Surge in cor­po­ra­tion tax down to Trump changes

The Irish Times - Business - - FRONT PAGE - John FitzGer­ald

Santa has come early for Min­is­ter for Fi­nance Paschal Dono­hoe. The tax rev­enue fig­ures to the end of Novem­ber rep­re­sented the best Christ­mas present for the Depart­ment of Fi­nance.

Once again there was a dra­matic surge in cor­po­ra­tion tax rev­enue, with this rev­enue up 32 per cent so far this year. This will cover up the se­ri­ous over­run in health spend­ing, and may even de­liver a bud­get sur­plus for the year as a whole.

In late 2015 there was an even big­ger sur­prise in cor­po­ra­tion tax rev­enue. At the time it was dif­fi­cult to make out ex­actly what was go­ing on.

How­ever, be­cause cor­po­ra­tion tax rev­enue is a fairly stable share of prof­its, it sug­gested a mas­sive in­crease in prof­itabil­ity. At the time no­body out­side the CSO put two and two to­gether. When the CSO pub­lished the na­tional ac­counts for 2015 the fol­low­ing July, the world was amazed to learn that Ir­ish GDP had grown by a quar­ter that year.

This time around the surge in cor­po­ra­tion tax sug­gests a sim­i­lar bumper growth rate for GDP in 2018. While the Cen­tral Bank and the ESRI have fore­cast growth this year of 7-8 per cent, it now seems highly likely that it will be over 10 per cent.

This mas­sive in­crease in prof­its, and re­lated tax rev­enue, is due to the changes in US tax law im­ple­mented by Pres­i­dent Don­ald Trump’s ad­min­is­tra­tion last year.

One of the pro­vi­sions of the law was that firms mak­ing large prof­its from in­tel­lec­tual prop­erty held abroad would have to pay US cor­po­ra­tion tax un­less they had al­ready paid cor­po­ra­tion tax abroad at a rate of more than 10 per cent.

This meant that prof­its ac­cru­ing in juris­dic­tions with a zero rate of cor­po­ra­tion tax had to find a friendly new lo­ca­tion, with a tax rate just above the thresh­old set by the US tax law. Ire­land’s 12.5 per cent rate has met this re­quire­ment.

As was the case in 2015, this “flight” to Ire­land of in­tel­lec­tual prop­erty owned by Amer­i­can multi­na­tion­als has not brought with it any sig­nif­i­cant em­ploy­ment. None­the­less, the ad­di­tional cor­po­ra­tion tax rev­enue that it gen­er­ates amounts to al­most 1 per cent of ad­justed Gross Na­tional In­come.

While more than 10 per cent of the ad­di­tional tax rev­enue will go in ad­di­tional EU bud­getary con­tri­bu­tions, the bal­ance that ac­crues to the ex­che­quer still rep­re­sents a sub­stan­tial in­crease in Ir­ish re­sources.

Prof­its of multi­na­tion­als

The in­creased prof­its of multi­na­tion­als could raise our mea­sured GDP by up to 5 per­cent­age points. With the CSO quar­terly na­tional ac­counts show­ing growth in the first three quar­ters of this year of more than 7 per cent, this would mean that the fig­ure for the GDP growth rate for 2018 as a whole could be sig­nif­i­cantly above 10 per cent.

This would make head­lines around the world, sug­gest­ing that Ire­land is a su­per econ­omy, but we know that the story, while good, is much less spec­tac­u­lar.

GDP, the stan­dard in­ter­na­tional mea­sure of eco­nomic ac­tiv­ity, is a poor guide as to what is go­ing on in Ire­land’s real econ­omy. While we have al­ter­na­tive mea­sures like Net Na­tional In­come (NNI) and GNI that are closer to the true pic­ture, it is still hard with cur­rent data to strip out from our sta­tis­tics the dis­tor­tions caused by multi­na­tional ac­tiv­ity, and to un­der­stand what is go­ing on in the real econ­omy. As a re­sult the Min­is­ter for Fi­nance is fly­ing blind to a de­gree. The ab­sence of use­ful in­for­ma­tion cre­ates a con­cern that un­wise de­ci­sions are be­ing taken.

Last month the CSO pub­lished data on the top 50 multi­na­tion­als in Ire­land. This showed that they ac­count for 40 per cent of Ir­ish GDP, but only 5 per cent of NNI, the best mea­sure of eco­nomic wel­fare.

The rest of the for­eign multi­na­tion­als ac­count for around 10 per cent of NNI be­cause they have a much higher em­ploy­ment con­tent.

So while multi­na­tion­als dom­i­nate the GDP fig­ures, they play a much smaller role in the real econ­omy.

We clearly ur­gently need data that can fully sep­a­rate the ac­tiv­ity of multi­na­tion­als from the rest of the econ­omy.

The cur­rent US ad­min­is­tra­tion has nei­ther the bon­homie nor good­will that we as­so­ciate with the real Santa. There is a real dan­ger that fu­ture changes in US tax law could wipe out much of our cur­rent cor­po­ra­tion tax rev­enue. In ad­di­tion, these fre­quent “wind­fall gains” de­tract from our rep­u­ta­tion among our friends and neigh­bours.

All of this ar­gues for sav­ing the un­ex­pected rise in tax rev­enue for a fu­ture rainy day.

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