Monday, July 13, 2020

The 2018 Aggregate Corporation Tax Calculation

The Revenue Commissioners have published the 2018 uptake of their aggregate summary of corporation tax returns.  The last of these would have been filed last September and the aggregate data is now available.  As previously, we will look at the outcomes in two stages:

  1. The determination of Taxable Income from Gross Trading Profits, and
  2. The determination of Tax Due from Gross Tax Due

So, lets look at the determination of Taxable Income for the five years from 2014 to 2018.

Aggregate CT Calculation for Taxable Income 2014-2018

In 2015, Irish GDP jumped by around 30 per cent in nominal terms and there’s a lot of action in the first annual change shown in the table.  The unusual GDP increase was primarily the result of the near €50 billion increase in Gross Trading Profits that happened that year.

If we jump down to the bottom of the table we see that that €50 billion increase in Gross Trading Profits only translated into increase in Taxable Income of less than €15 billion.  The main reason for this was the jump in the use of Capital Allowances.  In 2014, €18.6 billion of capital allowances was used against gross trading profit; in 2015 this was €46.2 billion. 

As is well understood this increase was due to increased claims for capital allowances for intangible assets.  Irish resident firms have been making significant capital outlays to buy intangible assets and this expenditure is offset against trading profit as a capital allowance in the determination of Taxable Income.

After 2015, Taxable Income continued to rise recording increases of €6 billion, €8 billion and €16 billion over the next three years.  The 2018 rise was the largest on record.

For the past couple of years we note a couple of things from further up the table:

  • The ongoing rise in the use of capital allowances;
  • The continued level of losses carried forward being used;
  • The increase in foreign income included in Irish CT returns;
  • The decrease in deductions for trade charges; and
  • The level of relief claimed for interest under Section 247.

We may take a closer look at some of these in due course.  For now, we note that after all the adding and subtracting we end up with a figure of €96 billion for Taxable Income in 2018. 

Of this, €87 billion arises from income that is subject to tax at 12.5 per cent (including capital gains which are regrossed to reflect the higher rate of CGT) and €9 billion is income taxed at 25 per cent (mainly non-trading income). 

Although not explicit from the figures it seems likely that the increase in income taxed at 25 per cent relates for foreign income of Irish resident companies.  Net foreign dividend income fell from €8.7 billion in 2017 to €4.5 billion in 2018, while total foreign income rose from €11.4 billion in 2017 to €12.2 billion in 2018.  In most cases, as a result of tax paid abroad, little additional tax is due in Ireland on this foreign-sourced income. 

We can get some insight into this if we look at the second part of the aggregate CT calculation: the transition from Gross Tax Due to Tax Due:

Aggregate CT Calculation for Tax Due 2014-2018

Multiplying the taxable figures by the applicable tax rate gives the starting point of Gross Tax Due (€87 billion x 12.5% plus €9 billion x 25%). 

Ireland had a limited number of reliefs from Corporation Tax.  By far the most significant is the relief for foreign tax paid on foreign income.  Ireland has a worldwide regime for the taxation of resident companies.  They must include all their income in the Irish CT return wherever earned. 

To avoid double taxation, relief is granted for foreign tax paid.  If the amount of foreign tax paid is less than the amount that would be due in Ireland (at the 12.5% or 25% rate) the company makes an Irish tax payment to bring the total tax paid up to the required amount.  In practice very little additional tax is due in Ireland.

We can see that Double Taxation Relief and the Additional Foreign Tax Credit were almost €2.2 billion in 2018.  At 12.5 per cent this amount of tax relief would correspond to an income of €18.4 billion.  As we say above, foreign income in 2018 was €12.2 billion so it must be that a large share of the foreign income is income that would be subject to tax at 25 per cent, and has double taxation relief applied accordingly.

After tax reliefs, we see that tax payable in 2018 was €10.9 billion.  As per reliefs, Ireland has a relatively small number of tax credits that can be used to reduce CT payments.  The most significant of these is the R&D tax credit though the cost of claims has fallen in recent years.

In 2016, the R&D credit and the repayment of excess R&D credits when the credit exceeded the starting liability summed summed to €670 million.  For 2018 this had reduced to €355 million.

The item Gross Withholding Tax on Fees is simply the granting of credit for tax that has already been paid to the Revenue Commissioners.  The tax code includes a number of instances where the payment of an invoice requires some of the fee to be withheld and paid to the Revenue Commissioners.  Typically this is 20 per cent of the amount due (reflecting the standard rate of Income Tax). 

The person/company paying the invoice withholds the required amount from the provider of the services and transfers the money to the Revenue Commissioners along with the intended recipient’s tax details.  The person/company from home the fee is withheld can then claim credit for the tax paid on their behalf.  The line for Gross Withholding Tax on Fees reflects this tax that has already been paid.

For all CT returns filed for periods ending in 2018, companies had a tax due amount of €10.2 billion.  As indicated in the recent Revenue paper this equates to an effective tax rate of 10.6 per cent ((€10,211 million / €96,049 million) x 100).

However, as we have seen, while there was a €3 billion difference between Gross Tax Due and Tax Due in 2018, €2.5 billion of this was because of tax already paid, either tax paid in other jurisdictions or amounts withheld from fees. 

If there had been no foreign tax paid or fees withheld for tax then the Tax Due on the €96 billion of Taxable Income reported in 2018 CT returns would have been €12.7 billion, an effective rate of 13.2 per cent.

As it was companies did pay tax to other jurisdictions on their foreign source income and did have fees withheld and transferred to the Revenue Commissioners on their behalf.  This means that the amount of Tax Due was reduced but the tax burden imposed by the Irish regime should take into account amounts already paid.

Anyway, whatever way it’s dressed up, Corporation Tax receipts was increased significantly in recent years.  In subsequent posts we will come back to some of the “big ticket” items in the top first part of the CT calculation.

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