DUBLIN Finland’s Minister of Finance Riikka Purra one can only dream of being able to report similar figures as his Irish colleague.
Irish Chancellor of the Exchequer Michael McGrath announced in April that the ministry anticipates a surplus of 8.6 billion euros in the state budget this year.
The Irish government therefore collects much more money than it spends. Over the course of four years, the government anticipates a surplus of 38 billion euros, reported The Irish Times.
In Finland, there is a hole of more than ten billion in the state’s budget this year, which needs to be fixed with debt.
This article explains why the economic situation of Ireland, which is slightly smaller than Finland in terms of population, is so different. Many remember that the Irish economy went into a downward spiral more than 15 years ago. The country had to ask the EU and the IMF for a rescue package in 2010.
Now the Irish economy is generally doing quite well. Unemployment is very low, and people are spending. This is reflected in strong income taxes and VAT revenues, opens the research professor Kieran McQuinn from the Economic and Social Research Institute (ESRI).
However, a significant part of the state’s tax pot comes from corporate taxation, which is quite low internationally in Ireland.
However, its revenues have grown wildly. Corporate tax revenues have grown from four billion euros to 24 billion euros in a decade.
in Finland the tax collector collected 7.7 billion euros in corporate tax last year. Finnish company tax in this article refers to corporate tax, which is paid by limited companies and, for example, cooperatives.
– We are lucky in the sense that we have a strong sector of multinational companies, says McQuinn.
However, it is not about sheer luck. Ireland has been trying to attract multinational companies and their investments to the country since at least the early 1990s.
For example, foreign IT and pharmaceutical companies operate in Ireland. Many of them did very well during the corona pandemic, and this also benefited Ireland. McQuinn raises, for example, Pfizer, which manufactures corona vaccines, which says it employs 5,000 people in Ireland.
A short walk from the research institute’s office are, for example, the offices of Google, the consulting giant Accenture, the accommodation service Airbnb and the Facebook company Meta.
Corporate tax is a fluctuating income
Ireland began reducing its corporate tax rate from 50% in 1987 to 12.5% in 2003.
Until a few years ago, multinational companies operating in Ireland were able to make juicy tax arrangements. The Irish Times says that this model, known as “double Irish”, was banned from new companies coming to Ireland in 2015 and from its old users at the end of 2020.
In addition, foreign companies have been attracted by Ireland’s English-speaking educated population and access to the EU region.
The downside of corporate tax is instability: tax revenues from multinational companies can fluctuate significantly.
– From the government’s point of view, the danger is that business tax revenues may run out, says McQuinn.
Without them, the state economy would look different. Finance Minister McGrath said that this year’s surplus – 8.6 billion euros – is largely due to taxes received from multinational companies. Without them, the budget would have a deficit of 2.7 billion.
Tax information is not public in Ireland in the same way as in Finland, so researchers do not know exactly how much any company pays in taxes.
However, tax revenues are highly concentrated: the Irish National Audit Office estimates that just three companies were responsible for 40 percent of all corporate taxes collected in 2022. Thus, the collapse of even one company’s results or emigration can swing revenues a lot.
Because of the instability, the Irish government should not plan to use the company tax revenues for ongoing expenses.
Now Ireland is in the process of establishing two funds into which it puts “extra” money for savings and investments. With the help of the funds, Ireland prepares for worse years and, for example, the aging of the population and climate change.
Taxation of giant companies is getting tighter
At the beginning of this year, Ireland tightened the taxation of the largest companies to at least 15% due to the international minimum tax agreement. This applies to companies with a turnover of at least EUR 750 million per year.
It is a proposal by the Organization for Economic Co-operation and Development (OECD), which has been accepted by almost 140 countries.
In Finland, the corporate tax rate for limited companies is 20 percent. The government reduced the tax twice between 2012 and 2014, dropping it from 26 percent.
Board advisor Jari Salokoski from the Ministry of Finance says that no government has since proposed that the corporate tax rate should be lowered. The Ministry of Finance considers the level to be internationally competitive.
In 2022, the corporate tax rate in OECD countries was 23.1 percent on average.
The increase will bring additional income to Ireland
For Ireland, an increase in the tax rate of a couple of percentage points will probably mean more tax revenues in the next few years, experts believe.
The international tax reform may include a second phase. In that case, corporate taxation would shift more clearly than at present to where the profits are generated. According to McQuinn, the reform would clearly hit Ireland’s tax revenues if it ever comes into force.
– A large part of the profit that the companies here earn comes from operations in other markets. Not what they sell in Ireland, he says.
Ireland has sometimes been criticized as a tax haven due to low corporate taxation.
McQuinn reminds that Ireland has put an end to juicy tax arrangements and is participating in the international minimum tax agreement. For him, calling Ireland a tax haven is not fair.
Besides, according to McQuinn, Ireland has the right to tax companies however it wants. For him, Ireland could defend itself with the fact that it does not have natural resources, like many other countries.
– Instead, we have a trained workforce. In other words, we need demand for intellectual capital, and that is brought by multinational companies.