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?

Rewriting the rules

From an Irish perspective the most significant announcement made yesterday by Commissioner Vestager was in relation to Amazon not Apple.  The Commission announced that Luxembourg had granted €250 million of illegal sate aid to Amazon.  The structure used by Amazon in Luxembourg is close to a replica of that used by US companies in Ireland.  It is a double-luxembourgish.  Here is the Commission’s description of the Amazon structure:

Continue reading “Rewriting the rules”

Miriam Hederman O’Brien Prize 2017

The presentation of the 2017 Miriam Hederman O’Brien prize awarded by the Foundation for Fiscal Studies will take place on the Monday 2nd October from 8:00 -9:30am in the Grafton Suite, The Westbury Hotel, Dublin 2.

The aim of the prize is to recognise outstanding original work from new contributors in the area of Irish fiscal policy, to promote the study and discussion of matters relating to fiscal, economic and social policy and to reward those who demonstrate exceptional research promise. The prize forms an important part of the Foundation’s overall objective of promoting more widely the study and discussion of matters relating to fiscal, economic and social policy.

The shortlisted papers are shown here and past winners here.

There will be tea / coffee from 8.00 as well as an opportunity to view stands promoting some of the work and applications nominated for the Award.

The event is free but please register in advance to info@fiscal.ie.

Analysis of Low Pay Sectors

Readers may have seen that the Low Pay Commission recently published their report Recommendations on the National Minimum Wage for 2018.

Perhaps of most interest to readers of this blog are the detailed appendices, which include a study by Revenue and Irish Government Economic & Evaluation Service (IGEES) economists Seán Kennedy, Brian Stanley and Gerry McGuinness of the low pay sectors based on tax return microdata. This paper is also separately available here.

The paper examines the incomes and mobility of taxpayers and the profitability of employers in Ireland using Revenue’s tax record data. The distributional and mobility analysis of low income taxpayers is based on a longitudinal dataset, which follows approximately 100,000 taxpayers for 4 years from 2011 to 2014. These taxpayers are stratified random sample drawn from the entire population of 2.1 million tax units on Revenue records. While analysis of incomes in Ireland and internationally is often based on a snapshot at a moment in time, the longitudinal nature of this dataset allows measurement of income mobility over time.

Some of the key findings are as follows:

  • One in three taxpayers are low paid, defined as those earning below two-thirds of median income.
  • The highest proportions of low paid taxpayers are in the wholesale & retail trade (23 per cent) and accommodation & food (19 per cent) sectors.
  • Five low pay sectors are identified, having median incomes that are substantially below the median income for all sectors. They include accommodation & food service activities, wholesale & retail trade and administrative & support service activities.  Slightly over one third of employments are in low pay sectors.
  •  Low pay sectors have the highest proportions of the youngest taxpayers. Two in five taxpayers are aged 24 and under in the accommodation & food sector.
  • In the low pay sectors, males earn slightly more than females while in the other sectors females earn more. The sectors with the highest ratio of males to females are construction, transport and agriculture (7.5, 2.9 and 2.8 times respectively).
  • In Dublin, median incomes in low pay sectors incomes are 7 per cent higher than those outside Dublin (compared to 9 per cent higher in the other sectors).

Based on an analysis of income mobility, lower paid taxpayers working in low paid sectors have a higher chance of increasing their incomes in future years relative to others within the same sector. For example, in the accommodation & food sector almost half moved upwards from the bottom quintile between 2013 and 2014.

Revenue’s Annual Report 2016

Revenue today published our Annual Report for 2016. The report itself contains a lot of interesting material on our activities and outputs last year. In addition, we have published research reports on Corporation Tax returns for 2015 and payments in 2016, the oil market in Ireland, our latest illicit tobacco survey results and a summary of lessons from the application of behavioural economics in Revenue. We have also updated our regular statistics on Local Property Tax.

The New Yorker on how Apple created Ireland’s real, and less real, economies

For readers who want a good summary of what’s going on with Apple, the EU Commission, etc., Adam Davidson of the New Yorker has a nice piece putting the decision in its historical and political context. From the piece:

Is the Ireland of the real Apple—the physical place with people doing things that produce profit—going to dominate, or will it be the Ireland of tax-free fictions and arbitraging loopholes in a complicated global economy?

Ireland’s economic transformation in the course of the past thirty-five years was remarkable in many ways. Up until the early nineteen-eighties, Ireland’s income per person was one of the lowest in Europe, right alongside Greece’s. Unemployment was well above sixteen per cent for much of the nineteen-eighties. The country’s income began to hurtle upward after 1995. Dell, Intel, and Microsoft joined Apple in Ireland. Large pharmaceutical firms also came, and now more than half of Irish exports are pharmaceuticals. At first, these big firms were excited to find people with advanced degrees willing to work at a fraction of what American, French, or German workers are paid. By the early two-thousands, Ireland’s per-capita gross domestic product was higher than that of the U.S. or the U.K., and fully a hundred and thirty per cent of the European average. For the first time in Ireland’s history, the country experienced net immigration. Alongside the new economy of high-tech and pharmaceutical companies, Ireland continued to develop its agricultural businesses, especially food manufacturing. Ireland is now a major exporter of snack foods and dairy products. For the first few decades, this growth seemed to have been based on something beautiful and right: the Irish had always been highly educated, clever, and hardworking, and they were now earning what they deserved.