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

That is beyond the boundaries of what is contained in the Bill. It is, however, an issue and forms part of what the OECD is reviewing. That organisation has been charged with drilling down into this matter. What I am about to say may be of assistance to the Deputy.

In today's economy much of the value of products can be attributed to the intellectual property of the company producing the good or service. Royalties are typically payments for the right to use intellectual property. Services exports from Ireland, particularly those relating to IT, are royalty intensive. Services exported have grown in recent years to over 50% of GDP. While a high volume of such intellectual property-rich goods and services is sold from Ireland, the underlying intellectual property is not typically owned here. Thus, the Irish sales company must pay royalties to the intellectual property holding company which is located abroad. The intellectual property involved is not typically developed in Ireland, nor is it owned here. Ireland, therefore, has no right to tax it. The ability of companies to locate valuable intellectual property in low-tax jurisdictions where they may not have real substance or presence is the real problem. This is what allows some multinational companies to achieve very low effective rates of tax. The OECD is examining this issue, principally through a reconsideration of its transfer pricing guidelines which deal with profits from intangible property.

We have stated all along that this is primarily an international issue. It is overly simplistic and unrealistic to expect that the world's tax problems can be solved by changing Ireland's domestic law alone.

The Irish tax code operates to ensure that profit generated in Ireland is taxed in Ireland. If we consider corporate tax receipts as a percentage of total tax revenue, the ratio in Ireland of 2.4% in 2011 is close to the European Union average of 2.3%. We are taxing profits that are generated in Ireland. To put it very simply, if one has a company in Ireland and part of its cost base is paying for intellectual property which is located in a company incorporated elsewhere, then, as was the case in our previous discussion, the cost of the intellectual property imported into Ireland can be offset against the profits in Ireland. It reduces the base on which we can apply the 12.5% tax rate. To remediate that is not within our hands because, obviously, the write-down of inputs is a normal part of the international tax code, but it is something that needs to be remediated internationally and it is one of the key issues that the OECD is addressing.