annual taxation report march 2019 · 2019-03-27 · annual taxation report page | 3 – in relation...

Prepared by the Economics Division,

Department of Finance

finance.gov.ie

Annual Taxation Report

March 2019

Annual Taxation Report Page | 2

Foreword

It is now a decade since we in Ireland were entering the most acute phase of the crisis. It is

no exaggeration to say that tax revenue at the time was, metaphorically-speaking, falling off-

the-cliff, the result of severe policy failures in the years preceding the crisis.

Decisive action to stem the tide and to put the economy back on its feet have paid dividends.

Taxation receipts have recovered from their crisis low point and, at the end of last year,

reached €55.6 billion, their highest level on record.

But we cannot be complacent; we must continue to monitor incoming data and trends in order

to identify any emerging imbalances. That is why my Department publishes its analysis in

this ‘Annual Taxation Report’.

The Government takes this analysis into account when deciding upon budgetary policy. Our

policy in this area is based on a number of important building blocks.

Firstly, budgetary measures must be financed by revenue streams that are sustainable

into the future. The analysis set out in this report highlights the sharp increase in corporation

tax revenues – which now account for one-fifth of taxation revenue – as well as the

concentration of receipts within a relatively small number of firms. This is a vulnerability that

we must be conscious of. While I do not expect any significant change in the short-term, it

pays to be cautious especially given ongoing changes in other jurisdictions.

Secondly, the most growth-friendly means of taxation is applying low rates to a broad base.

This goes for all tax heads, as such an approach limits the disincentive effects associated

with high marginal rates. This is especially the case with income tax, where I see it as crucial

that ‘work pays’. In relation to consumption taxes, the Government has broadened the VAT

base. These complements other measures aimed at broadening the taxation base, such as

reductions in tax reliefs and the continued roll-out of enhanced taxation compliance

measures.

Thirdly, the Government will use to taxation system to incentivise positive changes

(‘externalities’). For instance, a sugar tax has been introduced for health reasons while a

carbon tax has been introduced and increased in order to dis-incentivise the use of fossil

fuels. These measures have been further complemented through discretionary policy

decisions to increase the VAT rate on tourism activities to 13.5 per cent; a tripling of stamp

duty on commercial property transactions to 6 per cent and an increase in betting duty.

Fourthly, overall budgetary policy must be based on steady, incremental increases in

public expenditure and not a ‘big-bang / big bust’ approach. This is what characterises the

Government’s approach: public expenditure has increased in recent years but the increases

have been below the growth rate of the economy. In a related manner, it is important that

budgetary policy is not pro-cyclical – that is, budgetary policy does not amplify the economic

cycle either in ‘good’ times or ‘bad’ times.

Fifth, we must re-build our fiscal buffers so that we can support the economy in a downturn.

This is especially relevant at the current juncture, given the severe implications for our

economy if the UK were to exit the European Union in a dis-orderly manner. The

establishment of the Rainy Day Fund and reducing public debt are key Government policies


– in relation to the latter, it is Government policy that proceeds from the disposal of banking

assets and from the winding-down of NAMA will be used to reduce public debt.

Finally, budgetary policy must be more strategic and short-termism must be avoided. Our

population is ageing and this will involve significant costs beginning over the next decade.

Similarly, climate change obligations – legal and moral – will pose challenges for the public

finances. We must start planning for these now.

In summary, the analysis presented in this report provides food for thought and will feed into

the Government’s deliberations.

Paschal Donohoe T.D.

