The hottest topic on everyone’s lips this Christmas season – why does Ireland get so much money from corporation tax?
Revenue from the head of the tax office has soared in recent years, and corporate taxes alone keep the country’s finances in surplus.
Rising corporate taxes have also led to Ireland being accused of “siphoning” profits from other (mainly EU) countries for its own benefit.
This claim was made by prominent French economist Thomas Piketty in response to a report by the European Union Tax Observatory, a research arm of the Paris School of Economics.
According to the study, Ireland receives €4,500 in corporate tax revenue per person, five times more than France or Germany.
While per capita corporate tax revenues in these two countries have remained fairly constant over the past 20 years or so, Ireland’s has recently surged, increasing fivefold since 2014.
Piketty’s comments prompted a wave of reactions from a range of prominent business figures.
This included Ashoka Modi, who was one of the leading officials at the International Monetary Fund (IMF) during the bailout of Ireland’s financial crisis, who said the country had a “parasitic tax policy”.
French economist Gabriel Zucman, one of the report’s co-ordinators, also said Ireland was “siphoning” profits from other countries.
Nobel Prize-winning US economist Joseph Stiglitz, who wrote the foreword to the Tax Oversight Committee’s report, has previously said that Ireland is not a good “EU citizen” in corporate tax terms.
I understand. Ireland’s corporate tax approach is not popular overseas. Ireland has collected billions of dollars in taxes in recent years, comparable to those of oil-extracting countries, and has attracted increasing envy and resentment from other countries.
Ireland received €15 billion in corporation tax in 2021, an increase of 29% on the previous year. In 2022 she earned 22.6 billion euros, an increase of 48%. This year’s increase will be less dramatic, but the trend is still upward.
The importance of corporation tax cannot be overstated, as Ireland collected a total of €110 billion in taxes in 2022. These are vital to Ireland’s fiscal health.
In 2021, the Irish Fiscal Advisory Council estimated that as much as €9 billion of that year’s €15 billion in tax revenue was a “windfall”, or “unexplained by the performance of the domestic economy”.
Without these windfalls, the country would go from a healthy surplus to a worrying deficit.
So why does Ireland collect so much corporation tax?
The view of many, including Mr Piketty and Mr Modi, is that this is probably related to profit shifting.
This relates to how companies move revenue from one jurisdiction to another and is often done to minimize tax liability.
The general idea is to shift profits from countries with high corporate tax rates to countries with low corporate tax rates or none at all.
Many large multinational companies derive a large proportion of their profits from their European operations in Ireland.
This is because many companies, particularly US companies with European headquarters in Dublin, moved their intellectual property (IP) assets to Ireland several years ago.
IP is the copyrights and patents that underpin the sale of a product and often determine where profits are booked.
Many multinational companies have transferred their intellectual property following an international attempt in 2015 to crack down on tax avoidance by the Organization for Economic Co-operation and Development (OECD), an intergovernmental organization comprised primarily of wealthy developed countries. .
Subsequently, many large companies moved their intellectual property from unpopular corporate tax-free jurisdictions to jurisdictions that seemed more legitimate, such as Ireland.
Ireland was seen as more legitimate, with many American multinationals often having their European headquarters here, and with more economic activity and employees.
Ireland actively encouraged this process. In 2014, the government brought forward tax breaks, making it more attractive for multinational companies to move their intellectual property to Ireland.
The measures, which were in place from 2015 to 2017, resulted in multinational companies moving tens of billions worth of assets to Ireland, and have led to questions about why so many large companies have intellectual property in Ireland. I’ll explain it to some extent.
This means that profits from multinational companies’ operations across Europe tend to flow to Ireland and are taxed there as well.
Until the creation of the OECD in 2015, many U.S. companies kept profits from European markets in zero-tax jurisdictions.
No taxes were paid on that money, but multinational corporations could not use it. It was therefore considered desirable to move it to Ireland. He will pay some tax, but the amount will be lower at 12.5%.
After taxes are paid, the money could be returned to the United States or wherever the multinational company needs it.
While this has resulted in huge profits for Ireland, many other European countries feel they are missing out.
A report by the European Union Tax Supervisory Board estimates that more than $140 billion has been transferred to Ireland in recent years.
The Tax Justice Network, a UK-based research group, estimated that in early 2023, around $40 billion a year would flow to Ireland, resulting in $11 billion in “tax losses” to other countries. The exact numbers tend to vary from report to report, but the point is the same.
This is why other European countries are so angry. Their view is that taxes, which flow primarily to Irish businesses, should be distributed more evenly across Europe, based on criteria such as where products are sold.
Another view is that Ireland is simply making good use of its tax dollars for the benefit of its people. None of the measures taken by the government (leaving aside the controversial €13 billion Apple tax issue) have been found to violate international law.
Readers may also notice that the multinational companies discussed are almost always based in the United States. This is partly because the U.S. tax system allows companies to not pay taxes on overseas earnings until they bring them back to the United States.
Some economists see this problem as largely due to the U.S. tax system. Others will argue that much of the tax revenue Europe is struggling to capture, money that currently goes to Ireland, should instead go to the United States.
Wherever the money goes in the future, whether it goes back to the US, spread evenly across Europe or is still in Ireland, we dispute the notion that huge amounts of corporate profits are being transferred to Ireland. It’s difficult to chant.
But like most things in life, the reality is a little more confusing than most people imagine.