The 2016 Aggregate Corporation Tax Calculation

Ireland’s national accounts cannot be accused of being dull and the latest update to the National Income and Expenditure Accounts due this Thursday looks like it will offer plenty to chew over.  Of course, all the CSO are doing is reporting on what is going on.  The main reason for the lack of dullness in the accounts is the corporate sector, and in particular, the impact of foreign-owned MNCs.

We know tax is a factor behind a lot of what goes on so the tax data provided by the Revenue Commissioners is a useful complement to the national accounting data published by the CSO. 

The Revenue have now published the 2016 update of the aggregate Corporation Tax calculation.  This might seem a bit sluggish but the deadline for CT returns is nine months after the end of the financial year to which they apply to CT returns for tax years ending in December 2016 would have been filed up to September 2017 and the process of compiling the aggregate figures means we get the data about half way through the following year.

So, now that we have the aggregate CT calculation for 2016 what does it tell us?  Essentially, we can divided the calculation into two parts:

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

We’ll start with the determination of Taxable Income.

In relative terms (i.e. compared to 2015!) the changes in 2016 were relatively modest.  The starting point of the table, Gross Trading Profits, had a massive surge of almost €50 billion (and 50 per cent) in 2015.  The 2016 increase was €15 billion or “just” 10 per cent.

From 2014 to 2016, Gross Trading Profits increased from just over €95 billion to almost €160 billion.  Over the same period the bottom line here, Taxable Income, increased from €50 billion to €71 billion.  This suggests there is a lot going on in between when a €65 billion rise in Gross Trading Profits translates into an increase in Taxable Income of around one-third of that amount.

It also suggests that caution should be exercised when drawing a link between the 2015 surge in GDP and the 2015 surge in Exchequer Corporation Tax receipts.

There is a lot going on and it is almost all due to just one item: Capital Allowances, i.e. the tax treatment of expenditure linked to the acquisition or maintenance and development of fixed assets.  The fourth row of numbers in the table shows what happened.

Back in 2012, firms used €8.5 billion of capital allowances against their gross trading profits (though this could have been affected by lower profits) and by 2016 the amount of capital allowances used had risen to almost €60 billion. Most of this increase has happened in the latest two years for which data is available, 2015 (+€27.5 billion) and 2016 (+€13.1 billion).

The only other notable change in 2016 was the €6 billion or so reduction in Trade Losses Carried Forward used though all this has done is brought this item back to its 2014 level.  There is lots to be learned in the table but when it comes to recent changes, and finding links to developments in the national accounts, it really is all about capital allowances.  The next post will look at these in more detail.  For now we will looks at the second part of the aggregate CT calculation which shows how Tax Due is reached from the starting point of Gross Tax Due.

Applying Ireland’s two Corporation Tax rates shows that the Taxable Income reported by companies for tax years ending in 2016 resulted in a Gross Tax Due amount of almost €9.5 billion. Ireland does have a third tax rate paid by companies, that on capital gains, but these amounts are regrossed based on the difference between the CGT rate on the CT rate of 12.5 per cent and the 12.5 per cent rate is applied to these regrossed amounts to give the amount of tax due.

We can see that the €9.5 billion of Gross Tax Due results on a Tax Due amount of €7.2 billion once we reach the bottom line.  The reduction is due to credits and reliefs available under Irish CT legislation.  These are actually pretty limited in number and we can see that the bulk of the reduction is due to two sets of items:

1. Double Taxation Relief and the Additional Foreign Tax Credit
2. The R&D Tax Credit used against tax this year and the Payment of the Excess R&D tax credit.

Between them these factors account for €2.0 billion of the €2.3 billion difference between Gross Tax Due and Tax Due.  Earlier posts considered the impact of these features of Ireland’s CT codes on effective tax rates here and here.  Without them the effective tax rate on Taxable Income would essentially be 12.5 per cent.

Finally, it is worth comparing the figures for Tax Due shown here and the cash receipts for Corporation Tax recorded by the Exchequer.

For the five years shown the two series roughly sum to the same aggregate amount (c.€27 billion) but reach the 2016 amount of c.€7.25 billion by difference routes.  As is well known Exchequer CT receipts spiked by almost 50 per cent in 2015.  On the other hand the increase is Tax Due as shown in the aggregate CT calculation is more evenly spread across 2014, 2015 and 2016. 

This suggests there may have been a timing issue at play when it comes to the surge in cash receipts in 2015 with some receipts due on activity that occurred in 2014 delayed until the final CT return was filed nine months after the end of the companies’ accounting periods. 

And, again it highlights, that although the surge in CT receipts may have happened in the same year as the jump in GDP, they are not necessarily directly related.  As with lots of things lately, capital allowances play a central role in this and it is to them that we will turn next.