Minister for Finance and for Public Expenditure and Reform


Contents

Executive Summary .................................................................................................................. 5

Section 1 Introduction and background ........................................................................... 6

Section 2 Taxation receipts: 2000-present ....................................................................... 7

2.1 Aggregate trends ........................................................................................... 7

2.2 Dis-aggregate trends ..................................................................................... 8

Section 3 The recovery in taxation receipts ................................................................... 11

3.1: Income tax receipts ...................................................................................... 12

3.2: Consumption tax receipts ............................................................................. 13

3.2.1: VAT ............................................................................................................... 13

3.2.2: Excise duties ................................................................................................ 14

3.3: Corporation tax receipts ............................................................................... 16

3.4: Other tax receipts ......................................................................................... 16

Section 4 Focus on corporation tax receipts ................................................................. 17

Section 5 Conclusion ........................................................................................................ 21

Figures and Boxes

Figure 1 Taxation revenue, 2000-present 8

Figure 2 Share of tax revenue in 2018 9

Figure 3 From trough-to-current: cumulative changes in tax receipts 11

Figure 4 Cumulative change in income tax receipts and national wage bill since 2010 12

Figure 5 Cumulative change in VAT receipts and consumption since 2010 14

Figure 6 Distribution of excise receipts in 2018 15

Figure 7 Corporation tax receipts 2000-2018 16

Figure 8 Cumulative changes in corporate tax receipts and profits since mid-2010 17

Figure 9 Concentration of corporation tax receipts in 2017 19

Figure 10 Corporation tax receipts and corporate profitability 2000-2018 20

Box 1 Shedding light on trends in excise receipts last year 15

Box 2 Concentration of tax receipts within the corporate sector 19

Appendix: additional variables

Figure A.1 Share of tax revenue 2000-2018 22

Figure A.2 Taxation revenue as a share of national income 22

Figure A. 3 Share of corporation tax receipts 2000-2018 23

Figure A.4 Public debt as a share of national income 23

Figure A.5 Share of corporation tax receipts accounted for by the 10 largest players 24


Executive Summary

A decade on from the most acute phase of the crisis, the Irish budgetary accounts have finally

moved back into balance. The origins of the fiscal crisis in Ireland – the collapse of taxation

revenue – have been addressed and, at the end of last year, this revenue stream amounted

to €55.6 billion, its highest level ever.

The purpose of this report – the second such report to be produced by the Department of

Finance – is to monitor more rigorously taxation revenue developments inter alia in order to

assess whether imbalances are emerging.

The recovery in the taxation yield since the crisis mainly reflects the recovery in the tax base,

namely economic activity. Employment, consumer spending, etc. all continue to expand and,

in doing so, generate tax revenue streams. That said, any shock to the tax base would have

implications for the public finances. This highlights the importance of continuing to re-build

fiscal buffers and of ensuring that the economy is sufficiently flexible to be able to absorb the

inevitable shocks. The deteriorating international economic outlook and the non-negligible

possibility of a disorderly UK exit from the European Union highlight the need for policy

caution.

In the context of imbalances, the direct yield from the corporate sector now accounts for

nearly €1 in every €5 of tax collected, the highest share on record. This makes the State’s

revenue stream vulnerable to a deterioration in corporate profitability. A further vulnerability

arises from the concentration of corporation tax within a relatively small number of firms: the

largest 10 payers of corporation tax account for two-fifths of the corporate tax yield. With so

much uncertainty attached to the sustainability of receipts at such elevated levels, this

increases the premium attached to policy caution.


Section 1 Introduction and background1

A decade ago, the Irish fiscal crisis was entering its most acute phase. The bursting of the

property bubble a year earlier had triggered a chain of events that would ultimately lead to

Ireland’s loss of fiscal sovereignty. Perhaps most crucial was the collapse in taxation revenues

which fell by nearly one-third during 2009/2010, as this revenue stream had become excessively

intertwined with developments in the property market.

This is the Department’s second Annual Taxation Report2. Its purpose is to provide an in-depth

and longer-term perspective on trends in taxation receipts3. Such analysis is motivated inter alia

by the need to rigorously monitor the sustainability of taxation revenue, particularly in light of the

massive fiscal imbalances that were allowed to accumulate in the first half of the last decade.

This report is structured in a similar manner to last year’s analysis. Section 2 briefly recaps tax

revenue developments since the beginning of the last decade. Section 3 then documents how

taxation receipts have evolved from the low-point in mid-2010 to current levels4. Of key strategic

importance is the rising corporation tax yield, and some of the issues associated with this are

detailed in section 4. Section 5 draws some conclusions.

