Thursday, March 11, 2021

Changes in the Corporation Tax calculation for companies with no net income

In recent years we have been tracking companies whose net trading income is negative or nil in the Corporation Tax Distribution Statistics from the Revenue Commissioners.  One might think this would be a set of companies with little going on. One would be wrong.

Here is the aggregate corporation tax computation for companies with no net trading income for each year from 2014 to 2018 (latest available).

Aggregate CT Companies with no net income 2014-2018

The row of duck eggs for Net Trading Income are quickly evident but there are lots of big numbers above those zeroes.  Indeed, the set of companies with no net trading income were responsible for Ireland 26 per cent GDP growth rate in 2015.

The top line of the table is Gross Trading Profits and for companies with no Net Trading Income went from €13.5 billion in 2014 to €40.0 billion in 2015.  That increase drove the surge in GDP.

That increase was no linked to the surge in Corporation Tax revenues that began the same year.  The additional Gross Trading Profit were fully offset by Capital Allowances.  As we can see the amount of Capital Allowances available for these companies rose from €12.8 billion in 2014 to €38.4 billion in 2015.  All the extra gross profit was offset by capital allowances meaning no Corporation Tax was paid on those profits.

And for 2018 we can see that these profits have dropped out of this set of companies.  Gross Trading Profits for companies with No Net Income fell from €50 billion in 2017 to €18 billion in 2018. We will come back to where these profits ended up shortly.

The rest of the story for companies with no Net Trading Income is essentially one of Foreign Income.  Around three-quarters of the Taxable Income of these companies each year is Foreign Income. 

This is included in the Corporation Tax computation because Ireland has a worldwide regime with the profits of all resident companies subject to tax in Ireland, wherever earned.  Foreign profit will already have been subject to tax abroad and the only additional tax that would be due in Ireland is if the rate paid abroad was less than the relevant rate here. 

Given that Ireland’s Corporation Tax rate is lower than most other countries this means that very little additional Irish tax is due on the Foreign Income included in the Corporation Tax calculation.  That is main reason for the low effective rates shown at the bottom of the table.

So, back to those missing profits.  We can track them by looking for where the claims for capital allowances ended up.  Here are the claims of capital allowances by range of net income.

Plant and Machinery Capital Allowances by Range of Net Income 2014-2018

The top line shows the drop in capital allowances for companies with no net trading income.  Most of 80,000 or so companies who file tax returns with the Revenue Commissioners are not US MNCs.  The income ranges reflect that with the final category being for companies with a net income of more than €10 million.

We can see that the capital allowances moved down the table in 2018, but not all the way down. The increase in capital allowances can be seen in the row for companies with a net income of between €1 million and €5 million with these companies having €34 billion of claims for capital allowances.

That is a an incredible result with a huge gross trading profit resulting in a relatively tiny net trading income.  All bar a tiny amount of the additional profit for companies in this range of net income was offset by capital allowances.

As the previous posts noted these are profits and capital allowances linked to intangible assets.  These are assets (or maybe even just one!) that were moved to Ireland prior to October 2017.  Since then there has been an 80 per cent cap on the amount of profit in any given year that can be offset by capital allowances for intangible assets. 

This cap doesn’t apply to the profits in question here and we get €30 billion plus of gross profit being reduced to a net trading income of something between €1 million and €5 million.  This again shows that while intangible related profits were responsible for the surge in Ireland’s GDP they are not the source, yet, of the surge in Corporation Tax.  But when those capital allowances run out…

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