Wednesday, 2 September 2009

Brian Lenihan's fairy godmothers

An Saoi: The tax returns for August throw up a few surprises, with the main shock coming from Corporation Tax. Instead of the budgeted €226M net yield, the Revenue collected a massive €533M, an additional €307M. God only knows the source of this largesse, but it would require €2,456M in additional profits to give you this type of tax liability. One or more foreign fairies were needed to produce it from nowhere. We can only hope that some of Mr. Obama’s newly hired transfer pricing specialists don’t decide that it is really their money, and ask for it back - or at least not for a few years.

Most of the other figures continue to reflect a domestic economy in crisis. Customs figures confirm that imports are anaemic, and the Excise figures (including of course VRT), while marginally ahead of forecasts, are well below 2008 and reflect a depressed local economy. Capital Acquisitions Tax, CGT & Stamp Duties remain well below target, as would be expected. However, I suspect there may be a large amount of CAT unpaid caught up in unsold assets.

The most worrying numbers are for VAT and Income Tax. VAT may fall below €10,000M, or close to 2003 levels. Reduced spending and falling prices will both hit hard at VAT levels and further cuts in Government expenditure and the spending power of employees will drag the yield further in 2010. Income Tax is falling significantly below target, despite Budget increases. Payments by the directly assessed in October and November are unlikely to be close to target, and it is possible that a large part of last year’s preliminary tax may be refunded when returns are filed

It appears Corporation Tax may well exceed forecasts, despite possibly a net negative contribution from indigenous companies. September is a key month for Corporation Tax as companies with a December year end filing their returns and the March year end companies submitting their pre-preliminary tax payment. Last September saw €520M paid and while the target for this year is just €365M, it is hard to see it being reached. However, one never knows!

After the July figures, I suggested that the likely tax figure for the year would be in the region of €31,145M. I will stick by this figure for the present, but the Corporation Tax figures are amazing.


paul sweeney said...

You are assuming in your calculation on Corporation Tax that all companies pay at the top rate of the [low] 12.5%. That is the maximum rate! Then one deducts capital allowances and all the rest. For example, Ryanair paid CT on profits of €339m in 2006 at 0.9%. It bought a lot of planes which the co can rightly write off against tax. Thus the profit levels to generate this level of tax could and probably are much higher than you estimate.
Have we have partially built an economy on Tranfer Price Fixing, ie taking other countries company taxes! An Enterprise Economy?

An Saoi said...

@Paul: Thank you for your comment. Yes, I accept that the effective Irish tax rate for many of our foreign friends is in the area of 4 to 8%, depending on how aggressive they are and their relationship at home. Capital allowances however play little enough role in tax reduction when your rate is 10/12.5%. You also have to have expended money on machinery and equipment to claim capital allowances.

On the issue of Ryanair, there is little Ireland can say as we are the home of aircraft leasing, which depends on double dipping. I presume that most of the aircraft leasing not done out of Ireland is accounted for by Ryanair so as to ensure that they too double dip at the trough of capital allowances.

Yes of course we have very successfully turned ourselves into the scam centre of Europe. The Intellectual Property (IP) provisions in the most recent Finance Act continue the trend.

paul sweeney said...

An tSaoi, Captial allowancs can still reduce corporation tax to 0%! I agree totally that capital allowances are a legitimate business expense. However, it is interesting that many in Europe (and, no one, bar one, in the mainstream media here) are debating the legitimacy of deductions for interest as a legitimate business expense. Only Congress sought the curbing of interest for Private Equity firms (to a %age of total equity funding), in Budget submisions over the past few years. You should explain double dipping which I think means getting the tax break twice - in 2 juristictions.

An Saoi said...

@Paul, The issue of the legitimacy of interest deduction has been discussed in a very robust way in Germany, as much by more conservative elements such as the CSU as left wing parties. Personally, I am in favour of no deduction for interest and providing limited relief for direct investment by way of paid up shares and perhaps accelerating capital allowances with a shorter right off period. The current crisis has shown the dependence of Irish owned business on banks for capital rather than shareholders subscribing for it. I think that the financial institutions have legitimate reasons for refusing many small businesses as the owners have little financial risk. The balance sheets of the vast majority of smaller Irish businesses are effectively negative with all spare cash extracted. Indeed our close company provisions penalise companies with spare cash on the balance sheet.

For those who do not understand the term “double dipping”, it is used to describe claiming for the same relief twice. In the case of aircraft leasing, the lessor claims capital allowances against the leasing payments received and the lessee also claims them against gross profits. As you mention, it involves at least two jurisdictions. Approx. 75% of aircraft leasing in the world is done from Ireland. Double dipping may also involve interest on loans.

It would be interesting to read current Revenue views on such issues. They have, I understand recruited economists in recent years. I am not aware of their names or whether they have presented any papers, which are publically available. I have also heard that the Revenue have a tie-in with University of Limerick. I presume fruits of such research are available, at least under Freedom of Information legislation, as the taxpayer has borne the cost.