Oliver Mangan: Corporation tax boost when rate for large firms rises to 15% next year
The Department of Finance has warned over the past couple of years that much of the surge in corporation tax receipts could well prove temporary or windfall in nature.
The last three months have seen much lower than expected Irish corporation tax receipts, which fell by a third, or €2.3bn, on the corresponding three-month period last year. A big decline in receipts seems likely in November also, the most important month for payments.
Both the output and exports from the multinationals operating in the pharma and ICT sectors have fallen sharply this year and this is now being reflected in lower corporation tax receipts.
The surge was largely due to covid, with a big jump in the production of vaccines, as well as semi-conductors. This saw an associated big rise in corporation tax receipts, which almost doubled from €11.8bn in 2020 to €22.6bn last year. Demand for these products has fallen off after the pandemic, with high levels of inventories also being run down.
This is not a major surprise: The Department of Finance has warned over the past couple of years that much of the surge in corporation tax receipts could well prove temporary or windfall in nature. CSO data show that the output of the multinational sector in the first nine months of 2023 was still up by almost 50% from in 2020, and only 11% down on the 2022 figure.
It should also be remembered that 2021 and 2022 were record years for inflows on new foreign direct investment into Ireland and these flows remained strong in the opening half of 2023. Thus, the multinational sector is still adding capacity. Meanwhile, it would appear that much of the growth in output in 2021-2022 was due to contract manufacturing abroad.
This may help explain why there has not been a spill-over effect into employment and income tax receipts from the sharp fall in manufacturing output this year. There will of course be a negative impact on the public finances from lower than expected corporation tax receipts. Fortunately, much of the surge in these receipts in 2021-22 was saved.
However, revenues will be boosted next year by an increase in the corporate tax rate from 12.5% to 15% for larger companies, who account for the vast bulk of the receipts. Overall, while corporation tax receipts are falling back markedly, the public finances are in a strong position given the large budget surplus. Furthermore, the decline will be partly offset by the hike in the tax rate on larger companies and continued expansion of the multinationals in Ireland.
