Friday, April 2, 2010

Fall in tax revenue eases slightly

The March Exchequer Returns have just been published and allow us to update our analysis of tax revenue from February.  In a statement released with the return, the Minister for Finance has indicated his satisfaction with the figures.
“At end-March, €7¼ billion in tax receipts has been collected, some 3½ per cent behind profile for the period and 15 per cent below what was collected in the first quarter of 2009. However, a substantial year-on-year decline had been anticipated in the early stages of 2010 and for the year as a whole, the Budget day forecast of €31 billion, which represents a 6 per cent year-on-year decline, is still a valid target. The widely held view is that the economy will return to growth in the second half of the year and this should improve tax performance.”
In looking at the March tax figures we can see that the 15% drop for the first three months of the year represents a fall in revenue of €1,274 million below the amount collected in the same period last year. 
We can examine the pattern of tax receipts since 2007 with a graph that tracks cumulative tax receipts by month.  Click the graph to enlarge.
Monthly Tax Revenues There is now a gap emerging between the 2009 (green) line and the 2010 (red) line.  See close-up here. Similar graphs are also available for the main tax heads.  Click to view.
The graphs show that corporation tax revenue is very low and is down 73% on last year, with very little preliminary tax paid.  Relative to last year the best performing tax is Excise Duty (-1.8%).  The complete collapse in stamp duty and capital gains tax revenues relative to 2007 and 2008 is also evident.
Returning to the total tax take for 2010, the annual rate of decline eased somewhat in March.  After rates of 17.6% and 17.9% in January and February, the March 2010 was ‘only’ 9.2% below the corresponding figure for March 2009.  Here are the monthly tax revenues in millions with the associated annual changes.Tax OutturnsWe can also look at the forecasts made by the Department of Finance back in February. No monthly forecast of January tax revenue was made.  Tax Forecasts2We see that the outturn has fallen below the Department’s forecast for each of the last two months and that the forecast error increased from 3.7% in February to 7.5% in March.
Looking at the individual tax heads we see how the overall drop of 15% varies across the different headings.  The double-digit drops in both income tax and VAT give rise for concern.Tax Revenues MarchThe monthly equivalents for March 2010 and March 2009 are available here.  There even are some positive signs used in the table!  The performance of the individual taxes relative to the Department’s forecasts can be seen here.
The strongest performing tax is Excise Duties – up 12.1% on the same month last year and only down 1.8% for the year.  We don’t have the breakdown of revenue by excise duty.  Excise duties on oil (38.8%), tobacco (20.9%), alcohol (19.1%) and Vehicle Registration Tax (20.0%) are the main sources of revenue (using 2008 figures). 
The relatively good performance of Excise Duties in 2010 is probably down to changes in the rates applied rather than any improvement in activity.  Revenue will have increased because of the introduction of the carbon tax in last December’s Budget, though this will have been offset somewhat by the reduction in duties on beer and cider.  The effect of the €1,500 VRT rebate is also unknown.
For 2010 as a whole the Department predict that tax revenue will fall by €1,993 million.  In the first three months of the year there is already a drop of €1,274 million or 15% below the amount collected in the first three months of last year.  Tax revenue for the next nine months can only be €719 million or 3% below the amount collected in the last nine months of last year.
There will have to be a substantial improvement from the 15% drop we have seen so far this year if this target is to be met.   The monthly rate of decline has eased to 9.2% and the Department are forecasting that this will continue with a 4.9% drop forecast for April.
How will our forecast of a 7.2% lower tax revenue for the rest of the year fare out?

4 comments:

  1. The Progressive Economy person on tax has amended his tax projections after the March figures. His original figures for 2010 prepared back in November, which were very close to yours at around €29000M, see http://www.progressive-economy.ie/2009/11/likely-tax-yield-in-2010.html.

    He has now cut his total figure based on the collapse in Corp Tax to closer to €28000M, http://www.progressive-economy.ie/2010/04/crucifixion-friday.html.

    I would be interested in your comments and whether you feel the need to adjust your figures? The fall in CT so far this year may be partly technical, there was a change in the basis that preliminary tax was paid in 2009.

    However assuming that both he and you are correct in the thrust of your figures, then do you agree that we are facing into another mini-budget to make up the shortfall of €2000M-€3,000M, as he suggests?
    Have you any comments?

