A massive shock to corporation tax could cost Ireland as much as €6bn a year

That’s according to a Department of Finance paper exploring ‘extreme’ but plausible scenarios.

By Conor McMahon Deputy editor, Fora

THE PUBLIC PURSE could lose between €1 billion and €6 billion a year if there is a major shock to Ireland’s corporate tax regime, according to a newly published Department of Finance paper.

The report, released yesterday as part of a swathe of Budget 2020 documents, highlights the Irish economy’s exposure to global tax reforms.

It examined three “extreme, though far from implausible” situations where changes to international rules would undermine the State’s 12.5% corporation tax rate. Though the report did not rank the simulations by probability, the authors noted that ”low probability but high-impact shocks, can, and indeed do, materialise”, as was the case with the financial crash.

Institutions like the Central Bank, the Irish Fiscal Advisory Council and the ESRI think tank have warned the government about increasingly relying on corporate tax receipts to fund public expenditure. Last year’s takings generated €10.4 billion for the Exchequer, representing more than 18% of total tax receipts.

This comes at a time when the OECD has proposed reforms intended to address how tech giants are taxed, which is likely to impact Ireland, the European base for many of these firms.

The Department of Finance’s paper acknowledged this risk. It also highlighted the fact that Ireland’s corporate tax earnings are dependent on a small number of firms – around 45% of all receipts last year were generated by just 10 companies – which makes it even more vulnerable.

According to the study, if corporate tax receipts reverted to 2014 levels in the face of a corporate tax shake-up, the Exchequer would stand to lose up to €6 billion a year by 2021. That’s double the estimates previously forecast by professional services firm PwC and the International Monetary Fund.

“Depending on the source of this shock, other fiscal aggregates could be affected,” the Department of Finance paper stated, warning that income tax and VAT receipts could decline, while unemployment expenditure might increase in the wake of a significant shock.

A less-severe simulation, where corporate tax receipts would decrease from 18% of total tax takings to 14%, could cost the public purse €2 billion a year, the research found.

A third potential outcome, where corporate tax receipts fall in line with Ireland’s gross national income – an economic metric that excludes income generated by non-residents domiciled in the country – would cost the Exchequer €1 billion annually in lost revenue.

The authors of the report concluded that any shock to the country’s corporation tax earnings would have a “significant” impact on the State.

Their main recommendation to policymakers was to ring-fence “a certain portion of receipts so they are not used to finance permanent increases in expenditure or reductions in taxation”.

“While it is impossible to be precise regarding the size of windfalls, a prudent approach would be to treat all (corporate tax) receipts above the long-run average share as potentially ‘windfall’ in nature and to set these aside in the Rainy Day Fund.”

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