Understanding Ireland’s Corporate Tax Revenue

The NTMA are out with a really interesting note here (.pdf). 3 sectors–pharma, manufacturing, and finance and insurance–are responsible for 69.5% of all corporation tax.

Worth contrasting with Paul Tancred of Revenue’s earlier work trying to understand the problem here.

 

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Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

12 thoughts on “Understanding Ireland’s Corporate Tax Revenue”

  1. Gross operating surplus (GOS) as returned by US companies to the Bureau of Economic Analysis (BEA) includes transfers to Irish offshore shell companies while in recent years existing profit shifting by drugs firms has been boosted by booking of production at overseas group plants that now account for an additional 74% of customs-tracked exports.

    The real goods trade surplus (exports at €112bn and imports at €70bn) was €42bn in 2015. In addition, the trade surplus on so-called overseas contract manufacturing: amounted to €68bn.

    A state agency feels compelled to dance around these issues, which make comparisons with other nations of little value.

    BEA data on the US FDI investment in Ireland doubling since 2007 is promoted by the American Chamber of Commerce in Ireland as showing the likes of Germany and China trailing — but jobs data shows that the data is not reliable. Double investment since 1960-2007 and add just over 10,000 jobs!

    What is striking is that the small and underperforming indigenous international sector provides as many direct jobs as the FDI sector — the latter however gets the most attention from policy makers.

  2. I am very surprised at the (Fig 2) graph on the presentation, showing the very low percentage of of general govt revenue, in each country, that is represented by corporation tax. An EU average of 5.5% per the commentary, with Ireland, despite all the FDI companies etc, only managing to attain less than 7%.
    I have to wonder how much of EU GDP is made up of corporate profits, but on the face of it 5.5% in taxes from that sector is extraordinarily low.
    One wonders if society is now being constructed to benefit the corporations, rather than the corporations being constructed to benefit society,

    1. “One wonders if society is now being constructed to benefit the corporations, rather than the corporations being constructed to benefit society”

      One wonders? *Many* wonder!

    2. @ Joseph Ryan

      It should be kept in mind in relation to business taxes in Europe, that Irish employer social security tax rates are among Europe’s lowest: 11% vs. 31% in Sweden — this comes at a cost with 60% of Ireland’s private sector workforce having no occupational pension coverage.

      In 1952, the US corporate income tax accounted for 33% of all federal tax revenue. Today, despite record-breaking profits, corporate taxes account for 10% — however since 1980 there has been a jump in the number of US firms that pay tax on profits via income tax. In addition, sales tax is a state tax whereas elsewhere it typically is a national tax.

      The following are OECD rates for the ratio of corporate taxes in national tax receipts in 1965, 1999 and 2013 or 2014:

      Ireland: 9.1; 12.0; 8.3
      Germany: 7.8; 4.80; 4.2
      UK: 4.4; 9.90; 7.5
      France: 5.3; 6.50; 4.5
      Sweden: 6.1; 5.80; 6.1

      France has a bizarre system where an effective corporate rate (amount of tax provided for in accounts as a ratio of taxable net income) of 8 to 9% applies to small firms while the rate for other firms declines to the same range for very big firms.

      The OECD commented in 2013:

      France’s high statutory tax rate is coupled with low revenues, measured either as a share of GDP or total tax revenues because of the large number of loopholes and tax breaks. As the Conseil des Prélèvements Obligatoires (French Tax and Social Charges Board,2009) points out, the result is an effective tax rate paid on realised profits of only 8% for companies included in the CAC40 (the main index of the Paris stock exchange) and 22% for SMEs. More generally, the report finds that the effective tax rate diminishes as company size increases.

      France has two main corporate tax rates — a rate of 15% for small firms and a combined rate of 34.43% for bigger firms. In addition, a temporary 10.7% surtax, that applies to end 2016, is levied on companies with a turnover over €250m.

    3. @Joseph Ryan,

      ‘..corporations being constructed to benefit society…..’?

      Normally you’re much more clear-sighted. You should work on the basis that every large corporation that provides goods or services for the public is a conspiracy against the public. This is how our legislators should treat them.

