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Irish Corporate Tax Receipts Cushioned COVID-19 Effects

Posted on Sep. 21, 2020

Although revenues have fallen during the pandemic, the effect has been "less than feared” because of the overperformance of corporation tax receipts and the progressive nature of the income tax system, Ireland’s fiscal watchdog said.

Corporation tax receipts in 2020 are 31.4 percent higher than receipts in 2019, the Irish Fiscal Advisory Council (IFAC) said in its pre-Budget 2021 statement, issued September 17. But the independent statutory body warned that because a large portion of corporation tax receipts are determined by economic activity in the previous year, the overperformance is "vulnerable to downside risks in 2021.” 

IFAC warned that Ireland could face a sharp drop in revenues resulting from global policy changes like the OECD's base erosion and profit-shifting initiatives or changes in corporate behavior caused by the pandemic.

“COVID-19 could potentially lead to new risks associated with corporation tax receipts. It could lead to a shift in decisions in terms of where companies choose to locate,” the statement says. In its long-term sustainability report, published July 15, IFAC said that BEPS initiatives and international tax changes may affect Irish corporate tax revenue over the medium term by more than the €2 billion previously estimated by the Department of Finance.

According to the IFAC, after dealing with potential losses from COVID-19 and Brexit, Ireland will face three long-term challenges: aging, climate change, and overreliance on corporation tax receipts. It is difficult to balance alleviating future budgetary challenges with Ireland's commitment to limiting increases in tax burdens, IFAC said, but strengthening the approach to medium-term budgeting would help manage these competing pressures.

“Budget 2021 should ensure that there is a substantial multi-year stimulus in place for 2021 and beyond to continue targeted support measures and to support demand. Given the high uncertainty around Covid-19 and Brexit, putting in place an appropriately-sized contingency would help manage risks,” the statement says.

But the lack of clear commitments and specific plans to reduce existing spending and raise revenue “calls into question the credibility of the new Government in terms of its willingness to maintain a prudent budgetary stance," the statement says. IFAC emphasized that there are also no clear plans to improve medium-term budgeting or reduce the government’s reliance on corporation tax receipts.

Finance Minister Paschal Donohoe and Public Expenditure and Reform Minister Michael McGrath announced the government’s 2021 budget strategy in a September 16 release, noting that the government will prioritize management of the COVID-19 pandemic and Brexit. According to the government,“broad-based increases in taxation would be counter-productive at this stage of the cycle.” The release also states that there will not be any increases to income taxation or changes to income tax credits or bands.

The European Commission has urged Ireland to broaden its tax base to ensure stability because the country is highly dependent on corporation tax revenue, with the top 10 companies accounting for 45 percent of that revenue. Noting the volatile and transitory nature of the receipts, the report says broadening the tax base would make revenue more resilient to fluctuations in the economy.

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