1 This report was produced by the Economic Division of the Department of Finance, and does not necessarily

reflect the views of the Minister for Finance or the Irish Government. The analysis in the report is based on data available as of end January 2018. 2 The first report is available at:

https://www.finance.gov.ie/wp-content/uploads/2018/01/annual-taxation-report.pdf 3 The focus of this report is on ‘Exchequer’ taxation revenue and does not, therefore, include inter alia Pay-

Related Social Insurance (PRSI) receipts. 4 The collapse of taxation receipts during the crisis was comprehensively outlined in last year’s report; with

no incremental information, the analysis is not repeated here.

https://www.finance.gov.ie/wp-content/uploads/2018/01/annual-taxation-report.pdf


Section 2 Taxation receipts: 2000-present5

2.1 AGGREGATE TRENDS

The evolution of taxation receipts since the turn of the millennium is set out in figure 1. Receipts

last year amounted to €55.6 billion, the highest level ever and around 2¼ times the level that

prevailed at the beginning of the 2000s (in 2000, the taxation yield was €24.0 billion). The

evolution of tax revenue over this period, however, has been non-linear; significant revenue

volatility has been an important feature over the past two decades.

Turning to the performance over the various sub-periods, taxation revenue increased at an annual

average rate of 9.2 per cent over the period 2000-2007. The (nominal) economic growth rate –

as measured by modified Gross National Income (GNI*) – averaged 9.5 per cent per annum over

this period so, as would be expected, the two aggregates moved broadly in tandem.6 Receipts

subsequently peaked at just over €47 billion in mid-2007, before nose-diving in 2009 and early-

2010, as the consequences of earlier policy errors became apparent.

On foot of policy measures introduced to stabilise receipts, taxation revenue finally bottomed-out

at €31.2 billion in mid-2010. Overall taxation revenue then moved onto a stable upward trajectory,

as economic recovery gradually gained traction. By mid-2014, the pace of tax revenue growth

accelerated, in part due to the improvement in economic activity becoming more broad-based

(the earlier economic growth had been export-led and, hence, less tax-intensive).

By mid-2016, an important milestone was reached, when taxation receipts returned to their pre-

crisis peak, albeit with important compositional differences relative to the bubble period. The tax

yield has continued to increase in the period since then, reaching €55.6 billion at the end of last

year, the highest level ever.

5 The figures presented in this document are annualised, i.e. presented as 12-month or 4-quarter rolling sums, in order to smooth the volatile data series as well as to address seasonal issues. For the individual tax heads, peaks and troughs occurred at different times but all peaks were reached around mid-2007 and all troughs around mid-2010. 6 The GDP growth rate averaged 10.0 per cent per annum over this period.


Figure 1: taxation revenue, 2000 – present, €millions

In this, and in subsequent graphs, CT stands for corporation tax. From 2011, income tax includes the Universal Social Charge. Source: Department of Finance calculations.

Over the period 2010-2018, tax revenue increased at an annual average rate of around 6 per

cent; the corresponding increase in GNI* was 4.4 per cent. As a result, the ratio of tax revenue-

to GNI* has increased slightly over this period, with most of the increase frontloaded to the early

part of the decade (see figure A2 in the appendix).7

2.2 D IS -AGGREGATE TRENDS

To better understand the aggregate trends, figure 2 decomposes total receipts into five

categories: the ‘big four’ (income tax, value added tax, corporation tax, excise duties8) and ‘other’

taxes (see figure 2). The latter category – which is subject to change over time as some smaller

tax heads are moved to and from the Exchequer Fund9 – is mainly composed of stamp duties,

capital taxes (i.e. taxes on capital gains and capital acquisitions) and customs duties.10

7 GNI* is a better measure of Irish living standards than traditional metrics such as GDP or GNP as it

removes some of the activities of the multinational sector. 2018 figure is a Department of Finance estimate. 8 The yield from the ‘big four’ accounted for 92 per cent of total tax receipts in 2018. 9 For example, Local Property Tax in 2018 was, for the first time, paid directly into the Local Government

Fund and, accordingly, removed from the Exchequer Fund; motor taxation revenue moved in the opposite direction. 10 Customs duties are effectively taxes on imports from outside the European Union. 80 per cent of the

customs duty yield is paid directly to the EU budget (one of the few forms of tax hypothecation in Ireland).

