Ms Cora O'Brien:

I thank the Vice Chairman and members for their invitation to appear before the sub-committee on the issue of effective corporate tax rates. We appreciate that it has invested much time in this issue and that others have made contributions to this module and the general public debate on effective tax rates. The Irish Tax Institute has not published a specific report on effective corporate tax rates. However, I hope our experience, knowledge and research will offer some insights and bring a greater understanding to an issue that is complex, detailed and very often difficult.
The debate on effective tax rates is part of the wider debate on international tax issues. There is much attention focused on the matter in Ireland, given the high level of foreign direct investment, in particular by US companies. The fact that US tax residence rules differ from the tax rules of most other countries has led to many of the tax complexities or issues at the centre of the tax debate globally. Before talking about attempts to measure the effective corporate tax rates of a country, I would first like to focus on the principles of an effective corporate tax rate regime in a company, as that will help to bring some context to our discussion.
The effective rate of tax is generally understood to refer to the tax arising for a company as a percentage of the profits of the company. The effective corporate tax rate factors in the various deductions and reliefs a company is fully entitled to claim before it applies the 12.5% rate in Ireland’s case in trading income, the 25% rate on investment income and the 33% rate on gains. The majority of studies indicate the effective corporate tax rate here is generally very close to 12.5%, as there are few deductions and reliefs within our corporate tax regime. We have built our corporate tax strategy on having an attractive low transparent 12.5% rate which is simple to understand and administer for companies operating in Ireland and subject to tax here. In principle, the calculation of an effective corporate tax rate is somewhat akin to the calculation of an effective personal tax rate. A person could pay tax at the standard tax rate, yet his or her effective tax rate will be somewhat lower. Under Irish tax law, a person will see his or her overall income tax bill reduced when he or she factors in medical expenses, rent relief, mortgage interest relief, tax credits and many other items. It is the same in principle with effective corporate tax rates, albeit a more complex process.
Some of the negative coverage of the Irish tax system in recent times has held the suggestion Ireland has an effective rate of tax of around 2%, implying that global companies in Ireland can secure, so to speak, a 2% effective corporate tax rate if based here. The difficulty and confusion surrounding the effective tax rate issue come from the mixing of legal rules on incorporation with tax rules. If a global company is legally entitled to be incorporated in a country such as Ireland, it does not mean that it is taxed on all of its global profits in Ireland. It is only liable to be taxed in Ireland on the activities subject to Irish tax under rules recognised and accepted not just in Ireland but also by other countries and the OECD. A company may be incorporated in Ireland, but the management and control of that company may be located elsewhere, which means that under Irish tax law the company is not liable to Irish tax on foreign income. Ireland’s residence rules have been in place since 1922 and would not be regarded as being unusual but rather consistent with those of many countries and the model OECD treaties.
A global company based in Ireland that has its origins in the United States and is US-owned could have operations in 20 countries and derive its sales income from 70 countries worldwide. Incorporation in Ireland does not automatically mean tax residency in Ireland and does not mean entitlement to the profits from these 70 countries. Where a company is not Irish tax resident, Ireland can only legally lay claim to the tax that arises from relevant activity in Ireland. Taking an Irish incorporated company’s total global tax bill and dividing it by its total global profit in an attempt to estimate an Irish-based effective corporate tax rate from it is incorrect and distortionary. Trying to extrapolate an overall effective Irish corporate tax rate from these company figures is also distortionary and incorrect. The effective corporate tax rate of a company is a mathematical computation arrived at by virtue of the activity of a company and the application of the tax rules relevant to that exact activity in each jurisdiction in which the company operates.
In my comments so far I have dealt with the principle of calculating the effective corporate tax rate of a company, but calculating the overall effective tax rate for a country, whether Ireland or anywhere else, is very complex. There is no agreed definition of what a country’s effective tax rate means or how to calculate it and, for this reason, it is open to many interpretations. The Department of Finance's technical paper of April 2014 has reviewed eight approaches using three model types. There is no single, internationally agreed methodology in calculating the effective rate of corporation tax for a country. As a result, we have seen a variety of conflicting answers where different methodologies are applied to different data sources. While acknowledging that there is no agreed definition of a country’s effective corporate tax rate, the paper concludes "that the approaches based on national aggregate statistics are the most suitable". It cites the work on effective tax rates on the "net operating surplus" and "tax due" as a proportion of taxable income, approaches Nos. 3 and 5 in the report, which deliver an average effective corporate tax rate of 10.9% and 10.7%, respectively. Companies operating globally can have a combined low global effective tax rate, but one cannot attribute that rate to any one country or say it is its effective rate.
US Bureau of Economic Analysis, BEA, data suggesting a 2% effective rate for Ireland are incorrect. For example, the US BEA data provide a combined global tax rate for companies that are incorporated in Ireland and US-owned but operate in dozens of countries. In reviewing this data the Department of Finance concluded "the BEA data does highlight the ability of certain US companies to achieve very low effective rates for the foreign tax paid on their non-US sourced profits arising from their operations across multiple jurisdictions (including Ireland) but cannot give an appropriate measure of the effective corporate tax rate applying on their Irish profits".
I acknowledged that the debate on effective corporate tax rates was part of a far wider debate on international tax rules. This is what the OECD’s Base Erosion and Profit Shifting, BEPS, project is about and the Government is playing its part in the process. Last October we issued an international tax strategy setting out our position on international tax and emphasising the three key strands to our corporation tax strategy - rate, regime and reputation. We have a separate Irish consultation launched by the Department of Finance on the BEPS in an Irish context. The institute is also very engaged in this work. We highlighted many of the issues concerned at our global tax policy conference held last October in Dublin, made several submissions to the OECD and met Mr. Pascal Saint Amans, director of the OECD's Centre for Tax Policy and Administration at the OECD's headquarters in Paris last month.
I appreciate that there are many views on the international tax rules applied and corporate tax issues in general. The OECD, through its BEPS project, is working with member countries on its action plan to address what are accepted as outdated rules which have not kept pace in an increasingly globalised and digitalised world. The Department of Finance's consultation gives Ireland and its stakeholders a forum in which we can make a real and honest assessment of all the issues involved relating to the BEPS and the impact on Ireland and its future. Global investment is highly competitive and will always remain so; we must be acutely aware that other countries will look to fiercely highlight their own competitive tax advantages if there are perceived weaknesses among others. There are many strands to Ireland’s overall tax strategy, from the regime to rate and reputation. They must all receive the attention warranted if we are to play our part in the BEPS process and also if we are to make the best decision for Ireland and its future. I hope this presentation and discussion will help to shed light on some of the issues involved in that process. I thank the sub-committee for its time.