Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

Attracting foreign direct investment is a very competitive business and different countries have packages of incentives. The Irish package has been particularly successful for a variety of reasons which will be familiar to the Deputy. One aspect is that our corporation tax rate is 12.5% but there are other issues. For example, an American company coming to Europe will probably see advantages in having an English-speaking base for its European headquarters. That reduces the choice to ourselves and the United Kingdom. Traditionally, the United Kingdom did not need to offer incentives to attract direct investment into the UK. For example, they had car assembly business from Japan and various other business. The UK is becoming more competitive now and it is reducing its rate of corporation tax. The Chancellor has committed to getting the rate down to 18% or 19% in the next couple of years. They are certainly moving towards a percentage rate in the high teens. The margin is not as great as it was. The UK also has a treatment of patents called the Patent Box, which we are studying. This measure is quite competitive and probably attractive for certain types of companies. Holland has a well-developed package of incentives. Other countries, which in the past have not paid as much attention, are unhappy with the fact that some countries have incentives. Countries such as Holland, the UK - which is moving into that space - and ourselves, are entirely within our rights because it is a matter for the treaties. It is a sovereign right to set one's rates of tax, whether that is income tax or corporation tax. There are EU restrictions on VAT rates and the categorising of VAT but we are completely within our rights with regard to corporation tax rates.

The study to which Deputy Doherty referred was commissioned by the previous Government when we were under a lot of pressure from France at European level about our 12.5% tax rate. The study was carried out by PricewaterhouseCoopers with the World Bank. They studied nominal rates and effective rates of tax. On that basis, our 12.5% nominal rate had an effective rate of 11.9%. That is the basis for that figure. At a rate of 11.9% our nominal rate was the lowest or very low across OECD countries. Cyprus might have been 10%. Our effective rate was mid-table. I think we are at about 13 of the 27 eurozone countries. We are not out of line on our rate.

The next debate is about the base and this matter is currently before the Commission. This is the project referenced as CCCTB, common consolidated corporate tax base. We need to watch this very carefully. We have a small enough home market and we produce a lot more than we consume ourselves because of our small population. If the rules of taxation changed so that the tax was applied in the jurisdiction in which the profit was made rather than in the jurisdiction where the product was made or where the wealth was created, a lot of bigger countries competing with us will want to move into that space.

I am not referring to any company in particular when I give the following example. A washing machine which is manufactured in Dublin is sold in Paris with a 60% add-on by the time it is being retailed. At present, the full profit on that piece of manufactured goods would go to the Irish Exchequer. If the base were to change and the profit were to be applied to where the profit accrued, then the situation would be different. That would put us in a very bad space. Everyone is in competition. We want very transparent schemes which we can stand over but neither will we be played for fools, where what would normally be accredited to the sovereign Exchequer of the country where a product is developed, would be applied to the point of sale. Value added tax, VAT, is already charged at the point of sale. In this example, the French Exchequer in Paris would take quite a significant amount of tax from the sale of that same washing machine. Why revisit a second time and put in something that comes very analogous to VAT as a base corporation profits tax? Whatever about manufactured goods, it becomes even more complicated with regard to services. Our recent exports show we are very strong on the services side which is increasing more rapidly than the manufactured goods side. We are still strong on manufactured goods but the services side is very strong and is in double digits.

I refer to our tourism industry as an example. If a person in London books the Merrion Hotel for a week for a family, the bill may be €5,000. However, if the booking is made over the Internet from London, where did the wealth arise on the service? The service was provided by the Merrion Hotel but the booking was made on a website on the Internet. How would the base tax be applied in that case? There are many tricky areas. Another example would be an Irish IT company funded by advertising, by and large. When someone in Berlin accesses the search engine, is it at that point that the profit accrues because they read the adverts which have been put on the site? It is very tricky. We need to be careful where we tread because there are people in whose interests it is to change the rules entirely. However, it is not in our interest to change them.

In our role as EU Presidency, we have offered to debate the CCCTB fully. We regard that as our function as the Presidency. However, there is no enthusiasm for a debate in May or June because there are nearly as many views as there are countries. Nobody is ready for a debate yet. I do not think we are at the point of risk. However, we need to be cautious when debating these issues that we do not make stones for our competitors to throw at us. I am not referring to Deputy Doherty in this regard or to anyone else. As a general point, we could be quite genuine in our debate and get into a position where it will be hurled back at us with a twist, that we are running a tax haven. We are not running a tax haven. We are very transparent in our taxes. I will read the briefing note at this point and we might have a further conversation about it then.

