A global downturn in the tech or pharma sectors would leave Ireland’s finances dangerously exposed because corporate tax receipts have become concentrated among a handful of multinationals, new research has found.
There is almost nothing the government can do to mitigate the risk, David Purdue, an economist at the National Treasury Management Agency, said in a paper on understanding Ireland’s corporate tax revenue.
Ireland’s corporation tax receipts in 2015 were significantly larger than expected at €6.9 billion, with ten companies paying more than 40 per cent of this figure, up from an average of 23.8 per cent in previous years.
The concentrated nature of the receipts poses huge risks, particularly “the danger that the multinational companies who drive the receipts will relocate their business elsewhere,” Mr Purdue said. Companies could be tempted away to lower cost jurisdictions, or forced to shift some activities out of Ireland by possible reform of the US corporate tax regime.
“Even if multinational companies choose to remain in Ireland, our dependence on these companies opens Ireland up to idiosyncratic company or sector shocks which are hard to mitigate. A downturn in the information and communications technology [ICT] sector, for example, could see lower profits and hence lower corporation tax receipts for the state,” he said.
“This type of shock is not something Ireland can easily mitigate. The sectors that dominate Ireland’s multinational base — ICT, pharma, and financial services — are globally focused and as such Irish domestic policy will have little effect.”
Policymakers must take account of this risk when making fiscal decisions, Mr Purdue said. Attracting large multinationals has been a core principle of Ireland’s economic model for decades.
Stephen Kinsella, an economist at the University of Limerick, said that Irish policymakers should view corporation tax income as “highly volatile” and use it only for capital spending rather than current spending, such as public sector wage increases.
Last month the International Monetary Fund urged the government to save any higher-than-expected corporate tax receipts and use them for debt reduction rather than spending. It warned that Ireland may not be able to rely on exceptionally high corporation taxes in the future “given the global push for international taxation reform and greater transparency”.
Mr Purdue’s research showed that Ireland had a much higher dependence on US multinationals for tax revenues that any other EU country.
The share of corporation tax in general government revenue, at just below 7 per cent over 2010-14, was above the EU average of 5.5 per cent.
Mr Purdue said that the multinational money that flowed through Ireland in 2015, causing a surge in GDP, was unlikely to account for the higher corporation tax receipts. Transactions by multinationals caused an unprecedented 26.3 per cent jump in GDP in 2015, a statistical anomaly described by Paul Krugman, the Nobel prize-winning economist, as “leprechaun economics”.
Mr Purdue’s research indicated that any upside for the economy on the back of the surge in GDP growth was limited.
Three types of transaction swelled the 2015 GDP figure: multinationals “re-domiciling” in Ireland to reduce their tax bill in other jurisdictions; purchases by aircraft leasing firms; and companies relocating intellectual property assets to Ireland, again for tax reasons.
Of these, only the third probably led to a noticeable increase in corporation tax receipts, Mr Purdue said.
Manufacturing, led by the pharmaceutical sector, was the largest payer of corporation tax in 2015.
The Revenue Commissioners will publish full details of corporation tax receipts in November.