When bad tax news is good budget news: Rewind to last week

Only occasionally can bad news be useful.

Michael McGrath and Paschal Donoghue may not want to admit it publicly, but constant warnings about the volatility of Ireland’s corporation tax revenues have actually helped the two ministers a lot in drafting the next budget. “There’s been a lot of commentary, and rightly so, about the returns for August,” McGrath said on Thursday, without elaborating on the reason for the sharp drop in corporate tax collected last month.

Budgets are part economics, part politics and part expectation management.

Cabinet members look at the huge projected surplus for this year – and the years to come – and salivate at the prospect of spending the multinational largesse. They launch kites. Promises are made. Proposals are described before their value is assessed.

The fact that the government is fighting an election and is expecting an election either late next year or early 2025 only strengthens the call to abandon fiscal prudence and embrace fiscal populism.

There is nothing new in this, of course. However, this is exacerbated by the fact that by 2026 the surplus will rise, barring another black swan event, to €20.8 billion.

So Simon Harris is looking for measures to support students, while Darragh O’Brien is arguing for relief for both landlords and tenants. Heather Humphreys, meanwhile, is seeking an increase in social protection, from pensions to child benefits. The list of requirements goes on.

The government is already planning to break its spending rules in the next budget (and indeed in all budgets up to 2026), which the Fiscal Advisory Council says risks “repeating Ireland’s past mistakes, with already high employment and windfalls swelling the Treasury “. .

Both McGrath and Donohoe will not want to go much further than the 6.1 percent they plan to increase core government spending by in October.

So, amid demands for money, recent warnings about corporation tax will give McGrath and Donohoe some political cover. “They are armed with the advice of the Fiscal Advisory Council on the one hand and the corporate tax cut on the other. It’s not useless,” a senior government adviser told me.

In particular, it is worth looking at the prospects of the corporate tax, since the tax is becoming more and more important for the economic growth of the state.

As McGrath said in response to a question from Thomas two weeks ago, huge sums of money came to Ireland at the click of a button. However, he quickly added, “Similarly, some of them may also leave in the future.”

The Fiscal Advisory Council has been quite clear on this point: the unexpected corporate tax has closed holes in the treasury.

“Without the exceptional levels of corporate tax being collected, the government will still run a deficit. Official estimates from the Department of Finance put the windfall at €11.8bn in 2023 – almost half of the €24.3bn of total corporation tax receipts expected this year. This is equivalent to more than one out of every four euros of expected tax revenue,” the watchdog’s preliminary estimate of the budget says.

Volatility around the tax was highlighted by August Treasury figures which showed receipts from corporation tax fell by €1 billion compared to the same month last year.

“While a sharp drop was expected and there may be some timing issues, the magnitude of the drop is somewhat larger than expected, highlighting the inherent volatility of this tax rate,” officials commented.

Such warnings play into the hands of McGrath and Donohoe.

However, this raises some questions. Will corporate taxation end in Ireland? Or the tax that helped the country mask overspending in key government departments, cope with the pandemic and help Ukrainian refugees keep coming?

Last week we published a four-part series on corporation tax, detailing in some detail how Ireland has successfully transitioned from the infamous dual Irish regime of the past to the much more acceptable (and much more profitable) world of keeping intellectual property through the so-called green knitwear. While Ireland used to be a conduit for offshoring profits, this has now been replaced by Irish offshoring, a phrase coined by American economist Brad Setser.

However, Thomas dug methodically into the numbers, particularly the August corporate tax drop.

The slump can be summed up in one word: Apple.

The multinational technology company appears to have restructured some of its operations, leading to a difference in the timing of tax payments here. So Apple paid €1 billion extra in March and €1 billion less in August.

“The total corporate tax collected in Ireland in March and August, which comes almost entirely from Apple, is actually incredibly flat this year. The only difference is the balance of payments between the two months,” Thomas wrote.

And he was not the only one who believed in this. Setser, a former senior official at the US Treasury who spent more than a decade tracking the tax flow to Ireland from US multinationals, also weighed in on the subject in a column for Currency last week, as did Steven.

The consensus was that the huge surge in corporate tax revenues over the past decade was unlikely to continue. However, there is also little evidence that there will be a drop from current levels, except for company-specific issues such as concerns over the security of the new iPhone this week in Europe.

“Irish’s tax windfall from the Irish holding of profits by US corporations could increase over the next few years. If Ireland joins the rest of the EU and raises its minimum corporate tax to 15 per cent, all these firms will pay slightly more tax, as their tax bills are a function of both the tax rate and the size of their inherited tax breaks.” wrote Setzer.

“Furthermore, the tax benefits received from Irish holdings of corporate America have a fixed amount and time (they usually last fifteen years, but sometimes less). Over time, in the absence of new tax plays or sudden changes in the fortunes of the tech bigs, their taxable Irish profits should only grow.”

Stephen shared this view, although he did not say that the country’s finances depend on a few technology and pharmaceutical multinationals and a small number of key executives who support the status quo.

According to Stephen, “Budget 2024 will not change Ireland’s corporate tax regime, but will cement Ireland as the preferred conduit for transnational money outside the US. Therefore, given the structure of our political economy, dependence on corporate tax will only grow.”

Ireland has been playing the multinational game for some time and knows the rules of engagement. On Thursday, for example, Michael McGrath rolled out a new “opt-out” for multinational companies. The measure to exempt foreign dividends from corporate tax will not make any financial difference, but was a key requirement to simplify FDI investors. As Thomas said, it shows multinationals that we’re on their side.

There is no evidence that the reward will dry up. But with the budget approaching, it is politically useful for the budget minister to express his concern and exercise caution.

Elsewhere last week we were delighted to team up with Rockwell, which manages €250m on behalf of around 6,500 clients. Working with Amárach, we surveyed over 450 small and medium-sized business owners to find out their views on pensions, wellbeing and plans for the future. Founder Robert Whelan introduced Tom to the results of the survey and told the story of his own business.

Rachel Doyle’s approach to business was one of guts and unwavering faith. In the latest episode of Family Matters, she spoke to Alison Cowser about turning the Arboretum garden center from an idea into an Irish success story, and the dynamics of diplomatic succession in a family business. Family Matters is partnered with Whitney Moore.

Of the 100,000 planned rental homes, no more than 40 percent will ever be rented. However, according to Ronan Lyons in his column, the focus of the government and its money is on universal tax relief in the hope that it will keep landlords in the market – even if there is not enough data to tell us why they are leaving.

On Monday, we broke the news that a German bank had appointed managers of a property in Dublin owned by Korean investors. Based on the new analysis, Thomas and I explained how the original deal was built and why it fell apart.