I am grateful for the opportunity to appear before the committee. As Mr. Howard indicated, in the past two years, we published two papers on corporation tax receipts. My presentation will summarise these papers focusing on information from tax returns in 2015 and I will also highlight key trends from receipts in 2016.
Before proceeding, I will briefly outline the timing of tax returns and receipts to explain why we are focusing on 2015 in this presentation. The timing of a company's corporation tax payments depends on when its accounting period ends, and whether it is considered a large or a small company. A large company is one which had a corporation tax liability of €200,000 or more in the previous accounting period for these purposes. As shown in the chart, a large company with a 12-month accounting period ending on 31 December 2015 made its first preliminary tax payment in June 2015, that is, six months into its accounting period. The company made a second preliminary tax payment in November 2015, some 11 months into the accounting period. The CT1, which is the tax return for the accounting period, was then due to be filed in the ninth month after the end of the accounting period - September 2016 in this example. Along with this return, the company must also make a final corporation tax payment. This means that returns for 2015 were due to be filed by September 2016. With late returns and the time required for processing of data, comprehensive information from these returns is only available for our analysis from early 2017 onwards. We used this data in our report on 2015 returns in April 2017 and we are continuing to update and publish our statistics for 2015 across a range of other topics.
As indicated by both Mr. Palmer and Mr. Howard, net corporation tax receipts in 2015 were €6.87 billion, more than €2.2 billion higher than 2014. Net corporation tax receipts in 2016 were €7.4 billion, an increase of €500 million. Net receipts are after refunds or repayments. As shown in the chart, our analysis finds an increase in trading profits to be the largest factor underpinning the growth in corporation tax receipts in 2015. This increase is attributed to a combination of improved trading conditions and increases of productive capital stock in Ireland. The growth in trading profits between 2014 and 2015 returns is more than €46 billion or a 49% increase. Almost all economic sectors exhibit higher trading profits indicating a broad base for the increase. More than 90% of the trading profits, that is, €129 billion, are attributed to the largest five sectors as shown in the chart; the remaining 16 sectors account for the other 10%. The manufacturing sector is the largest sector accounting for two-fifths of the trading profits. The largest subsectors within manufacturing are pharmaceutical and medical device products. The €46 billion increase in profits in returns for 2015 is the primary factor behind the increase of €2.2 billion in corporation tax in 2015. It important to be aware, though, that a company may reduce its profits by claiming capital allowances in respect of certain expenditure. These allowances are the tax equivalent of the accounting depreciation of an asset.
The value of plant and machinery capital allowances claimed increased by €27 billion to almost €50 billion in 2015. Again, that is shown on the chart. Subject to certain conditions, capital allowances may be claimed on intangible assets. The most common examples of such assets that might qualify for allowances are patents, trademarks and copyrights. The increase in the value of intangible asset capital allowances was over €26 billion in 2015. This accounted for almost all of the increase of €27 billion. These intangible capital allowances are restricted so that they may only be offset against trading income generated from the use of those intangible assets.
Aside from increases in trade profits, other factors helped to bring about the increase in corporation tax receipts in 2015 and 2016. One of those factors was non-trading profits. As Deputies are probably aware, a higher corporation tax rate of 25% applies to non-trading profits. As shown in the chart, the value of non-trading profits reported in the 2015 returns was approximately 19% lower than the previous year. This equated to a decrease of €462 million. With the return to growth, the number of companies paying tax has increased. This is making a significant contribution to higher tax receipts. The number of companies paying corporation tax increased from 35,700 in 2014 to 39,900 in 2015 and 44,100 in 2016, representing increases of 12% and 11%, respectively, in those years. The corporation tax receipts from cases not previously paying tax were €470 million in 2015 and €345 million in 2016. Companies newly paying tax are generally new businesses, start-up businesses or businesses returning to a profit-making position.
