We now have the full-year figure for Ireland’s highest-ever corporation tax take, which came in at €22,643 million last year. The surge in the final quarter of this year was such that the Department of Finance has also increased the portion of receipts it qualifies as “windfall” since late September budget estimates, bringing it to €10.5 billion.

“Our colleagues in Revenue advised that about €1.5 billion of that was unlikely to be repeated,” the Department’s chief economist John McCarthy explained.

Another feature of the Exchequer statement for 2022 released this Wednesday is that the amount of corporation tax collected in December was smaller than in the same month in 2021 – a rare occurrence in recent years. Presenting the figures, Minister for Finance Michael McGrath insisted that he sees “no significance in one month’s data”, especially on the back of the mountain of corporation tax collected in November.

He stuck by Budget forecasts expecting corporation tax to remain broadly flat this year at around €23 billion. The next estimates are due in April. With uncertainty hanging over a “windfall” component now accounting for nearly half of what has become Ireland’s second-largest tax source, can we get confirmation anywhere of what is likely to happen?

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Just over one year ago, after November figures had established that 2021 would be a record year for both corporation tax revenue and growth rate, I wrote a column warning: “Last month saw a record corporation tax take. It may have seen its peak”. This was based on two expectations at the time:

• A fall-back from the Covid-19 bounce in demand for cloud-based services and for some pharmaceutical supplies sold by many multinationals out of Ireland, and
• Signs that those American firms most exposed to a US court ruling on the treatment of share-based payments to R&D staff were reversing decisions to locate part of their profits in this country, putting the so-called green jersey tax structure at risk.

The latest figures from the Department of Finance show that I was wrong. We now know that corporation tax receipts grew by 48 per cent last year, much faster than in 2021.

With corporation tax now comfortably the second-largest source of revenue for the Exchequer after income tax, what can we expect for this year? To attempt a better prediction than last year’s, I’ll enlist some help from another tax stream – Vat.

When a company sells a cloud-based product like software or a streaming subscription to an end customer in another EU country, Vat is due on the transaction just like it would be in Ireland. Yet, although the EU operates as one country when it comes to Vat, the 27 tax administrations of member states remain separate.

To allow each country to retain the benefit of Vat paid by its citizens while facilitating business, the EU changed the rules in 2015 and established the mini one-stop-shop (Moss) scheme. Since then, sellers of “telecommunications, broadcast and electronically supplied (TBE) services” to individual consumers have been liable to pay Vat in the country of consumption at the local rate. However, they don’t have to register for Vat in each EU member state – they can pay the Vat to the tax authority in the country where they are established, which then remits it to the consumption country. 

The new rules were gradually phased in and there were some changes in the first half of 2021, when the UK left the scheme and the one-stop-shop (OSS) was expanded to cross-border sales of a wider range of products and services in the EU. Since then, it has remained unchanged.

Vat Moss remittances from Ireland to the rest of the EU are a proxy for sales of digital services by Irish-registered companies to consumers on the continent. Those are mostly booked by the international HQs of US multinationals, such as purchases made by Europeans through Apple’s Appstore or Microsoft’s Xbox. This is how their quarterly evolution has looked like since the start of the scheme (it will be a few weeks before figures for the last quarter of 2022 are available).

The largest EU markets where Ireland exported consumer electronic services in the latest reported quarter were Germany (26 per cent) and France (21 per cent), which together received nearly half of Ireland’s Vat Moss remittances.

The phenomenal acceleration of immaterial e-commerce apparent since the end of 2021 has, in part, been reflected in corresponding profits feeding into last year’s corporation tax. But a lot of this revenue growth has yet to trickle into digital multinationals’ tax returns. The associated profits subject to corporation tax have yet to be declared this year and will contribute to the 2023 tax take.

A correction, but at a higher level

For the first time since the introduction of Vat Moss, remittances fell in the third quarter of last year. That’s the correction in online business reflected in the wave of redundancies in Silicon Valley and, to a lesser degree, in Dublin’s Silicon Docks at the end of last year.

This may not be over, as illustrated by this Wednesday's announcement by Salesforce. The software multinational, which claims 2,100 employees in Ireland, will cut around 10 per cent of its global workforce and reduce its office space. To put this figure in context, Salesforce reported throughout 2022 that it was growing employee numbers at an annual rate of over 30 per cent. "As our revenue accelerated through the pandemic, we hired too many people leading into this economic downturn we’re now facing, and I take responsibility for that," Salesforce's chief executive Marc Benioff wrote in a letter to employees.

Asked about the corporation tax risk posed by the tech downturn, McGrath said this highlighted the importance of not taking its "windfall" portion for granted. "That's an important safeguard in terms of the Department's assessment of those receipts, but the key driver of the increase in corporate tax receipts has been an increase in profitability across a number of sectors," he said, referring to pandemic-proof pharmaceutical and medical devices industries.

Acknowledging the jobs losses in digital multinationals and the disappointment for those affected, he added: "Even after all the announcements that have been made, the tech sector in Ireland will be significantly larger this year than it was pre-pandemic."

In the meantime, it is worth noting that although Q3 2022 saw a 6.8 per cent drop in Vat Moss remittances compared to Q2, they were still 12.7 per cent higher than those in Q1. Each of the three quarters reported so far for last year saw an unprecedented Vat transfer of over €1 billion from Ireland to other EU countries. The total €3.5 billion in remittances for those nine months, using an average Vat rate of around 20 per cent in market countries, is equivalent to over €17 billion in EU digital consumer sales booked in Ireland.

This slice of Irish-based multinational activity is only a fraction of the total. Vat Moss does not account for B2B sales of electronic services to Vat-registered customers, such as advertising. Arguably, this sector has seen a steeper decline in recent months than consumer sales, analysts indicate.

Yet Vat Moss does not cover sales of physical goods either, especially medicines and medical devices, where Irish exports to Europe have been booming. Pharmaceutical multinationals declare a large portion of the resulting profits in Ireland, and this will add to the corporation tax take this year. Not to mention the carefully guarded secret of Apple’s Irish-domiciled iPhone sales. 

Between this, the large cloud-based profits of the past year yet to be taxed in Ireland and the prospect of the correction in the tech industry’s runaway growth stabilising at a level of business much higher than in recent years, my bet for this year is on a smaller but noticeable fresh increase in Ireland’s corporation tax revenue – maybe higher than the Government is banking on in the budget.

Should disaster happen and a large chunk of the €10.5 billion "windfall" corporation tax evaporate next year, I asked McGrath and his Public Expenditure and Reform colleague, Paschal Donohoe, how they would absorb the shock.

"The first line of defence in a scenario where corporation tax receipts do not materialise to the level that we're projecting is the surplus," McGrath replied, with €5 billion now reported for the past year – and another first €2 billion deposit into a reserve fund, a policy he wants to continue. By contrast, he said that what he wanted to avoid were deep cuts that would hurt people.

Donohoe added that the €7.3 billion year-on-year increase in corporation tax receipts in 2002 went towards the twin buffers of the surplus and the reserve fund. "That approach is the reason why we now have the foundations ready in 2023 to be able to manage the corporate tax risks," he said.

Further reading

Between the US and the EU, a gap remains on the minimum 15% corporation tax