The latest Corporation Tax pot of gold

Ireland’s Corporation Tax generates a huge amount of domestic debate.  There are a couple of common themes that run through it.  One of them is that “we would collect X billion in extra tax if only we did Y.”  The latest of these relates to companies who have no liability for Corporation Tax under the headline “68% of companies paid no Corporation Tax in 2014”.

There is, of course, a pretty simple reason why most companies don’t pay Corporation Tax: they don’t make a profit.  This is because they have never started trading, stopped trading or are trading but didn’t generate a taxable profit.  There a several reasons why companies are established with trading for profits being only one of them.

However, the story doesn’t end there and goes on to say that companies with no Corporation Tax liability actually had earnings of €17 billion in the period from 2009 to 2014.

The Irish Corporation Tax regime is actually relatively straightforward.  Once a company’s taxable income is determined it is multiplied by 0.125 (or 0.25 in some cases) to get the gross tax due.  There are then a limited number of credits and reliefs available which give the ultimate calculation of tax payable.  Here is an aggregate calculation using 2011 data.

So if there are €17 billion of earnings out there that results in a tax payable of zero it shouldn’t be too difficult to work out what is going on.  And it isn’t.  First here are the annual figures:

The average amount of net taxable income per company with no Corporation Tax liability is just under €32,000.  But the distribution is probably highly skewed because it requires the use of the limited credits and reliefs we have to get the gross tax due from the €16.8 billion of net taxable income to a tax payable of zero.  And indeed those making the queries were told as much:

The Department of Finance says there is a range of tax reliefs available to companies which explains much of this, such as double taxation relief, which prevents companies being taxed on profits they have already paid tax on elsewhere or tax reliefs that apply to research and investment.

But that didn’t stop some heroic conclusion jumping been made:

Sinn Féin says vital public services have suffered as a result. Employers, however, say Irish businesses already face high taxation.

TD Louise O’Reilly said: “Our estimation is that from 2009 there could potentially be 2.1 billion euro in tax revenue that has been forgone by the State through whatever means. I think when you’re looking at figures that size though, you’re not talking about simple loopholes. You’re talking about government policy.”

Yes, €16.8 billion multiplied by 0.125 is €2.1 billion but wouldn’t it be helpful to actually understand why the tax payable on this net taxable income is zero and propose to remove the provision that results in it rather than just shooting off blindly.

Here are the reliefs and credits used by the companies with nil or negative Corporation Tax liabilities over the six years in question.

And there is the €2.1 billion reduction of the €2.1 billion gross tax due to give tax payable of zero.  Almost 95 per cent refers to Double Taxation Relief.

Ireland operates a worldwide Corporation Tax system whereby Irish-resident companies owe Irish Corporation Tax on their earnings no matter where earned and can owe Irish Corporation Tax on dividends from subsidiaries and other passive income receipts.

However, if an Irish-resident company earns profits through a branch or subsidiary in another jurisdiction it will pay corporate income tax on those profits in that jurisdiction.  In Ireland these profits will be included in the company’s taxable income and the gross tax due will be calculated including foreign profits.  To avoid double taxation the company can apply for relief of the gross tax due in Ireland based on the corporate income tax paid in the foreign jurisdiction. 

It is fairly obvious that in this instance we are dealing with a small set of companies who have no domestic profits (which would trigger a tax liability excluding them from the above table) and have foreign earnings where the foreign tax paid exceeds the amount of gross tax due at Ireland’s Corporation Tax rates thereby giving a tax payable figure of zero.  These companies are not avoiding tax; they have already paid it.  If the amount of eligible foreign tax paid was less than the amount of Irish tax the company would have to pay the balance to make up in the difference.

So, in theory, we could have collected €2 billion of extra Corporation Tax over the last six years if we had abolished Double Taxation Relief from 2009.  And the figure would be even higher as this €2 billion only includes companies who have nil or negative Corporation Tax liabilities.  Over the past six years the total amount of Double Taxation Relief granted to all companies has been almost €4 billion (and was almost €1 billion in 2014 alone).

But getting at this latest pot of gold depends on these companies with foreign profits continuing to be Irish resident which would subject them to an additional 12.5 per cent (or 25 per cent) tax on top of the corporate income tax paid where they earned their profits.  Would companies stick around for such double taxation? And if Irish-resident shareholders move away with them we would lose the income tax collected from distributed dividends.

Double taxation relief is not just “government policy” it is international best practice in taxation around the world.  And it is probably going to get more attention in Ireland as inversions and re-domiciled PLCs increase the number (and size) of companies who are eligible for it.

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