The losses incurred by companies can be used to offset their corporation tax liabilities. During the recession, many companies accumulated large trading losses. If full effect cannot be given to the amount of a trading loss in a particular period, whether to the company itself or to other companies in the group through group relief provisions, it can be carried forward indefinitely. Approximately 26,900 companies did not pay, or reduced their tax due, for 2015 because of trading losses. The value of trading losses carried forward claimed on 2015 returns indicates that certain companies are returning to profitability, utilising legacy losses and paying corporation tax on their trading income once their losses have been exhausted. Furthermore, the aggregate value of losses has not increased as much as in previous years. As Mr. McCarthy noted, improved trading conditions have led to companies exhausting their losses forward. This can be seen in the 8,000 companies that carried losses into 2014 but indicated no losses carried into their 2015 returns. This indicates that companies which returned to profitability contributed approximately €203 million in corporation tax in 2015.
The total value of losses still being carried forward in 2015 was €209 billion. An examination of the companies carrying forward losses shows that approximately €40 billion of the losses carried forward into 2015 involved claims made by companies that were in liquidation or were otherwise unlikely to be in a position ever to use these losses. Most of these companies are in the financial services sector.
While capital gains is not a significant factor when explaining the increase in corporation tax receipts, it should be noted that capital gains on the disposal of assets increased receipts by approximately €110 million in 2015. Companies, like individuals, pay capital gains tax where a capital gain is realised on the disposal of an asset. In most instances, companies pay their capital gains liabilities as part of their corporation tax liabilities and this is classified as corporation tax in net receipts figures. The number of companies reporting capital gains increased by approximately 19% to 1,080 in 2015. The value of the gains reported by those companies increased by 57%.
Companies that engage in certain qualifying research and development activities are entitled to claim a tax credit on the expense incurred. The Exchequer cost of the research and development tax credit in 2015 was €708 million, which represented an increase of €155 million on the previous year. While the value of the claims increased, the number of companies claiming the credit decreased by approximately 2.5% from 1,570 in 2014 to 1,532 in 2015. This is indicated on the graph on the screen.
Revenue's large cases division is responsible for managing the tax affairs of the largest taxpayers in the State, including multinational companies. While net receipts from companies dealt with by the large cases division have grown, they have remained relatively stable as a percentage of total corporation tax receipts. The proportion of corporation tax receipts coming from such companies increased from 80% in 2014 to 80.5% in 2015 and 82.1% in 2016.
It is notable that in 2015 the €2.2 billion increase in corporation tax receipts is, as noted previously, roughly split 80:20 in favour of large-case division versus non-large-case division companies. As non-LCD companies contribute approximately 20% of corporation tax receipts, this is another indicator of the broad-based nature of the increase in receipts. However, it should be noted that in 2015 the increase in receipts is primarily from LCD companies.
Another measure that Revenue tracks and analyses - this was mentioned by my colleagues in their statements already - is the contribution of the top ten payers annually as an indicator of the concentration of corporation tax receipts. In the past decade, the top ten payers in any given year have paid somewhere between 16%, as was the case in 2007, and 41%, as in 2015, of total corporation tax. Mr. McCarthy and Mr. Howard have noted how the proportion of tax paid by the top ten companies in 2016 declined slightly by four percentage points to 37%.
Corporate entities also contribute to the Exchequer by collecting and remitting payroll taxation on behalf of their employees. Companies in a positive gross corporation tax position, that is to say, companies paying corporation tax, accounted for 1.2 million employments in the State in 2015. Over €11 billion is paid on behalf of those employees in respect of PAYE, USC and PRSI based on incomes earned over €31 billion. Let us consider foreign-owned companies separately. Foreign owned companies account for 28% of employments by companies, 39% of incomes earned by their employees and 45% of tax paid.
It is useful to look at corporation tax in an international context, as shown in the chart on the screen. Ireland's headline rate of 12.5% is still among the lowest of OECD countries. Notwithstanding this fact, the proportion of corporation tax receipts relative to GDP in Ireland was equal to the average of OECD countries at 2.7% in 2015. Although Ireland's corporation tax receipts increased in 2015 and 2016, the increase was not out of line with economic growth in the year. Indeed, the two are closely linked. As in the OECD comparison in the chart on the screen, the figures are within the range one might expect.
Revenue continues to work with the Department of Finance on forecasts of tax receipts for 2017 and future years. The June 2017 collection will be key to getting an indication of whether corporation tax receipts are likely to meet the target this year. Based on current information on performance to date in 2017 and indications picked up from the contacts of our large cases division with large companies, we expect corporation tax receipts to be broadly on target this year.