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Excise Duty Income Tax CT VAT other Total


Figure 2: share of taxation revenue in 2018, €millions

The time-series showing the share of each tax heading within total taxation is set out in the appendix. Source: Department of Finance calculations.

Perhaps the most important development during the 2000-2007 period was the sharp increase in

the share of receipts accounted for by the ‘other’ taxation category. As turnover in the residential

and commercial property sector increased sharply during the mid-2000s, with both sectors

ultimately moving into bubble territory, transaction-based tax receipts (such as stamp duties on

property transactions and capital taxes) surged. As a result, receipts from this category rose from

just under 9 per cent of total receipts at the beginning of the decade to 16 per cent in 2006.

The construction bubble also contaminated other tax revenue headings. For instance, income

tax receipts11 were distorted by a mis-allocation of labour at the time – at its height, the

construction sector directly accounted for 1 in every 8 persons employed in the mid-2000s.12

Additionally, VAT receipts were inflated by the exceptional level of new house building (which

amounted to over 90,000 units at its peak). Indeed, VAT receipts during the first half of the 2000s

became the single largest source of tax revenue, surpassing income tax revenue for the first time.

11 While not part of Exchequer revenue, PRSI receipts (which are classified within the Social Insurance

Fund) as were also inflated. 12 Available data do not disaggregate construction employment into its sub-components; however, it is

reasonable to assume that, given the high (and unsustainable) level of new house building, a large part of those classified as employed in the construction sector at the time were employed in the house building sub-sector. Moreover, this sector also indirectly boosted employment through the provision of ancillary services such as conveyancing, estate agency, etc.

5,418

21,241

10,385

14,235

4,284

Excise Duty

Income Tax

CT

VAT

other

tax receipts in 2018 = €55.6 bn


A mis-allocation of capital also contributed to the inflated tax receipts. For instance, corporation

tax receipts were artificially boosted by the highly profitable (at the time) property-related activities

in the banking and construction sectors, both of which had become excessively leveraged.

The erroneous policy of using these transient tax revenue streams to finance both a narrowing of

the income tax base and increased public expenditure13 lay at the heart of the adverse debt

dynamics that emerged from 2008. When these turnover taxes effectively dried up from 2008

onwards, a permanent (structural) gap in the public finances opened up, requiring (unavoidable)

pro-cyclical consolidation to ensure that public debt remained on a sustainable trajectory.

The increase in tax revenue since the low-point in mid-2010 has been broad based, with all tax

heads contributing positively (detailed in section 3). Income tax receipts are, once again, the

single most important source of taxation revenue, with VAT receipts the second largest source.

Undoubtedly, the most notable development in recent years has been the sharp increase in the

corporation tax (hereafter ‘CT’) yield. CT receipts are now the third largest revenue stream for

the State. The pace of increase and its rising share within overall taxation raises questions

regarding the sustainability of the CT yield at such an elevated level; with this in mind, recent CT

trends are explored in more detail in section 4.

The most stable revenue stream over the past two decades has been excise duties. The yield

from this tax head was €4.3 billion at the beginning of the 2000s; at the end of last year, the yield

was €5.4 billion. Even during the crisis the decline in excise receipts was relatively modest.

Finally, the yield from the ‘other’ tax component has recovered from its crisis low-point. Part of

this reflects compositional changes, while policy measures14 have also played a role. In addition,

there would appear to have been some ‘normalisation’ of turnover in the property market as well

as a recovery in property prices, both of which are contributing to an increased yield in the ‘other’

tax component.

13 In nominal terms, public expenditure doubled over the period 2000–2007. 14 For example, the increase in stamp duty on commercial property transactions from 2 to 6 per cent in 2018

and the introduction of the €150 million bank levy in 2014 have boosted the yield from stamp duty.


