Paschal Donohoe (Dublin Central, Fine Gael) | Oireachtas source

Before I do so, I have been asked to refer two matters to the committee. This will only take one moment to do. First, I have been asked by the Revenue Commissioner to clarify a comment made during the earlier discussion on REITs. REITs do not get a tax deduction for local property tax. REITs pay a dividend out of the profits available for distribution and the shareholders are taxed on the amount received. I think there was an exchange earlier that may not have given that point the certainty it needed. On another matter relating to section 8 of the Bill, my officials have advised me that a technical amendment may be required to make the section work as intended. I am signalling that I may need to bring such an amendment forward on Report Stage.

On the amendments proposed by Deputies Doherty and Boyd Barrett, I note that the Irish corporation tax regime contains a small number of specifically-targeted tax reliefs the focus of which is on the creation of additional employment, as is consistent with current Government policy on innovation, with a view to generating high value-added economic activity in the country. Some other countries have a high headline rate of corporation tax which is supplemented by a high number of tax reliefs which reduce the overall rate of tax paid. In contrast, our approach to this tax is clear. We have a competitive headline rate of corporation tax which is applied to a broad base. The amendments relate to a number of different areas which I will address individually.

Under existing loss-relief provisions in the Taxes Act, any unrelieved trading losses of a company for an accounting period may be carried forward for off-set against trading income of the same trade in a future accounting period. Losses incurred in the carrying on of a trade are a normal fact of business life. The provision of relief for such losses is a standard feature of our tax code as it is in all other OECD countries. The carrying forward of unrelieved trading losses is a usual feature in other tax jurisdictions.

The central purpose of the knowledge development box, or KDB, is to encourage companies to carry out their substantive activities in Ireland. The KDB is based on the modified nexus approach which was designed by the OECD as part of the BEPS project and is not designed by tax planners seeking to design complex tax avoidance structures. By adhering to the rules, the KDB is a positive measure for Ireland which is focused on incentivising substantive research and development and encouraging companies to bring in real operations and high quality jobs that have a positive impact on the Irish economy. The research and development tax credit is also a very important feature of the Irish corporate tax structure. The central purpose of the tax credit is to encourage companies to undertake high value-added research and development activity in Ireland thereby supporting jobs and investment here. Reflecting these considerations, the Government's innovation 2020 strategy aims to achieve the EU 2020 target of increasing overall, i.e. public and private, research and development expenditure in Ireland to 2.5% of GNP by 2020.

A review of the research and development credit was carried out by my Department ahead of budget 2017. It concluded that the credit was responsible for 60% of the research and development being conducted in our country. This is considered to be a reasonable level of additionality. The bang-for-buck ratio is estimated to be 2.4. That means for every €1 in foregone tax revenue, €2.40 in additional research and development is being conducted. This is also considered a reasonable result. Overall, the paper's findings suggest that the rationale for the research and development tax credit is not in question. Firms have clearly responded to it by increasing their research and development. My officials and I are conscious of the need to evaluate the research and development tax credit regularly, but it is important to recognise that while this is a significant credit, it is one of the few tax credits in our corporate tax code compared to other jurisdictions. However, I am mindful of the need to monitor the cost of this tax credit and will continue to do so in line with the Department's tax expenditure guidelines.

In line with the established practice of carrying out periodic reviews of key areas of tax policy, a review of Ireland's corporate tax code has recently been undertaken. The review made 18 substantial recommendations which we are now working to implement. Ireland has taken a number of steps towards implementing the BEPS recommendations and the review sets out a road map for the State to create certainty on the implementation of the recommended measures. These include the launch of a consultation process which is now under way. Therefore, I do not accept the proposed amendments.

One of the points raised during the contributions of the Deputies related to the discrepancy between the Revenue Commissioner and CSO figures. According to the CSO, total business expenditure and research and development, which is referred to as "BERD", was provisionally estimated at €2.1 billion in 2014, of which €200 million related to capital expenditure. Initial Revenue tax returns indicated a 2014 figure of €4.6 billion, with no capital expenditure subtotal given.

In 2014, at that point a broad definition of Research and Development was still in operation in the Revenue guidelines. The Revenue Commissioners has now confirmed that the initial figures, including carry forward tax credits resulted in a double counting of the eligible expenditure. Further data provided by Revenue, removing the influence of the carry forward credits indicate there is not a substantial difference between the Revenue's estimates for gross expenditure linked the Research and Development tax credit and the CSO's BERD. In regard to the cost and why it keeps increasing, the costs of the scheme have continued to rise and the most up-to-date figure is €708 million with 1,535 claims. It has risen from €282 million in 2012. However, between 2012 and 2015, the base year threshold of the research and development tax credit was phased out and ultimately removed. This entailed that all relevant expenditure could qualify for the tax credit, where previously qualified expenditure for research and development was only that in excess of the expenditure incurred in 2003. In other words there was a change in the base year which in turn had effect in the cost which increased the following years.

I am aware that this is one of the few credits we have in our corporate tax code and that is in contrast to other countries with whom we compete. I am also aware of the fact that this is tax expenditure that is increasing and has increased significantly. While I can point to plausible reasons as to why this has happened, it is reaching a very large and even larger figure and I will monitor further growth in that figure carefully across next year.