Up to 9 billion euros, or 60% of corporation tax levied by the government, could be “temporary”, meaning it should not be counted on in the future, said the Irish Tax Advisory Council (Ifac).
In its latest report, the financial watchdog said the government’s overreliance on volatile and vulnerable corporate tax revenues posed a significant threat to public finances and needed to be reduced urgently.
He suggested that the government could reduce this overreliance by replenishing the so-called rainy day fund or paying down the debt.
The council estimated that, since 2014, the State has collected some 22 billion euros in corporate taxes, including 6 to 9 billion euros out of the 15 billion of last year, “beyond which can be explained by the national economy”.
In other words, these revenues do not come from additional activity in the Irish economy, but from the additional profits of multinationals that transit through Ireland. The council warned that a substantial part of “surplus” income has now been absorbed by ongoing spending, including health care.
“This increases the risk that potential cancellations of these revenues in the future will lead to a sharp increase in borrowing requirements to fund recurring commitments,” he said.
Corporation tax is now virtually on par with VAT as the second source of state revenue. It represents nearly €1 out of €4 collected in tax.
However, around 50% of the total comes from 10 major multinationals, including tech giants Apple, Microsoft and Google, which have large European bases in Ireland.
While corporate tax revenues have risen sharply in recent years, they could still suffer large reversals, Ifac said in its report. “They are more volatile than other major 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 revenue, the government risks having to adjust current spending downwards to consolidate public finances in the event of a drop in revenue,” he said.
Ifac chairman Sebastian Barnes warned that “if a few large companies at the same time decided to restructure their business for whatever reason – because they were taken over or had a better idea of how to organize themselves – this could have a major impact on the Irish economy”.
Changes to 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 from international tax changes – initially estimated at €2 billion – has not been updated following the agreement to impose a overall minimum rate of 15%.
In its recent stability program update, the government predicted that corporate tax revenues would continue to grow in the coming years, reaching €18.4 billion by 2025.
Corporate tax growth is expected to slow after two years of profitability gains, mainly in the information and communication technology (ICT) and pharmaceutical sectors, the government said. However, he also noted “an almost certain decline in corporate tax revenue” at some point in the future.
In its latest budget assessment report, the council also said the government faced a delicate balancing act to manage high inflation, protect poorer households and implement key policies.
“Rising energy and food prices have pushed inflation to its highest level in a generation. Further price increases and tighter financial conditions could herald a global slowdown,” he said.