Section 3 The recovery in taxation receipts

Figure 3 charts the cumulative change in taxation receipts from the low-point in mid-2010 to the

end of last year. Overall tax revenue increased by €24.4 billion over this period, an increase of

65 per cent. Broadly speaking, two factors have been at work.

The first factor relates to policy measures introduced to correct the large structural deficit that

emerged following the collapse of the property bubble. While the primary motivation for these

measures was revenue-raising, an important secondary objective was the need to address the

structural weaknesses that characterised the Irish taxation system at the time – namely the

hollowing-out of the tax base – that had contributed to the fiscal crisis. Important base-broadening

reforms of the tax system were implemented, including the introduction of the Universal Social

Charge (USC) in 2011 and the Local Property Tax15 in 2013. In the case of USC, it is important

to stress that a significant part of this tax simply consolidated existing taxes (the income and

health levies) into a single tax.

Figure 3: from trough-to-current – cumulative change in tax receipts, €millions

Source: Department of Finance calculations.

15 OECD analysis shows that property taxes are amongst the least distortionary of all taxes, largely because

the immobility of property means that these taxes do not affect factor endowment. Property taxes also constitute a form of ‘wealth tax’ and are, broadly speaking, progressive in nature.

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Additionally, a carbon tax was introduced16 which, as well as raising revenue, is welfare-

enhancing (by incentivising behavioural change, the appropriate pricing of carbon can contribute

to achieving environmental goals). At the same time, significant progress was made in phasing

out and curtailing tax expenditures.17 The cumulative effect of all of these measures is that the

tax base has been widened considerably and re-oriented towards more stable revenue streams.

The second factor relates to the economic cycle and, in particular, the recovery that has been

underway in earnest since 2013. While GDP overstates the underlying pace of recovery,18

indicators that are unaffected by some of the peculiarities of the Irish national accounts clearly

point to a strong recovery since around 2013/2014. For instance, the unemployment rate has

fallen from a peak of nearly 16 per cent in 2011 to around 5¾ per cent at present.

3.1 : INCOME TAX RECEIPTS

The largest increase in receipts has been in the income tax yield which, at the end of last year,

amounted to just over €21 billion, an increase of €10.0 billion (89 per cent) relative to its low-point.

Figure 4: cumulative changes in income tax receipts and national wage bill since mid-2010

CoE is the national accounts term for the national pay bill. Last observation is 2018Q3 as this is the last data-point for CoE. Source: CSO and Department of Finance calculations

16 The carbon tax was introduced in 2009 at a rate of €15 per tonne and subsequently increased to €20 per

tonne in 2012. 17 Evidence shows that tax expenditures are not only costly to the State (including deadweight costs) but

can, in many cases, be regressive. 18 See:

https://www.finance.gov.ie/updates/%ef%bb%bfgdp-and-modified-gni-explanatory-note-may-2018/

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Receipts within this tax-head have been boosted by the introduction of the USC (the yield from

which amounted to c. €4 billion last year). It is worth noting that, for the most part, income tax

policy changes introduced during the crisis involved adjustments to tax bands and credits rather

than changes in rates; the rationale for this lay in the need for a broadening of the income tax

base while minimising dis-incentives caused by high marginal rates.

The recovery in the labour market, which began around 2012, has also had a favourable impact

on the income tax yield. Total employment is now around one-fifth higher (c. 399,000 jobs) than

at its low-point. Wage inflation has also contributed to higher income tax receipts although, on an

economy-wide basis, wage inflation has been relatively modest over the period in question.19

Indeed, this is a feature of the Irish labour market that is consistent with trends elsewhere, and

which has prompted economists to question whether there has been a flattening of the so-called

‘Phillips curve’, i.e. a weaker relationship between unemployment and wage inflation than has

traditionally been the case.

Figure 4 sets out the cumulative increase in income tax receipts (vertical axis) and the cumulative

increase in the national wage bill (horizontal axis) since mid-2010. The correlation between the

cumulative changes in income tax revenue and the wage bill is low at the beginning of the series.

