Monday, October 2, 2017

Effective Tax Rates in the C&AG Report-Companies

Comparing effective tax rates across countries may be difficult but comparing them across companies using the same system should be insightful.  And we get significant added value from the C&AG report chapter on Corporation Tax Receipts in the analysis provided of the “Top 100” companies.

The C&AG place companies in the “Top 100” using their Taxable Income and Tax Due figures for 2015.  The table below gives the outturns for these, and the steps between them, in the aggregate Corporation Tax computation published by the Revenue Commissioners.

Revenue CT Comp 2011 to 2015

For 2015, we can see that €65.1 billion of Taxable Income resulted in €6.2 billion of tax due or 9.6 per cent of Taxable Income.  There is lots going on before we even get to Taxable Income (capital allowances, loss relief and trade charges) which is where most previous attention has focused.  The C&AG report gives some insight into what happens lower down the calculation. 

The table shows that before any reliefs or credits are applied the 12.5 per cent and 25 per cent Corporation Tax rates gave rise to €8.4 billion of gross tax (12.9 per cent of taxable income) with the reliefs and credits leading to the €6.2 billion tax due figure.

Of the two ranking used by the C&AG the ranking of companies by Taxable Income is probably the most informative as it gives the position before the application of credits and reliefs.  It should also be noted that the unit of analysis is individual companies of which there may be many in a group. One company or subsidiary in a group having a low effective tax rate does not mean that the group has a whole has a similarly low rate.

The distribution of effective tax rates (tax due as a percentage of taxable income) for the top 100 companies by taxable income is given in this useful chart:

C and AG ETR by Taxable Income

The overall rate for the top 100 is put at 9.3 per cent but there is significant variability within the group.  Reassuringly, depending in your perspective, 79 of the 100 companies had effective rates (using the tax due as a proportion of taxable income approach) of between 10 and 15 per cent with 57 companies having rates of 12.5 per cent or above (likely reflecting the 25 per cent CT rate on non-trading income).  At the other end, though, 13 companies have effective rates of less than one per cent with eight being zero or negative which unsurprisingly is where attention was drawn.

How can this be?  Well, the C&AG report (and the table above) tell us:

Of the 13 taxpayers with an effective rate of less than 1% for 2015, they had availed either of double taxation relief to offset Irish corporation tax or of the research and development tax credit or of both these reliefs. The other 43 taxpayers with an effective rate of less than 12.5% had also availed of various reliefs.

There are no loopholes here.  Double tax relief and the R&D credit are central parts of the Irish Corporation Tax regime.

Ireland uses a worldwide system so profits earned abroad are included in an Irish-resident entity’s taxable income.  There was €7.5 billion of “foreign income” included in Ireland’s Corporation Tax base in 2015.  To allow for the tax paid on that in the source country Ireland grants a credit to avoid double taxation.  Total relief for tax incurred abroad amounted to €1,195 million in 2015 (double tax relief was €947 million and the additional foreign tax credit was €238 million).

We don’t get a break down of companies using double tax relief but any Irish-resident companies whose taxable income is derived from activities outside of Ireland will have an effective rate of Irish tax (which is what the C&AG has looked at) close to zero as the relief available for tax paid abroad will almost always fully offset the tax due at 12.5 per cent in Ireland.  The effective tax rate of the company will be higher as it will reflect the tax paid abroad.  And if these companies do have Irish-source income it will have an effective tax of around 12.5 per cent  - unless, that is, they use the second major relief available in Ireland which is the R&D tax credit.

In 2015, claims under the R&D tax credit amounted to €708 million (of which €349 million was used and €359 million was the payment to firms of excess R&D credit).

If double tax relief can be viewed as relief for tax incurred abroad, the R&D credit can be considered relief for (a particular) an expense incurred in Ireland.  Claims that the zero per cent rates reflect tax avoidance are a little wide of the mark given that to achieve them the company must either pay tax abroad or spend money in Ireland.

Of course, what the R&D credit does is subsidise that expense and whether that is justified is an important policy question which was addressed by this 2016 evaluation published by the Department of Finance while Ireland’s approach can be compared to that used internationally in this  OECD review of R&D incentives published a few weeks ago. 

Spending 100 to get back 37.5 (12.5 from the standard deduction of the expense and 25 via the credit) does not make sense unless the company expects the R&D activity to lead to increased profitability in the future.  The amount of expenditure undertaken for recent years was provided in this PQ:

  • 2012: €2,448m
  • 2013: €3,646m
  • 2014: €4,581m
  • 2016: €4,234m (prov.)

In the absence of the credit companies will undertake some R&D and the 2016 evaluation found a 40 per cent deadweight from the scheme.  That is, while 60 per cent of the associated R&D activity was a result of the scheme, 40 per cent would have taken place anyway and these companies benefitted from partial public funding of R&D they would have fully funded privately anyway. 

On the repayable component of the scheme (i.e. instances where the tax credit is greater than a companies computed tax bill) which were the subject of a recent set of parliamentary questions the evaluation finds:

Analysis of the firm characteristics of the R&D tax credit show that it is mainly older, larger and non-Irish firms who derive financial benefit from the scheme, although it is typically Irish firms who benefit more from the repayable credit element of the scheme.

Should we be concerned with the zero per cent effective rates shown in the C&AG report? Not unless we think companies are paying tax elsewhere or incurring R&D expenditure to avoid Irish taxes. Between them these two elements, which were highlighted by the C&AG account for €1.9 billion of the €2.2 billion between gross tax and tax due.

Granting relief for tax paid abroad is something we should do unless we move to a territorial system in line with most other countries in which case the foreign income of Irish-resident companies would not be counted as part of taxable income while granted relief for R&D expenditure is a deliberate policy choice designed to encourage such activity which we can change if we wish.

If anything, when looking at these useful figures the focus should be on the other end of the range published by the C&AG but “79 of top 100 companies have tax rate of 10% or above” is not what the headline writers are looking for.  And, as stated earlier, most of the action happens above the starting point of taxable income used by the C&AG.

2 comments:

  1. Thank you for sharing your thoughts and knowledge on this topic. This is really helpful and informative, as this gave me more insight to create more ideas and solutions for my plan. I would love to see more updates from you.

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