      1. “One wonders if society is now being constructed to benefit the corporations, rather than the corporations being constructed to benefit society”

        Nonsense. For a start the focus should not be on corporations per se but on the owners of corporations and those with whom they interact. There is a long standing debate about the incidence of corporate taxation: does it ultimately fall on owners (shareholders) or customers or workers? One train of thought is that in open economies with high capital mobility, the incidence of corporate taxes may be largely on labour, unlike closed economies where it may be largely on capital (i.e. shareholders). There is a big literature on this. For example see the following from the NBER: http://www.nber.org/papers/w11686

        There is an argument for not taxing corporate profits at all, but on concentrating on the incomes of the ultimate owners. Some of them will dodge taxes by living in some tax haven, but would this be any worse than what we have?. Not everyone wants to, or could physically live in places like the Cayman Islands.

        1. What you say is, of course, true but seldom, if ever, mentioned. Taxing corporations is seen, by definition, as a good thing. There is also a something of a contradiction in the paper itself in the manner in which it lays emphasis on the “low” share that corporation tax represents of the total tax take when it is one of the highest in the OECD. Factoring in the actual level of tax levied, the relative share is probably even bigger. Not a very solid basis to plan expenditure, given the mobility of the FDI involved, a fact recognised in the paper.

          John Fitzgerald on the general topic.

          http://www.irishtimes.com/business/economy/john-fitzgerald-greater-accuracy-on-national-accounts-vital-for-budgeting-1.2744962

          The coincidence of circumstances is, once again, pushing things in the right direction. Some credible figures will have to be established other than those used to calculate the aptly named Expenditure Benchmark required under the fiscal rules.

        2. “For a start the focus should not be on corporations per se but on the owners of corporations and those with whom they interact. …”

          Why should the focus be on the ultimate owners of the corporations; ultimate owners, distant, unknown, who will often never bear a burden of taxation on their gains within those corporations?

          Corporate profits are a return on the capital employed by investors in a corporation, and to attempt to follow that chain of return through tax havens and special tax vehicles etc, down through decades, if not generations, through to its ultimate beneficiary would be a futile and meaningless exercise.

          Corporations are now revenue generating and asset rich, politically powerful behemoths. They generate huge returns and use every trick, and ruse, to minimise paying taxes to the societies in which they operate. IMHO, they have got away with far too much in respect of the low taxation levels in relation to their returns on capital employed.

          Even when the ownership churns, the investors, getting out pay capital gains tax (not income tax) , usually at a reduced rate, and in many high profile cases relocate their tax residency before cashing in gains, to avoid paying any tax at all. Monaco and Portugal spring to mind.

          In Ireland at present, we have the Alternative Investment Funds (AIFs), apparently not paying a cent of corporation tax, on revenue (and capital gains?) on assets in Ireland, yet any non-corporate individual would pay income tax and capital gains on those assets.
          Hardly equitable, is it?

      2. @ Paul Hunt

        Powerful corporations are not new — think of the Standard Oil Trust and the East India Company — and today some of them have governments on their knees. But we live in neither a Utopia nor a Dystopia — some corporations contribute to the advance of humanity! In 2006 when university students and others protested against French government proposals aimed at reducing youth unemployment, one national poll suggested that three-quarters of French students would like to become civil servants — in recent years China has withdrawn the so-called iron rice bowl or right of life-time employment from most civil servants.

        The development of joint-stock companies helped to bring prosperity to Europe — sometimes taking advantage of colonialism — but where the balance of self-interest and the public interest lies is an issue in particular for near or actual monopolies, whether ownership is via taxpayers or shareholders.

        Adam Smith, author of the 1776 book ‘An Inquiry into the Nature and Causes of the Wealth of Nations,’ had a sophisticated view on self-interest while that of Karl Marx was naive — it’s an irony today that China is the only significant ‘communist’ economy and it’s the closest we have to a model of a 19th century classic capitalist economy!

        If Marx was right, China should now be preparing for the collapse of capitalism.

        I did once read ‘The Wealth of Nations’ and P. J. O’Rourke’s ‘On The Wealth of Nations’! The latter was more entertaining!

        “The interest of the dealers in any particular branch of trade or manufacturers,” Smith wrote, “is always in some respects different from, and even opposite to, that of the public.” He went on to note that any proposals coming from business “ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.”

        While Smith identified the importance of individual self-interest, his emphasis was that you serve your own self-interest by serving the self-interest of others, in the context of a community. It is not what is generally concluded because the last line of the following extract is what is most often quoted, in isolation:

        In civilized society he [man] stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons.

        In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only.

        He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.

        It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-love, and never talk to them of our own necessities but of their advantages.

  3. The paper shows that around 80% of the variation in corporate taxes can be explained by Gross Valued added or Gross Operating Surplus. The problem is that it is impossible to predict the explanatory variable one year ahead so we are as likely to witness massive undershoots relative to profile as massive overshoots.

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