This is most likely because of the policy-induced changes to income tax revenue that were

implemented during this period (which means that the yield was increasing even as the income

tax base was declining). In more recent years, the cumulative increase in income tax receipts

has been more closely aligned with the cumulative increase in the wage bill.

3.2 : CONSUMPTION TAX RECEI PTS

The tax heads most closely correlated with personal consumer spending are VAT and excise

duties. The performance of these tax heads has diverged somewhat in recent years, partly

reflecting the fact that excise duties are levied on a smaller subset of goods than VAT. In addition,

the consumption of some goods on which excise is levied appears to be undergoing change, part

of which may be structural.

3 . 2 .1 : VAT

VAT receipts began to increase from 2014, mirroring the trend in personal consumer spending

(figure 5). Household disposable income has improved in recent years, largely on foot of strong

employment growth. In addition, households have responded to improved economic conditions

by reducing savings from disposable income from the exceptionally high levels recorded at the

height of the crisis (the latter reflecting the precautionary motive as well as the need for household

balance sheet repair).

The increase in household consumption has supported higher levels of VAT. As highlighted

earlier, VAT is payable on new housing, so the increase in housing output since its nadir is also

19 It is worth pointing out that the elasticity (=sensitivity) of income tax receipts – the PAYE and USC components – to wage inflation is higher than the elasticity of these receipts to employment.


contributing to the VAT revenue. Having said that, the level of housing output remains low with

the result that the contribution from this component is likely to be relatively small. Overall VAT

receipts at the end of last year amounted to €14.2 billion, €4.0 billion (40 per cent) above the low-

point.

Figure 5: cumulative changes in VAT receipts and consumption since mid-2010

Last observation is 2018Q3 as this is the last data-point for nominal consumption on an ISA basis. Source: CSO and Department of Finance calculations.

3 . 2 .2 : EXCI SE DUTI ES

Excise receipts at the end of last year were around €1 billion higher than their low-point. An

annual decline in receipts was recorded last year; part of this reflects a front-loading of payments

to 2017, in advance of the introduction of ‘plain packaging’ for tobacco products. However, the

consumption of other goods subject to excise duties has been modest with the result that most

sub-components of excise are broadly flat (see box 1).

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Box 1: shedding light on trends in excise receipts last year

Of the four largest tax heads, the recovery in excise receipts since the crisis has been the most subdued. Indeed, the excise yield, at €5.8 billion last year, was lower than a year earlier.

To better understand recent dynamics, figure 6 below provides greater granularity on excise receipts for 2018. The single largest component was ‘other oils’, a category that includes diesel and home heating oil. At €1.6 billion, the yield was higher than a year earlier, although receipts in this category were behind original expectations. This may reflect (a not unwelcome) trend of the national vehicle stock becoming more fuel efficient, and may be part of an ongoing structural change rather than a cyclical phenomenon.

Light oils, a category which includes petrol, declined in annual terms last year. This may reflect a substitution effect associated with the shift from petrol-fueled to diesel-fueled cars. For instance, there has been a noticeable increase in used car imports from the UK (partly reflecting bilateral euro-sterling exchange rate movements since the ‘Brexit referendum’ in June 2016), with these being mainly diesel-fueled (although there is some evidence that this shift to diesel may be reversing).

Staying with motor-related issues, VRT receipts amounted to €0.9 billion last year. This represents an annual decline and is explained by the decline in new car registrations last year (a trend that has continued in the opening part of this year).

Figure 6: distribution of excise receipts in 2018, €millions

Other includes sugar tax, betting tax and electricity tax.

Source: Revenue Commissioners.

Excise duties from alcohol amounted to €1.1 billion last year. Receipts from the consumption of beer and spirits rose slightly, while the yield from wine consumption fell marginally. As a result, excise receipts from the broad alcohol category were largely unchanged relative to 2017.

Receipts from tobacco consumption fell sharply last year. This is largely the flip-side of the surge in receipts in 2017 which, in turn, was grounded in the front-loading of payments associated with important health-policy changes, namely the introduction of so-called ‘plain packaging’ for tobacco products.*

*as set out in Tobacco Products Directive (2014/40/EU) and Public Health (Standardised Package of Tobacco) Act 2015.

