which is actually available isn’t provided because the Department of Finance estimates of receipts were out.

For a country that’s often accused of being a corporate tax haven, we are remarkably good at amassing tax from companies.  As the Department of Finance economists point out, Ireland has relied more heavily on corporation tax receipts in comparison to other forms of tax receipts than most other European countries, not just in the past few years but over the last 20 years.  This reliance also makes Exchequer receipts vulnerable.  A particular concern has been the relatively small number of companies making the bulk of the corporation payments – just ten companies in 2018 paid 45% of the total in 2018.

The situation was ever thus – only a small handful of companies paid the bulk of tax, and the survival rate of this cohort is quite high.  Three-quarters of the biggest-paying companies a decade ago are still alive and well and paying tax in Ireland.  Of the 150,000 or so companies that sent in tax returns in 2016, more than half were profitable.  So why do relatively few companies account for so much tax?

The answer, I think, lies not so much in economics but in a vagary of the Irish tax system.  Irish tax law harbours particular negativity towards a “close” company – close in this sense meaning that the stakeholders are connected closely either by family or commercial links.  Most Irish companies are close companies.

These close companies are subject to additional tax surcharges if it seems the company structure is being used to sidestep income tax liabilities for their owners.  As a result they are often run at break-even or close to it.  Profits get paid out as wages and salaries and are taxed under income tax rules, not corporation tax rules.  This is borne out by another finding by the Department of Finance economists, which is that foreign multinationals (which typically are not closely held) account for close to 80% of all corporation tax receipts.

Predicting corporation tax receipts is not just a matter of predicting the economic outcomes for our corporate sector as a whole.  In practice it is about assessing the tax environment for multinationals.  While some politicians and commentators find it distasteful, providing a stable tax environment for foreign investors is key to ensuring that the recent high corporation tax receipts, so often described as windfall, become routine.  This is also why the current round of OECD consultations on revisions to the way multinationals are taxed is so important to the Irish economy overall.

We simply cannot afford to get our corporation tax receipts a tad out in future.

 

Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland.