Up to €9bn or 60 per cent of the government’s corporate tax collection may be “temporary”, meaning it cannot be counted on in the future, the Irish Tax Advisory Council (Ifac) has said.
In its latest report, the financial watchdog said the government’s over-reliance on volatile and vulnerable corporate tax revenue posed a significant threat to public finances and needed to be reduced urgently.
He suggested that the government could undo this over-reliance by rebuilding the so-called rainy day fund or by paying down debt.
The council estimated that, since 2014, the state has collected some 22 billion euros in corporate taxes, including between 6 and 9 billion euros of the total of 15 billion euros last year, “beyond what can be explained by the national economy”.
In other words, these revenues come not from additional activity in the Irish economy but from additional multinational profits sweeping Ireland. The council warned that a substantial part of “surplus” income has now been absorbed into permanent spending, including health.
“This increases the risk that possible reversals of these receipts in the future could lead to sharp increases in borrowing requirements to fund recurring commitments,” he said.
Corporation tax is now almost on a par with VAT as the second source of state income. It represents almost €1 of every €4 collected in taxes.
However, around 50 per cent of the total comes from 10 big multinationals, including tech giants Apple, Microsoft and Google, which have significant European bases in Ireland.
While business tax revenues have risen sharply in recent years, they could still be subject to strong reversals, Ifac said in its report. “They are more volatile than other important taxes; prone to larger forecast errors; concentrated in a handful of companies; and they are exposed to changes in the global tax environment,” he said.
“By financing current spending with corporate tax revenues, the government risks having to adjust current spending to put public finances on sound footing should revenues fall,” he said.
The president of Ifac, Sebastian Barnes, warned that “if a couple of important companies at the same time decided to restructure their activities for some reason, because they were taken over or because they had a better idea of how to organize themselves, this could have a great impact on the economy. Irish”.
Changes in the international tax landscape could have a similar impact, he said.
In its report, the council notes that the government’s estimate of potential losses due to international tax changes, originally set at €2 billion, has not been updated following the agreement to impose a global minimum rate of 15 percent.
In its recent Stability Program Update, the Government forecasts that corporate tax collection will continue to grow in the coming years, reaching 18.4 billion euros in 2025.
Corporate tax growth is expected to moderate after two accelerating years of rising profitability, mainly from the information and communication technology (ICT) and pharmaceutical sectors, the government said. However, it also noted “an almost certain drop in corporate tax revenue” at some point in the future.
In its latest fiscal assessment report, the council also said the government faced a delicate balancing act in managing high inflation, protecting the poorest households and enforcing major policies.
“Increases in energy and food prices have driven inflation to the highest rate in a generation. Further price increases and tighter financial conditions could herald a global recession,” he said.