The taxation of profits from intangible assets and Ireland’s contribution to the EU Budget

In last weekend’s Sunday Independent Richard Curran had a piece the start of which looked at a measure passed via Financial Resolution No. 3 on the night of the Budget speech. He says:

Multinationals make very real profits from charging for the use of their IP. In 2015, the trading profit made by multinationals in Ireland on their IP shot up by €26bn. This was completely offset by capital allowances they received - basically reducing their taxable profit on that to close to zero.

To put it in perspective if we had allowed just 80pc of that to be set against capital allowances, we could have taxed 20pc of it at 12.5pc. It could have yielded around €650m in tax.

The measure is linked to the recently published Review of Ireland’s Corporation Tax Code and Richard Curran’s piece throws light on most of the key issues, except one: the link to Ireland’s contribution to the EU budget.  This is referenced in paragraph 9.3.11 of the review:

Figures from the Revenue Commissioners and Tancred (2017) show that there was a €26 billion increase in intangible-asset related gross trading profits in 2015. This was offset by an increase in the amount of capital allowances for intangible assets of a similar scale. These gross trading profits are included in Ireland’s Gross National Income but the use of capital allowances results in a much smaller amount being included in the taxable income base for Ireland’s Corporation Tax. Given Ireland’s contribution to the EU Budget is calculated by reference to Gross National Income, this increase in profits has an impact.

Assessing this impact was beyond the scope of the review but is something which the seven-page note linked below attempts to address.  With lots of moving parts precision is difficult to achieve but the broad elements of the issue should hopefully stand out.

A note on intangibles, the taxation of their profits, and Ireland’s contribution to the EU budget

Update: Here is a bullet-point summary

  • In 2015 intangible-asset-related gross trading profits of multinationals operating in Ireland increased by €26 billion.
  • In the same year claims for capital allowances related to expenditure on intangible assets increased by €26 billion.
  • No Corporation Tax is due on the gross profits offset by capital allowances
  • Using estimates from the Department of Finance implies that these figures have risen to around €35 billion for 2017.
  • These untaxed profits are included in Ireland’s Gross National Income which adds about €200 million to the country’s contribution to the EU budget.
  • A cap on the amount of capital allowances that can be used in a single year is to be introduced for new claims for capital allowances on intangibles.
  • Based on patterns for the past two years the Department of Finance forecast that this will result in €150 million of additional Corporation Tax being paid in 2018.
  • The Revenue Commissioners figures for 2015 and the Department of Finances estimates of the impact of recent onshoring imply that  intangible-asset-related gross trading profits are expected to be around €40 billion in 2018 (with a further €36 million added to the EU contribution).
  • If the cap applied to all claims, existing and new, then the additional Corporation Tax to be collected in 2018 could be up to €1 billion using the 2015 figure published by Revenue and estimates from that time used by Finance.
  • If companies who are expected to move IP here in future years are happy to pay the tax now why doesn’t the same apply for companies who already have IP here?

7 thoughts on “The taxation of profits from intangible assets and Ireland’s contribution to the EU Budget”

  1. Very useful and informative. Mirage is lifting in the desert of the real.

    So in 2015 we have 25 Billion of Capital [ ~35 billion in 2017 to @40 billion in 2018], intangible asset related gross trading profits on which no Irish corporation tax was paid due to the deduction of capital-allowances, resting in a gloriously rent free Hibernian capital but costing its Labour-Citizenry due to “lost” corp tax revenue plus increase in EU contributions, the latter costing ~10 Billion over a ten year period plus impacting on the fairy figures in Grimms’ fiscal space.

    As you put it? “Why aren’t we collecting it?” This isn’t hospitality! We’re being codded … yet again.

    Methinks we sorely need some serious discourse and action on Labour-Citizenry Allowances …..

    As for “grandfathering” …. No comment …

  2. Dave O’Donnell’s use of the term mirage is appropriate and in the age of concern about Fake News, I tend to use the term fairytale, for example for statements that Apple has over $200bn “trapped” in Ireland😏

    It’s interesting though that while this called-trapped cash and “moving IP to Ireland” are Orwellian, they do have the aura of being facts even though both result from electronic accounting transactions, typically performed in seconds or minutes by junior staff in the United States.

    It’s also interesting that most of the commentary quoted in the media on Intellectual Capital are made by vested interests who do paid work for FDI firms, and of course they are optimistic
    about increasing real world research in Ireland.

    US multinational companies spend about 85% of their R&D in the US and there is no existing evidence that that will begin to shift significant research to Ireland and identify Irish ☘️ inventors in paten applications.

  3. I’m not sure that either ‘mirage’ nor ‘fairytale’ really gets to the core of this obscene boondoggle: Transubstantiation more like.

    Am I now an involuntarily volunteered serf in the neo-feudal state of MNCstan? Looks like it.

  4. “If companies who are expected to move IP here in future years are happy to pay the tax now why doesn’t the same apply for companies who already have IP here?”

    The levying of taxation always involves some form of negotiation and political judgement. When it comes to MNEs the “negotiation” is at a different level primarily because they exercise so much economic and market (and inevitably political) power. In 2014 the loophole allowing Apple to use an Irsh incorporated company that wasn’t taxable anywhere was closed, the phasing out of the ‘double Irish-Dutch sandwich’ boondoggle was announced and many of the MNEs (under pressure from various forces) were keen to move their IP from no-tax jurisdictions to lightly-taxed jurisdictions (such as Ireland). Even if it wasn’t announced at the time the then government opened a window by increasing the capital allowance percentage from 80 to 100% to faciliate the last gambit and to provide some compensation for the closing or phasing out of previous loopholes or boondoggles. There was no indication that this wndow would remain open indefinitely, but it allowed a huge transfer of IP at a negligible tax cost. The window has now been closed a little (from 100 to 80%) and it’s tough on those MNEs which didn’t shift their IP while it was fully open. But I don’t think we should feel too sorry for them. However, if the 80% was applied to the MNEs that got in while the wndow was open 100% they would cut up very rough. And since it is likely these are the ones who exercise power and who the government wants to keep happy, it won’t happen. However, the cut from 100 to 80% will generate some tax revenue that will partly compensate for the increased EU contribution. And since, as Seamus points out, there are many moving parts, more compensation may emerge to defray the higher contribution.

    The real question is should be relying so much on tax revenue from these Leprechaum economics gambits. And if we are locked in should we not be treating most of it as economic rents or windfalls and putting the receipts in to a sovereign wealth fund.

      1. Indeed Colm. And I’m sure you know that I know that. But we could always pretend, project an optical illusion and seek to suspend disbelief for as long as possible. We do that all the time, in the same way that we pretend we have an energy (now a utilities) regulator that protects the interests of consumers when electricity and gas prices are more than 20% higher than those in Britain (where the government there is legislating for a price cap to bring their prices down), or a central bank that protects the interests of bank customers but finds that, even if it has the powers to do so, it would take too long and be too much hassle, or an aviation regulator that protects the interests of airline passengers but goes missing when the Irish-based but biggest airline in the EU treats its customers with utter contempt until the British regulator, the CAA, gets stuck in.

        I think a pretend sovereign wealth fund would be a wonderful addition – the Leprechaun economics crock of gold.

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