On my latest trip to Ireland, I had the privilege of engaging with fellow accounting professionals. Our discussions brought to light the intriguing nuances between the tax systems of the Emerald Isle and our own Shaky Isles.
Overall tax revenue
Both countries’ tax systems raise a significant amount of revenue for their respective governments. In the year to 30 June 2022, New Zealand cracked the $100 billion tax revenue barrier for the first time ($100.6 billion) up from $93.8 billion in the year prior. Ireland by comparison had net tax receipts of €82.4 billion for the year ended 31 December 2022, up from €67.5 billion in the year prior.
The comparison does not quite compare apples with apples as Irish net tax receipts include excise duties – €5.5 billion in the 2022 income year. New Zealand excise duties on alcohol, tobacco, and fuel are collected by the NZ Customs Service and are not included in our tax revenue statistics.
Both countries have also had significant increases in the level of tax revenue raised over the past four years from 2018 – 40% ($72.1 to $100.6 billion) and 51% (€54.6 to €82.4 billion) respectively for New Zealand and Ireland. New Zealand’s tax revenue increase is primarily attributable to wage and price inflation – the former coupled with bracket creep adding to personal income tax and the latter to increased GST take.
The tax pie ingredients
At a high level, the composition of the tax base for both countries is broadly similar. New Zealand and Ireland are both heavily reliant on three key tax types – Individual income tax, GST/VAT, and corporate tax with the first mentioned individual income tax being the most significant.
The Irish tax base is slightly broader in that it includes a capital gains tax (CGT) and stamp duty. The Irish CGT provides a relatively consistent but not substantive revenue stream. Most capital gains are subject to CGT at a flat rate of 33%. While New Zealand does not have a separate comprehensive CGT, a number of gains are deemed to be income and taxed under our Income Tax Act.
Let’s delve into two of the key tax types: individual income tax and corporate tax.
Individual income tax
New Zealand and Ireland both adopt a progressive tax system for the taxation of income derived by individuals – that is higher income earners are required to pay more tax overall. As an income threshold (or tax rate band) is exceeded, any additional income is then subject to tax at the higher tax rate applicable to that band. This process repeats until all income is accounted for at graduated progressively higher tax rates.
At first blush, Ireland appears to have a relatively simple and flat two-tier tax rate system, similar in concept to what the NZ ACT Party are proposing in their election 2023 tax policy. Income up to an initial threshold, currently €40,000 for a single individual/2023 income year, is taxed at a standard rate of 20% with any income in excess of this threshold taxed at 40%. The average wage in Ireland for 2023 is €44,202.
The initial threshold level for the standard tax rate however varies depending on the personal circumstances of the taxpayer – for the 2023 year this threshold can range from €40,000 up to €49,000. Specific tax credits, allowances and reliefs can then also apply to further complicate matters.
The initial income threshold has additionally been increased over the past three years – presumably to counter inflationary effects. As discussed above, not something that we have seen in New Zealand since 2011 – generating significant revenue gains for successive NZ government, and a point of difference between parties in the 2023 election campaign.
New Zealand has a graduated tax rate system with five bands ranging from 10.5% for income up to $14,000, to 39% for income over $180,000. Its application is relatively simple. Complexity is only added on interaction with the transfer system, including working for families tax credit entitlements.
Double the tax and a “double Irish with a Dutch sandwich”. While somewhat cryptic, both components aptly highlight the key differences in approach to corporate tax between the two countries. Ireland has basically used its tax system and the taxation of corporates as an enabler to attract foreign investment and multinationals to set up in Ireland. Its corporate tax rate of 12.5%, one of the lowest in the OECD, reflects this.
At 28%, New Zealand’s corporate tax rate is more than double that of Ireland and towards the higher end of the OECD. The 2022 average statutory corporate tax rate for OECD member countries was 23.57%. In terms of full disclosure, Ireland actually has two rates of corporation tax – the most commonly referenced 12.5% relates to trading income, while there is additionally a higher 25% rate for non-trading income – i.e. rentals and investments.
New Zealand has shown no appetite to substantively lower its corporate tax rate and/or to compete with the likes of Singapore to become a regional investment hub. As a country we have also shown no interest in participating in a corporate tax rate “race to the bottom” to compete for foreign equity investment. Our approach has been more aligned to “economic rents”, the return required by a multinational to not be dissuaded from coming to New Zealand. This approach also recognises that there may be other factors in play which will determine whether a foreign company wants to establish a physical presence in New Zealand.
New Zealand has also been reluctant to reduce corporate tax rates given the relationship between this rate and our individual and trustee tax rates and the potential impact that this has on tax compliance behaviour. Substantive misalignment of tax rates is more problematic absent a comprehensive capital gains tax in terms of the overall integrity of our tax system.
There has also been limited support to return to a differentiated tax rate based on residence, albeit this time the lower rate would need to sit with the non-resident corporate.
A “double Irish with a Dutch sandwich” sounds like an order that you might place at a posh café. In reality it describes a now defunct tax avoidance driven investment scheme used by certain large multinational corporations. The descriptor referenced an investment structure which employed two Irish companies with a Dutch company in between (hence the sandwich).
So, what is the key take out? Ireland is heavily reliant on foreign investment and taxation from multinationals – in terms of corporate tax take and increased employment and economic activity – the latter two supporting PAYE and VAT. Is this sustainable? Rest assured that Ireland will do everything that it can to retain its key corporate taxpayers.
Heavy reliance on Top 10 Multinationals
For many years Ireland’s corporate tax take has been heavily reliant on a small group of multinational companies. In terms of the concentration of net corporate tax receipts there are some very telling tax statistics for the 2022 year – The top 10 companies accounted for 57% (€13 billion) of that total revenue (€22.6 billion) – the top 100 companies 79% - with 86.5% in total coming from foreign owned multinationals.
The Top 10 companies vary from year to year but come from a relatively small pool of multinational corporations. The below table from Revenue Ireland highlights the net tax receipts from each year’s top 10 payers over the period 2018 to 2022. The increasing importance of the Top 10 is also relevant as the corporate tax take increases relative to total net Irish tax receipts.
Heavy reliance on a limited number of taxpayers to sustain revenue for a whole tax type – corporate tax does generate risk. I suspect however that multinational flight risk has been well managed and mitigated to the extent possible by ensuring that tax and business settings remain at least competitive. Revenue risk is therefore more likely to flow from a downturn in business profitability.
The key foreign owned multinationals are focused in the following sectors: Information communications & technology, pharmaceuticals, healthcare & medical devices. For many there is significant connection with Ireland in the form of manufacturing activities of scale. For those with a lighter touch Ireland may still be an extended regional headquarters providing technical, sales and operations support to customers in multiple countries.
In the above circumstances there would need to be a compelling business case to warrant change given the related disruption to business and costs to restructure.
More in common than not ….
Overall, both countries’ tax systems have more in common than not. Each country places reliance on the same three key tax types. Ireland’s attraction with foreign investment and the impact that this has had on its corporate tax is a point of difference. Time will tell as to whether they are ultimately too exposed to the “Top 10”, but in the meantime they are reaping the rewards in terms of additional tax revenue. They may also emerge unscathed from their involvement in BEPs. A remarkable Houdini act. There is something to be said for making your own luck.