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  2. Hi Greg,

    I had a look at the Progressive Economy posts you mention - here and here.

    I still think that something just below €30 billion will be achieved. The fall in Corporation Tax is alarming but not being a tax accountant I am not in a position to dicuss it fully. But I'll try anyway!

    The rules relating to paying Corporation Tax are not as straightforward as with PAYE. Companies with Accounting Periods ending on the 31st December will be expected to pay 90% of the tax due for 2010 by the 21st November. "Large" companies with such a year end will have to pay a first instalment of preliminary tax (up to to 50% of the tax liability) by 21st June.

    Obviously these dates would differ for companies that use other Accounting Periods than that ending on 31st December. However, I would expect that most of the "large" companies in Ireland, big pharma etc., would have the 31st December as their year end.

    Figures from the Revenue Commissioners from 2008 published here indicate that over 70% of the total Corporation Tax take (€4.5 billion out of €6.3 billion) was paid by less than 1% of companies paying Corporation Tax. These are the 574 companies of the 59,269 paying Corporation Tax who have a trading income of more than €10 million.

    I think the current drop in Corporation Tax revenue is driven by a collapse in profits and small and medium size enterprises. The premlinary tax payments of these companies must be very very low as they expect to have a low Corporation Tax liability for the current accounting period.

    With the first preliminary tax installment due from the "large" companies by June we will have a much clearer picture of where will be for the year. With our exports holding and big pharma performing well I think the figure for the year will not be as low as the first three months indicate. It will be down but nowhere near the 74% drop we have seen so far this year. Let's see how far down we are after the June Exchequer figures.

    For the year as a whole, I do think tax revenue will be below the Department's forecasts. Another problem is that the Department's forecasts of non-tax revenue will not be met. A case in point here is BOI's attempt to pay the €250 million dividend of the €3.5 billion in preference shares we own. They couldn't pay us in cash so we got 16% of the bank's ordinary shares. It remains to be seen what will happen when the banks come to paying the stipend of about €1 billion due for the Deposit Guarantee Scheme.

    I do not think we will see another mini-budget but it not be a surprise if the December budget is brought forward. If Budget 2010 was about Public Sector pay cuts, Budget 2011 will be about All Sector tax increases.

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  3. Seamus, Thank you for your prompt response. There are a number of large multi-nationals with substantial Irish operations which have year ends at times other than year end, Microsoft, Oracle & Diageo all have 30th June, Vodafone & historically Bank of Ireland were 31st March and the retail trade used 31st January. Privately owned Irish companies have always paid very little Corporation Tax, as much because of the close company rules as anything else. Joan Burton, herself an accountant, has made reference to the level of major refunds being made to Banks etc, following on from Dáil questions she asked.

    The implied threat of another pay cut of 8% if Public Servants don't vote the "correct" way, seems to suggest that the Govt. seems to feel the need to axe expenditure asap.

    I had not fully considered the issue of non tax income, thank you for mentioning it. It would seem to make immediate expenditure cuts more likely in the very near future, if say there is a clear €2,500M -€3,000M gap visible by May. Add say €4,000M planned cuts to a €3,000M hole and maybe we finally have revolution?

    Finally, the introduction of an increasing number of tax "incentives" to multi-nationals may also be hitting the amount of CT paid. It peaked in 2006 and has been falling very steadily since. These again are mainly aimed at foreign owned MNCs.

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  4. Hi Niall,

    The level of refunds is notable but they are not actual losses to the Exchequer.

    The reason companies are getting refunds is because the amount of preliminary tax they paid exceeded their final corporation tax bill once the year was over. Basically, the companies underestimated the deterioration in trading conditions that occurred as 2009 progressed.

    Irish companies pay little corporation tax because they are so small when compared to the multinational operations here. I am not familiar with the tax "incentives" given to the multinationals.

    I think ther government is well aware of the huge hole in the public finances. The current deal offers a lot to the unions (no pay cuts) but is naturally proving a hard-sell in the current climate. If it is not passed we may see further pay cuts but not at anywhere near the threatened 8%. Probably not even half of that.

    The next budget will see tax increases, that will effect everybody and not just public servants. I think public servants were the big losers from the last budget (some social welfare cuts excepted). The private sector largely escaped the government axe in the last budget.

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