1,136.3

1,103.4

621.2

1,598.0

433.2

890.0

105.7

alcohol

tobacco

light oils

other oils

carbon

VRT

other

total excise receipts in 2018 = €5.8 bn


3.3 : CORPORATION TAX RECEI PTS

Of particular importance has been the very strong performance of corporation tax receipts since

its low-point in mid-2010. However, the performance has not been uniform over this period –

modest increases were recorded up until 2014 but, from 2015 onwards, corporate tax receipts

have surged (figure 7). Last year, receipts totalled €10.4 billion, a remarkable figure given that

as recently as 2014, the CT yield amounted to €4.6 billion (see section 4).

Figure 7: corporation tax receipts 2000-2018, €millions

Source: Department of Finance calculations.

3.4 : OTHER TAX RECEIPTS

Finally, receipts from the ‘other’ tax category amounted to €4.3 billion at the end of last year,20

€2.5 billion (140 per cent) higher than at the low-point in 2010. Receipts from this ‘other’ category

now account for around 7¾ per cent of total receipts, compared with the peak of 16 per cent at

the height of the bubble, a proportion which is not suggestive of imbalances at this stage.

20 Unadjusted for the fact that the composition of the ‘other’ category changes from time-to-time.

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Section 4 Focus on corporation tax receipts

The most important development on the taxation front in recent years has undoubtedly been the

surge in CT receipts. As highlighted earlier, CT receipts last year amounted to €10.4 billion, the

highest level ever and around €6 billion higher than in the mid-part of this decade. As a result,

the CT yield now amounts to 19 per cent of the total yield; historically, the figure has fluctuated

within a narrow band around 14 per cent (see figure A3 in appendix).

Figure 8: cumulative changes in corporate tax receipts and profits since mid-2010

NOS is net operating surplus (gross profits less depreciation) and is the national accounts term for profits. The NOS figures for the first three quarters of last year should be treated as highly provisional (the figures for NOS for 2018 in the Institutional Sector Accounts are determined residually). Last observation is 2018Q3 as this is the last data-point for NOS. Source: CSO and Department of Finance calculations.

Given these developments, it is important to assess – insofar as is possible – the sustainability of

CT receipts. This is not an easy exercise, especially in the current highly uncertain economic

environment with policy changes underway (or proposed) in other jurisdictions. While it is

impossible to be definitive regarding the sustainability of receipts at such elevated levels,21 a

deeper understanding of the reasons for the increase in receipts can help shed some light on the

issue.

21 The ‘Coffey Report’ suggested that receipts were sustainable until 2020, when this was undertaken the 2016 outturn amounted to €7.4 billion.

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ase in

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€m

cumulative increase in NOS, €m

observationsfrom 2015Q1 onwards


CT liabilities arise from corporate profitability – that is to say that corporate profitability is the base

for CT. Gross operating surplus (GOS) is the national accounting term for corporate profitability.22

Net operating surplus (NOS) adjusts the GOS figure for the depreciation of capital (both tangible

and intangible) assets held by the corporate sector. This NOS measure should, therefore, provide

a proxy for the corporate tax base.

22 Noting that there are modest differences between GOS (as reported by the CSO in the Institutional Sector

Accounts) and aggregate profitability (as reported by the Revenue Commissioners).


Box 2: concentration of tax receipts within the corporate sector

While some sustainability issues have emerged at an aggregate level, there is also a concentration issue within this tax head, with receipts dominated by the multinational sector which accounts for around 80 per cent of total corporate tax receipts. This is, perhaps, not unsurprising given the success of Ireland’s industrial policy and the importance of inward direct investment to the economy.

However, it is also important to highlight the dominance of a small number of firms who pay significant amounts of corporation tax – in 2017, for instance, the top ten payers accounted for approximately 40 per cent of the total corporation tax receipts; put another way, the corporation tax payments of these top ten payers accounted for 6½ per cent of total taxation receipts that year.

