Thursday, July 14, 2022

Continued Calm in the Aggregate Corporation Tax Calculation–apart from Capital Allowances Claimed.

This time last year we noted the relative calm across most of the items in the 2019 update of the Revenue Commissioner’s aggregate Corporation Tax calculation.  The recent release of the 2020 update has seen this largely continue. 

This may not be a surprise as, elevated though they are, Exchequer Corporation Tax receipts were relatively stable across 2018 (€10.4 billion), 2019 (€10.9 billion) and 2020 (€11.8 billion).  It is also hard to discern a clear impact of the COVID-19 pandemic in the figures.

Anyway here is the calculation of Taxable Income for the most recent five years that are available.

Aggregate CT Calculation for Taxable Income 2016-2020

The bottom line is that Taxable Income for the financial years of companies that ended during 2020 aggregated to just over €110 billion, an increase of around €4 billion on 2020.  There is probably a bit more going on under the headline aggregate figures.

The starting point of Gross Trading Profits was actually lower in 2020 compared to 2019.  However, this was offset by lower figures for capital allowances used and trade losses carried forward used.  There may be a pandemic effect here via the impact on the aircraft leasing sector which would have seen a big drop in gross income in 2020.

There was a reduction in trade charges in 2020.  In this context these are typically certain royalty payments for the use of intellectual property.  The reduction may be due to the restructuring undertaken by US MNCs and the relocation of the IP either back to the US or onshored to Ireland.  We might have expected this to result in an increase in capital allowances but as noted above they actually fell.

There is however some tumult if we look at the figures for capital allowances claimed.  The figures in the above tables are for capital allowances used, that is actually offset against positive income in the year they are claimed.  In some cases firms may claim capital allowances but not have sufficient positive income to use them against.  Those unused capital losses are carried forward to subsequent periods where they may be offset against positive profits if they arise. [Technically, the unused capital allowances are carried forward as trade losses.] 

Aggregate CT Calculation Capital Allowances Used and Claimed 2013-2020

The first time we really got interested in these figures was when those for 2015 were published.  These gave insight into the 26 per cent GDP growth rate published by the CSO for that year.  In 2015, the amount of capital allowances claimed jumped from €24 billion the previous year to €51.5 billion.  There was an associated increase in the figures for capital allowances used which is also reflected in the increase in Gross Trading Profits (which are included in GDP).

The following years saw increases but nothing that really stood out – until 2020.  As can be seen, claims for capital allowances went from €86 billion in 2019 to €145 billion in 2020.  The annual increase in 2020 is bigger than the annual total for 2015.  But what is unusual now is that it is not associated with increases in the other related items.

As discussed above there was actually a slight drop in the amount of capital allowances used in 2020, as there was for Gross Trading Profits.  So we have a huge increase in capital allowances claimed but no evidence of an associated increase in profits.  It is hard to know what is behind the rise in claims for capital allowances.

The panel on the right of the table gives the figures for the consumption of fixed capital for non-financial corporates in the national accounts.  We can see that by and large the national account version of depreciation tracks the tax treatment of it.  Consumption of fixed capital jumped in 2015 and typically has been around 85 per cent of the figure for capital allowances claimed.

The figures can differ in how depreciation is treated.  Most notable the capital allowances for aircraft for leasing can be claimed over eight years whereas such aircraft will be depreciated over 25 years in the national accounts.

The difference between the figures exploded in 2020 with consumption of fixed capital in the national accounts being a little over 60 per cent of the figure for capital allowances claimed in the Corporation Tax statistics.  There may be some insight in the forthcoming annual national accounts set to be published by the CSO.

We return to the aggregate Corporation Tax calculation and look at how Gross Tax Due as derive from Taxable Income becomes Tax Due.

Aggregate CT Calculation for Tax Due 2016-2020

Again, there is really nothing of note that stands out in the 2020 figures.  The biggest impact on Tax Due comes from Double Taxation Relief and the Additional Foreign Tax Credit which reflects the tax paid in foreign jurisdictions on the worldwide income of Irish resident companies included in their Irish tax return.  A move to a territorial system would see such foreign income removed from the Irish tax base.

Elsewhere there were only small changes.  The amount of the R&D tax credit remained relative stable compared to 2019.  And the end point of Tax Due gives figures that closely match the receipts collected by the Exchequer.

There may be a bit more going on in the next releases.  In 2020, Corporation Tax jumped to €15.3 billion and is on track to be even higher in 2022.  And maybe additional data releases will give some insight into that unusual jump in capital allowances claimed in 2020.

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