Billions of euros in corporate tax flow into the state coffers. This year it should be 20 billion euros. Ten years ago it was 3.5 billion euros.
It seems inevitable that politicians will become dependent on this source of income, while economists worry about when it will dry up.
The corporate tax ‘money tree’ will benefit the government this year as it prepares a €6.7 billion budget. If tax revenues from corporate profits had remained at the level of 2019 (which was itself a record), the treasury would have a deficit of around 7 billion euros this year and next.
So we hit the jackpot. What could possibly go wrong? The obvious risk is that corporate decisions made by executives in headquarters thousands of miles away could seriously reduce the amount of corporate tax available to us.
The contribution is so concentrated that at this point more than half of all corporate tax revenues come from just 10 companies. By way of comparison, every eighth euro collected as a tax in the state comes from decisions made in just 10 boardrooms.
Of course, we should welcome the fact that multinational companies contribute enormously to our economic prosperity. The problems arise when we examine how much profit and tax is declared by Irish companies.
Much of this is clearly due to the physical presence of these companies, which have created hundreds of thousands of jobs and sell genuine products around the world.
But there’s another part of the win that’s harder to explain and quantify. It relates to the location of intellectual property (IP) in Irish registered companies and the attribution of profits to Irish companies from activities in other countries.
Multinational giants like Apple, Intel and Pfizer have invested billions in equipment and people here. It’s extremely unlikely they’ll pick up sticks and take it all somewhere else.
The problem arises where the Treasury is overly dependent on the profits derived from the more intangible aspects of what large corporations have registered in Ireland.
Some believe this fear may be overdone. Danny McCoy, chief executive of employers’ group Ibec, acknowledges that corporate tax revenues could fall going forward, but he sees no signs of falling in the short term. He believes intellectual property is a sustainable resource, unlike exploring for oil or gas, which is running out. It’s an interesting analogy, except we didn’t develop the IP. It’s only here – for now. Oil and gas are finite resources, but they cannot be moved.
Mr McCoy is right when he says that Ireland did not find this ‘money tree’ by accident, but by developing one of the most successful business models in the world.
The Central Bank and Irish Fiscal Advisory Council warn of the risks of having such a high percentage of government revenue coming from a handful of companies.
The solution is to make sure we don’t use potentially temporary gains to fund day-to-day government spending. But corporate taxes contribute nearly a quarter of all taxes. How could we not?
The government is now talking about setting aside some of the extra billions to pay down debt or put into a rainy-day fund.
Why not put the money in a fund that invests in one-off projects like schools, hospitals, transportation infrastructure, or a wealth fund to meet future state pension needs?
The largest sovereign wealth fund in the world is in Norway. The fund is worth $1.2 trillion based on government revenue from massive gas and oil discoveries. They never spent any of it. The state only benefits from the investment return of the fund on an annual basis.
We didn’t find much gas. We have leveraged our relationships with US multinationals and our tax laws to great effect. Multinationals are here to stay, which is very positive.
What we don’t know is whether the excessive corporate taxes collected in recent years will continue.
The US and others could move towards greater isolation and shorter corporate supply chains. We are now in a very uncertain world. But companies will always have to expand abroad. They’ll just be more selective about where they go.
Ireland offers an opportunity. They will want to invest, create jobs, and locate their executives and intellectual property in places they consider politically stable and “business-friendly.”
Ireland continues to fit that bill. If anything, the current international upheaval could bring more foreign direct investment to Ireland in the coming years.
Political stability is one thing, being “business-friendly” is another. Neither is a matter of course.
Future struggles between states and corporations will not only be about taxes. It deals with topics such as data protection, access to energy sources, labor law and regulation.
We are already seeing political tensions around data centers and their power consumption. Ireland is already accused of taking a soft approach to data regulation by powerful tech giants. These problems will only get worse.
The challenge for Ireland may well be to remain an attractive place to invest without falling into the pockets of a handful of corporate giants.
The more they contribute to corporate taxes, the greater the dependency on the state and the more influence these companies retain.
The success of foreign multinationals in Ireland has been transformative. It should never be the end goal of economic strategy. The longer term goal should be to build more Irish business success stories.
The presence of global giants here should support this process, not replace it. In the meantime, let’s put the extra money to good use.
https://www.independent.ie/opinion/comment/we-need-to-branch-out-with-the-money-tree-tax-in-case-firms-up-sticks-and-leave-41826184.html We need to branch out with the “money tree” tax in case companies hit sticks and leave