US President Joe Biden’s recent visit sparked much debate and dissection about the real and imagined Irish on both sides of the Atlantic.
But this week, from the unlikely source of income, we were treated to a glimpse of a uniquely Irish-American universe so otherworldly that it both terrifies normally sober economists and makes the most fiscally prudish positively skittish.
In an addendum to its annual report, the Tax and Customs Administration published an analysis of the corporate income tax payments and returns for 2021 and 2022.
The headline that jumped out of the report was the finding that the tax paid by the ten largest companies (all US multinationals) here went from 53% of corporate tax paid in 2021 to 57% in 2022.
In cold hard cash terms, that was ten checks written for just over €13 billion.
This is the ‘concentration risk’ that the Ministry of Finance warns against.
Simply put, it’s like saying we have too many eggs in too few baskets.
If this tax disappeared or decreased significantly, we would have a big hole in our public finances.
The eggs and baskets are alarmingly in the sub-dozen or even sub-half-dozen category of concentration risk.
Industry accounted for just over 77% (€5.7 billion) of last year’s 48% (€7.3 billion) corporate tax increase.
When the profit of the industrial sector is further broken down, about half goes to ‘ICT manufacturing’.
There are not too many companies in Ireland involved in ICT manufacturing.
Just under half is attributed to ‘chemical and pharmaceutical production’.
Again, not a whole lot of companies are involved either. That’s how concentrated most of the Treasury’s fortune is.
The report also highlights that manufacturing sector profits are up 41.4% in 2021.
The IRS report also undermines the narrative that Ireland’s corporate tax generosity only proves that our economy really is a comprehensive tax regime
“Revenue’s report calculates that in 2021 there were 825,000 people employed by foreign multinationals (a third of the workforce) who collectively paid €13.3 billion, or 52%, of the combined income tax, USC and PRSI totals”
‘Booms don’t last forever’
You don’t have to be a believer in business cycle theory to realize that profits on this scale can’t last forever.
We’ve had a boom in IT and pharma, much thanks to a happy uptick in Covid. But booms don’t last forever.
The report from the UK tax authorities also undercuts the narrative that Ireland’s corporate tax generosity only proves that our economy is truly a comprehensive tax system.
Yes, tax structures are of course important and are very attractive to multinational companies that choose to establish themselves here.
But their investment in the economy isn’t just a brass plate and a few generous professional fees.
The Revenue report calculates that in 2021 there were 825,000 people employed by foreign multinationals (a third of the workforce), who collectively paid €13.3 billion, or 52%, of the combined income tax, USC and PRSI totals.
Corporate income tax returns have risen steadily since the middle of the last decade. They’ve gone through the roof in recent years, nearly doubling since 2020.
Reforms introduced by the Trump administration, coupled with other reforms brokered by the Organization for Economic Co-operation and Development, appear to have boosted profits routed through Ireland
Ironically, the reforms introduced by the Trump administration in 2017 that sought to unlock some of the billions offshore owned by US multinationals, coupled with other reforms brokered by the Organization for Economic Cooperation and Development (OECD), the profits routed through Ireland and consequently the tax paid here.
In the very short term, next year’s increase in the minimum corporate tax rate, which is part of the OECD reforms, could well lead to Ireland collecting even more next year.
There is another theory that intellectual property tax exemptions that were “imported” into Ireland by multinational corporations after the Trump reforms have now all expired, leading to higher taxes being paid on the profits attributable to the patents on various software and other products.
The second part of the OECD deal, which would give larger countries the right to tax a larger share of the profits of large multinationals, has not yet been agreed.
That is the part of the deal that could reduce the amount of tax collected by Ireland.
The Ministry of Finance’s estimate of this at €2 billion is vastly out of date. It will be higher than that.
However, with the US quickly entering the election cycle, the prospect of this part of the deal being finalized soon fades, and with it the danger of Ireland’s tax premium abruptly disappearing in the near term.
The OECD recently appointed a US citizen, Manal Corwin, to replace Pascal Saint-Amans as head of its tax reform operation.
Mrs. Corwin took office this month. We will have to wait and see whether her appointment is a catalyst for a process that appears to be stalled.
In the meantime, with few clear signs of an imminent slowdown in the corporate tax bonanza, the political challenge here to use this windfall wisely will intensify.