Figure 9: concentration of corporate tax receipts in 2017, €

Figure A5 in the appendix shows evolution of the share of total tax revenue accounted for by the largest 10 payers over time. Source: Revenue Commissioners.

The skewed distribution of corporate tax receipts is evident from figure 9 which shows the percentage of total corporate tax payments (vertical axis) by payment size (horizontal axis). The graph shows that nearly two-thirds of receipts (64 per cent) are from firms paying in excess of €10 million. This highlights the potential exposure to idiosyncratic or firm-specific shocks. In summary, both the rising share of corporation tax receipts within overall taxation revenue and the concentration of corporation tax receipts within a small number of firms represents a vulnerability for the public finances.

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16% of receipts are from companies paying < €1 million

34% of receipts are from companies paying < €10 million


Figure 10 sets out the evolution of quarterly CT receipts and quarterly NOS. As evident, the

correlation between the two series is quite strong. More importantly, the data in figure 8 show

that the surge in CT receipts from 2015 onwards has occurred in tandem with a surge in

corporation profitability since then. This is very much consistent with data from the Revenue

Commissioners, which show that trading profits (excluding balancing charges) increased by €63

billion (66.5 per cent) between 2014 and 2016 (latest available data).

Figure 10: corporation tax receipts and corporate profitability 2000-2018, €millions

Source: CSO and Department of Finance calculations.

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corporation tax receipts

corporate profitability(post depreciation)

"level shift" from 2015


Section 5 Conclusion

A decade on from the onset of the most acute phase of the Irish fiscal crisis, the Exchequer

accounts have finally returned to balance. Revenue-raising measures together with economic

recovery have boosted taxation receipts, which have now reached their highest levels ever.

At a dis-aggregated level, an important contributory factor has been the surge in corporation tax

receipts, which are now around 2¼ times their level in the mid-part of this decade. Given the

uncertainty surrounding the sustainability of corporation tax receipts at such elevated levels, it is

imperative that future budgetary policy is cognisant of possible shocks to the corporate tax base.

The optimal approach, in an environment of heightened uncertainty, is to assume that at least

part of these receipts is windfall in nature and, accordingly, should not be used to finance

additional public expenditure and / or reductions in income taxation. For instance, circa €0.4

billion of the 2018 corporation tax over-performance was due to the adoption of a new

International Financial Reporting Standard known as IFRS 15 and is chiefly one-off in nature. The

Minister has stated his intention to bring to Government (and subsequently publish) a set of

proposals on how this over-reliance can be addressed.

In the year immediately before the crisis, the ratio of debt-to-GNI* was around 30 per cent; last

year the figure was 105 per cent. The higher debt burden means that the capacity of the economy

to absorb any shock is greatly diminished. As it currently stands, the UK will formally exit the

European Union next month, and the probability of an exit without a transition phase or trade

agreement in place is non-negligible. Furthermore, the pace of growth is slowing in almost all of

our main export markets, which could lower the Irish growth rate with implications for the cyclical

taxation yield. These factors highlight the need for caution.


Appendix: additional variables

Figure A.1: share of tax revenue 2008-2018, per cent

Source: Department of Finance calculations

Figure A.2: taxation revenue as a share of national income, per cent

Figure for 2018 is based on Department of Finance estimate for GDP and GNI*. As the tax data are reported in Exchequer terms, the figures do not include inter alia PRSI receipts. Source: Department of Finance calculations.

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income tax VAT excise corporation tax stamp duties capital taxes other inc. customs

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tax / GDP

tax / GDP - average 2000-2018

tax / GNI*

tax / GNI* - average 2000-2018


Figure A.3: share of corporation tax receipts, per cent of total

Long run refers to the average over the period 2000-2018. Source: Department of Finance calculations.

Figure A.4: public debt revenue as a share of national income, per cent

Figure for 2018 is based on Department of Finance estimate for GDP and GNI*. Source: Department of Finance calculations.

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CT: share

long term avg

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debt / GDP

debt / GNI*


Figure A.5: share of CT receipts accounted for by the largest 10 payers, per cent

Source: Revenue Commissioners

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