Ireland’s surging revenues from Corporation Tax are evident in the Institutional Sector Accounts which are now available for the second quarter of 2022. Here is the four-quarter sum of Taxes on Income or Wealth (D.5.) paid by the non-financial corporate sector since 2004.
Obviously, we are interested in what has been happening in recent years and, in particular, the near-vertical increase seen in recent quarters. Looking at the series there are three level changes that can be identified over the past decade: 2015, 2018 and 2022.
This is more evident if we look at the annual change of the four-quarter sum. The three peaks correspond to the years listed above and are instances when the annual increase was 40 per cent of higher.
Of course, what is striking about the latest increase is that it is a 50 per cent increase on what was already an elevated level. We could go back through some of the factors behind the 2015 and 2018 jumps but here will we focus on the most recent increase – though as the most recent it is the one we know least about. It will be the first half of 2024 before the Revenue Commissioners report aggregate data for the CT returns filed with them for financial years ending during 2022.
One thing we can look at from the Institutional Sector Accounts is the indicative effective tax rate using Net Operating Surplus (NOS). Some differences aside, NOS in the national accounting equivalent of Earnings Before Interest and Taxation (EBIT) from financial accounting. There may also be some timing differences that distort things from time-to-time but these should wash out.
Here is the ETR on the Net Operative Surplus of Non-Financial Corporates since the start of 2014. To help with some of those timing issues both the numerator and denominator are taken as a four-quarter moving sum.
What we see is that, bar the odd fluctuation, the ETR on NOS has been generally fairly stable over the past decade or so. And this is a period when there have been some tumultuous changes in Ireland’s national accounts (2015 and all that).
There a small step-up evident in late 2018. It is possible this is due to rule changes related to the claiming of capital allowances for intangible assets introduced in Budget 2018. But that is something for another day.
It can also be seen in the chart that the ETR is below the 12.5 per cent headline rate for Ireland’s Corporation Tax. A key reason for this is likely to be differences in the treatment of the depreciation of aircraft.
For tax purposes in Ireland, aircraft can be amortised over an eight-year period while in the national accounts a wide-body aircraft is depreciated over 25 years, which better reflects the actual lifespan of the asset. In both cases the gross, or pre-depreciation, profits will be the same. Due to the longer depreciation period, the net profit in the national accounts will be higher and this reduces the effective rate. Tax accounts for aircraft leasing will have more depreciation (or at least will have more depreciation quicker) which will reduce net profits and lead to a higher ETR, probably close to the 12.5 per cent rate. Again, this is something for another day and is not really our interest here.
Our interest is in the ETR in the chart for the past two or three quarters which is the highest for the period shown. At 9.6 per cent, the ETR for Q2 2022 is around two percentage points higher than the average from 2014 to 2021 (7.3 per cent). The average in 2019 and 2020 (post the 2018 step-up) was 8.0 per cent.
Is there something that could be pointed to that could have caused this recent rise in the ETR? There is nothing that particularly stands out. There doesn’t appear to have been any rule or rate changes that could be pointed as contenders as explanations.
One issue could be the preliminary nature of the 2022 figures for NFCs in the latest institutional sector accounts. The CSO will have a fair handle on gross profits - from trade data and other sources. They can obviously see how much Corporation Tax is being paid from the monthly Exchequer statements – but the detail behind those payments may not yet be available to them.
As alluded to above, companies are currently paying Corporation Tax linked to profits made in 2022. Companies make preliminary Corporation Tax payments in months six and eleven of their financial year – by which time it is expected that they will have 90 per cent of their expected Corporation Tax liability paid. Companies then file their full Corporation Tax return in month nine following the end of their financial year and accompany that filing with any outstanding amount due.
So a large company with a year-end of December 31st will make its first preliminary Corporation Tax payment in June (45 per cent), make its second preliminary payment in November (90 per cent) and file its full Corporation Tax return the following September.
A similar schedule has been set out for alternative year-ends. For example, if a company has a year end of September 30th, its first preliminary payment will be due in March, its second in August with its full return to be filed by the following June. This could be significant has 2022 has seen unusually large CT revenues reported for March and August.
Of course, the Exchequer Returns also give no reason for an increase in the ETR. One possible explanation is that the CSO have underestimated profits and that these will be revised up in subsequent releases which will, in turn, reduce the ETR. It’s certainly possible but the CSO have been keeping an ever-closer eye on some of the key MNCs operating in Ireland via its Large Cases Unit (LCU).
An alternative explanation is that the gross profit figure is fine but that the net profit, i.e. post depreciation, will be revised. Companies pay Corporation Tax on their net profit. In recent years, there have been huge claims for capital allowances for intangible assets. However, these allowances, at least as related to the original acquisition of the intangible asset, will be exhausted.
This means a company could face a much higher tax bill even if its gross profit is unchanged. This is because it has run out of capital allowances to use as an offset against the gross profit. If this was to happen, the companies net profit would increase and it would have to pay more tax.
It is possible that this is the reason for some of the 2022 increase in Corporation Tax. Of course, absent the full returns of the companies it is just supposition. It is not clear how the tax treatment of capital allowances for intangible assets aligns with the consumption of fixed capital for those assets in the national accounts. Both are versions of depreciation and, as set out above for aircraft, they do not have to coincide.
The Institutional Sector Accounts show no decline in the consumption of fixed capital for NFCs. Here are the quarterly CFC figures for the NFC sector since 2012.
The step changes linked to the onshoring of intangible assets (Q1 2015, Q1 2020 and others) are clearly visible. The increases over the past two and a half years are more gradual and more like those that would be linked to the ongoing, and regular, increase in the stock of tangible assets (buildings, plant and machinery) owned by the sector.
Could some of the 2022 increase in CT be linked to the exhaustion of capital allowances? It could be. It certainly is something that could happen over the coming years. But it will a while before we have evidence of that.
How it will be treated in the national accounts will also be worth keeping an eye on. As noted, the exhaustion of the capital allowances will not impact gross profits – so GDP won’t be directly impacted. It is net profits that will change – so the impact may be on GNP. Higher net profits accruing to foreign-owned companies would push down on GNP. This would reduce the gap between GNP and GNI*.
Another possibility is that the intangible assets are relocated when the capital allowances run out. This would have a direct impact on GDP – pretty much the reverse of what we have seen with the onshoring in recent years, most notably the event in 2015.
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