DAN O’BRIEN

Last year US multinational corporations in Ireland paid 80pc of our total corporation tax take

CORPORATION tax is making the news like never before. That is mostly down to the Apple case — but another topical profit tax issue is why there was such a massive increase in revenues from this tax to the Exchequer last year.

Corporation tax receipts reached an all-time peak in 2015, coming in at almost €7bn. To get to that figure, receipts rose in a single year by almost 50pc, a growth rate that caught everyone by surprise, including the Mandarins of Merrion St who make one-year forecasts for all main revenue streams.

As the first chart shows, this growth rate far exceeds those recorded during the Celtic Tiger boom, when even the most plodding companies could turn a decent profit.

In an attempt to make sense of last year’s figures, two useful research papers have been published of late, one by Paul Tancred of the Revenue Commissioners* and another by David Purdue of the National Treasury Management Agency**.

The recovery in receipts over the past half decade can be explained in general by the recovery in economic conditions in Ireland and internationally. The fact that fewer companies are carrying forward losses incurred during the recession has counted too.

One indicator of the strength of the Irish recovery last year came on Friday when the Irish Stock Exchange reported that its listed companies recorded a 25pc annual increase in after-tax profits in 2015.

But most of the increase in total corporation tax revenue is explained by the activities of US multinational corporations based in Ireland. That is simply because they are the most profitable and have long paid most of the tax. Last year they coughed up 80pc of the total.

The studies also point out that the corporate tax base is getting even narrower. The bulk of corporation tax revenues comes from a small minority of companies who pay in excess of €1m (85pc of receipts come from 1.5pc of companies). Last year, just 10 companies paid 41pc of the total, a share that was almost double the average in the 2008-12 period.

The concentration reflects the fact that in recent years multina- tionals (which are mostly export orientated) have performed better than the indigenous sector, which remains focused on the domestic market. It also reflects multinationals restructuring their international operations — with a view to declaring more profits in Ireland, where the tax rate is comparatively low.

For confidentiality reasons, the Revenue Commissioners do not disclose the details of individual companies, but we do have information on sectoral returns. Tancred analyses these figures to show that three sectors account for the most tax: manufacturing (led by pharmaceuticals), finance and IT. Multinationals account for most activity in all three.

The surge in corporation tax revenue late last year was closely related to the eye-popping 26pc increase in GDP growth.

But two cited causes of GDP growth (aircraft leasing and inversions) will not necessarily lead to bumper corporation tax, according to Purdue. That is in part because of the existence of double taxation treaties, which ensure companies don’t pay tax twice on a single set of profits.

Another cause of the surge in GDP was the shifting by some companies of intellectual property assets to Ireland, which was prompted by the G20/OECD’s effort to have companies book profits where they are generated (the ‘BEPS’ process). This does impact corporate tax receipts.

For all the attention corporation tax gets, it is worth noting that it accounts for a relatively small part of the total tax take across the world, as the second chart shows. Nor has it been trending downwards over recent decades, as the race to the bottom thesis might suggest (it is true that competitive pressures have driven down corporation tax rates across the world, but profits have been rising as a percentage of GDP, offsetting the revenue effect).

And, contrary to popular notions, the amount raised by Ireland in corporation tax is not out of line with other countries, as the second chart illustrates. At its peak during the bubble it was accounting for one in eight euro raised by the State, above the OECD average, and three times more than at the end of the dismal 1980s before the surge in multinational investment of the 1990s.

And all of this is despite Ireland’s 12.5pc rate being well below the OECD average of 25.3pc (though this is exaggerated because the difference between headline rates and the rates actually paid in most countries is usually bigger than in Ireland).

With the present environment at home and abroad, it cannot be underscored just how important foreign direct investment (FDI) is to the Irish economy. Using competitive tax rates to incentivise FDI and exportled growth has been an important part in Irish economic policy since the late 1950s. Although it took until the 1990s, the presence of FDI in Ireland goes a long way to explain how our economy was transformed from one of the poorest in Western Europe to among the richest.

Almost any measure one cares to look at shows the importance of multinationals to the Irish economy.

Foreign-owned multinationals account for one-third of Ireland’s gross value added, two thirds of business research spending and a massive 90pc of goods and services exports. More than one in 10 workers in the private sector work for an IDA-sponsored company. In certain sectors this percentage is higher: about half of manufacturing jobs are in foreign-owned enterprises, according to Department of Finance analysis.

No OECD country has as large a share of its workforce employed by foreign companies.

Nor is there any doubt that as well as employing thousands directly, multinationals provide thousands of jobs indirectly — thanks to the economic activity they bring into the country.

According to the Annual Business Survey by the Department of Jobs, Enterprise and Innovation, IDAassisted companies spend €4.8bn on Irish materials, €5.9bn on Irish services and €9.7bn on payrolls. All of which in turn leads to billions in taxes that can be spent on public services.

Whatever view you take on who is right and who is wrong in the Apple case, the importance of the multinationals in Ireland’s economic transformation and continued prosperity cannot be overstated.