By John CampbellBBC News NI economics and business editor
1 hour ago
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The Republic of Ireland collected €22.6 billion in corporate tax in 2022
In April 2021, remarks by the US Secretary of the Treasury sparked nervousness among Irish politicians and officials.
It was clear that the US was preparing to revive international efforts to reform corporate taxation.
Janet Yellen wanted to end “the global race to the bottom” in which large, mostly US companies staged operations to cut corporate taxes sharply.
A long-standing part of the Republic of Ireland’s economic strategy has been to attract tax-sensitive foreign investment.
The total corporate tax rate of 12.5% is among the lowest in the developed world.
The work on those global tax reforms is not yet complete and Ireland is yet to be settled.
But for now, the country is reaping an astonishing bounty.
That became clear when Treasury Secretary Michael McGrath delivered his spring economic forecast last week.
Michael McGrath is in a position that would envy many finance ministers around the world
He was in the fortunate position to forecast a budget surplus of €10bn (£8.85bn) this year, or 3.5% of national income.
In other words, the state will collect 10 billion euros more in taxes than it spends.
This is not expected to be a one-off; the annual surplus is expected to exceed €20bn (£17.7bn) by 2026.
Where does the money come from?
The Irish economy has made a strong recovery from the Covid-19 pandemic, so more taxes such as VAT are being collected.
But something else is going on. That something is corporate income tax from multinationals.
Last year, Ireland collected €22.6bn (£20bn) in corporate tax, 182% more than the €8bn (£7.08bn) it collected five years ago.
Of that €22.6bn, Mr McGrath has designated around €12bn (£10.62bn) as a “windfall” from multinationals, meaning it is derived from a certain set of circumstances that will not last forever.
Ireland has long played a role in multinational corporate tax planning, often as a conduit to move money.
But in the middle of the last decade, some of the world’s largest companies began to reorganize their businesses so that they would pay much more tax in Ireland.
Ironically, this was partly a response to pressure on big companies to clean up their tax laws.
The principle was that companies should report their profits in locations where they have substantial real-world operations or activities, rather than just in a low-tax location where they happen to have an office with few employees.
Multinationals such as Apple employ thousands of people in the Republic of Ireland
Ireland was a perfect fit – it was a tax-friendly jurisdiction, but companies like Apple had long had real operations in the country and employed thousands of people.
What followed was the legal transfer of intellectual property (IP) rights to Ireland – the most valuable profitable parts of these companies.
Financial journalist Thomas Hubert has been analyzing company returns to find out how much tax Apple has paid in Ireland since that IP move.
There are probably other factors at play, including the expiration of certain tax incentives, but commercial confidentiality means there isn’t really a full and easy-to-understand explanation of exactly what’s going on.
So what should you spend it on?
Prof Alan Barrett from the Economic and Social Research Institute in Dublin said the difficulty of determining how much of this tax is a temporary windfall means there is caution about how the money should be spent.
“The government and all commentators recognize that because we can’t explain why so much additional revenue is coming in, that revenue could disappear very quickly,” he said.
“The discussion right now is about the idea that we have to be very careful not to make long-term day-to-day spending commitments based on this revenue.”
He said people were aware of the danger of repeating the mistakes made at the end of the Celtic Tiger period, when spending plans depended on property tax revenues, which collapsed along with the real estate market.
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Rents and property sales have skyrocketed during the Irish housing crisis
One obvious way the money could be spent is on a massive social housing program and related infrastructure.
Ireland is in the grip of a housing crisis that the governing coalition has struggled to get to grips with and is being penalized in the polls as a result.
But Prof. Barnett said turning the windfall into houses wasn’t easy.
“The difficulty is that the economy is essentially running at full employment, so there just aren’t the agencies available to do things like build housing or other forms of infrastructure,” he said.
For that reason, more and more people are thinking of a form of sovereign wealth fund.
In concluding his prognosis, Mr. McGrath that “the costs of demographic change are now very clear ahead” and that it will cost up to €8 billion more per year over the course of this decade simply to meet existing levels of government support. employ.
That is why he will soon come up with a proposal to “pre-finance part of these costs through a government savings vehicle for the longer term”.
But don’t expect the whole windfall to be snatched away.
Ireland’s next general election is due in March 2025 and a few giveaway budgets may be the best chance for the coalition to retain power.