An external shock to the multinational sector in the Republic could have “serious repercussions” for the public finances, a Government report has warned.
The Department of Finance’s Annual Taxation Report said two of the State’s most important revenue streams, income tax and corporation tax, were now highly concentrated around a narrow base of employees and a handful of big companies, creating a “potential vulnerability” at the heart of the Irish tax system. It noted that approximately 500,000 taxpayers and just 10 firms accounted for over a third of the €68.4 billion in tax generated last year.
“Though income tax and corporation tax proved stable through the pandemic — and have experienced substantial growth during the recovery — the tax base for both revenue streams remains very narrow,” the report said. It also warned that the risks inherent in both tax bases were interlinked as over 30 per cent of income tax receipts and around 80 per cent of corporation tax receipts are related to foreign multinational firms.
“As such, a shock to FDI [foreign direct investment] would have significant negative implications for the public finances through both of the State’s two largest tax revenue streams,” it said. The Government has been repeatedly warned about the concentration risk linked to corporation tax here but the concentration risk inherent in the income tax system has received less analysis.
The report noted that the distribution of tax liabilities in the Republic was “markedly skewed towards higher wage earners” with the top 25 per cent of earners paying approximately 80 per cent of income tax while one in four taxpayers paid little or no income tax. Employees of foreign-owned multinational firms accounted for about one-third of all income tax receipts. A shock that affected the multinational and/or the higher end of the wage spectrum would have an extremely severe impact on the income tax yield, the report warned.
“While much commentary has focused on the potential loss of corporation tax receipts in the event of a shock to the multinational sector, ie a sudden reduction in FDI, this would also result in a very substantial loss to income tax [and PRSI] receipts,” it said. “Perhaps counter-intuitively” the narrowness of the State’s tax base is what served to insulate the public finances during the pandemic, the report said, with increased profitability and rising wages, particularly in the multinational sector, boosting receipts.
Corporate tax receipts last year were €4.4 billion (41 per cent) higher than pre-pandemic, mainly reflecting the importance of “pandemic-proof” sectors (pharma, med-tech, ICT) in Irish economic activity, the report said, while Income tax receipts were €3.7 billion (16 per cent) higher than immediately before the pandemic. “Labour market resilience, supported inter alia by remote working in tax-rich, knowledge-intensive sectors, was the key factor behind the robust receipts,” it said.
The department’s report also provided a retrospective examination of the extraordinary level of fiscal support the Government provided during the pandemic.
At €48 billion, or more than one-fifth of national income, the scale of this intervention was unprecedented, it said. The subsequent strong economic recovery, notwithstanding the current inflation crisis, and the absence of any significant “scarring” suggests that this approach was the appropriate course of action, the department concluded.
Minister for Finance Paschal Donohoe said the report was an important contribution to discussions on how taxation policy can respond to economic challenges and would complement the work of the Commission on Taxation and Welfare.
“The analysis shows that, while the headline figures are very positive, our tax system contains significant structural vulnerabilities, especially in respect of income tax and corporation tax. It is essential that we rebuild our fiscal buffers to ensure that we are able to weather future shocks that could impact on these receipts,” he said.