In a number of answers to parliamentary questions and representations on this issue I have repeatedly advised that there is no agreed international methodology for calculating the effective rate of corporation tax. The international context is very important in the area of corporation tax in Ireland, as we have used our competitive corporation tax regime to attract investment from abroad since the 1950s. In the absence of an agreed methodology it is not possible to compile a report like the Deputy has suggested nor would it be possible to introduce a minimum effective rate.

On the point the Deputy has raised regarding any measures in the Finance Bill 2013 being used by businesses to lower their effective rates of tax, I wish to point out that all companies in Ireland pay the standard 12.5% rate in respect of profits generated here. A higher rate of 25% applies in respect of investment, rental, other non-trading profits and profits from certain petroleum, mining or land-dealing activities. When we consider the effective rate of tax, we are looking at the 12.5% application. That rate works out at 11.9%. If the 25% rate is included, there are certain analysts who state that, on average, our effective rate is above 12.5%. That, however, is more of a makeweight argument or a debating point than an issue of substance.

Other countries may have high headline rates of corporation tax but these are mitigated by a large number of tax reliefs. The approach in Ireland is transparent. We have a relatively low headline rate of corporation tax and this is applied to a broad base. We, therefore, have only a small number of incentives in Ireland but we ensure that these are targeted. In the first instance, these are focused on the creation of additional employment - as is consistent with Government policy - and, in the second, they are concentrated on areas of innovation with a view to generating high-value economic activity in the country. Our research and development, special employment and other incentives fall into this latter category. We have a small number of reliefs - including the research and development tax credit and the three-year exemption from corporation tax for start-up companies - and these will be enhanced by the Bill before us. The main purpose of the changes we are making this year is to give further support to the SME sector. We are confident that the very limited tax which may be foregone in the short term is justified by the targeted nature of these measures, particularly in respect of supporting employment. When I introduced the budget, I stated that on this occasion we would be focusing on SMEs. The reliefs I have outlined favour the SME sector and they do not change the effective rate of corporation tax. The statistics contained in the report to which I refer show that there has been no variation. This is because the reliefs are marginal and they apply to a small group of companies.

For the reasons outlined, I will not be accepting the amendment. However, the Deputy is right to express concern. We do not have control over some of the matters that are being recited in the media and debated by discussion groups and think-tanks and nor can we remediate them. What is wrong with the system is that it is called the "double Irish taxation system". We in this jurisdiction do not control the arrangement which allows people to exercise the double Irish taxation system to their advantage. It is tax law in other countries, including the United States, rather than in Ireland which could remediate these situations. What we must do, therefore, is ensure that our situation is transparent and that we are operating in accordance with the treaties. We unashamedly say that we have decided to have a low corporation tax rate so that we can attract foreign direct investment into this country. Under the treaties we are quite entitled to set our rate of corporation tax. If other countries decide to set higher rates, they are quite entitled to do so. Of course, our rate of corporation tax gives us some competitive advantage in the context of attracting foreign direct investment. However, it is not the only factor by any manner of means.

I discussed this matter with someone in London recently and I asked about the rate's effectiveness. He stated that if it is a choice between London and Dublin, the 12.5% rate does not make a great deal of difference. He also stated that if it is a choice between Dublin and Leeds, Bradford, Halifax, York or Bristol, then the rate tips matters in Dublin's favour. I do not know whether that is correct but I was impressed by the anecdote, particularly as it shows that the 12.5% rate is not the be all and end all of everything. There are other factors at play but it is obviously very important for us to retain our rate of corporation tax.

I am considering how we might deal with the concerns the Deputy is expressing. There is no doubt that people have an incorrect view of the situation which obtains in Ireland. We must ensure that the real situation is communicated in order that our country will not be categorised as a tax haven, particularly as it is not such a haven. We have a low corporation tax regime and we are quite entitled to that. We are quite open about how we operate and our effective rate lies very close to our nominal rate. Our intention is that this will continue to be the case. I appreciate from where the Deputy is coming. We need to convince everyone else of that as well.