Dr. Brian Keegan:

I thank the committee for the opportunity to contribute to its work in so far as it relates to an examination of corporation tax in Ireland. Members will have received our briefing document on corporation tax. I am happy to provide any further explanations and whatever clarifications I can in the course of the meeting this morning. I am joined today by my colleague Ms Norah Collender.

Any charge to tax on companies in Ireland hinges on the concept of residence. All developed countries operate residence rules by virtue of the place of incorporation, or the place of management and control, or a hybrid arrangement. In Ireland, the charge to corporation tax is, first and foremost, based on the place of incorporation. A company incorporated here is tax resident here.

In Ireland, the headline corporation tax rate is 12.5%, but other rates also apply to companies. Investment or passive income is taxed at a rate of 25%. Capital gains — namely profits arising from the sale of a capital asset, such as land or buildings — are taxed at 33%. Many companies are subject to further surcharges on profits, and these companies are known as close companies. The majority of companies in Ireland are close. Close companies are defined as companies that are owned and controlled by a small group of people; often they are family ventures.

The Irish tax system operates to ensure that, all else being equal, it is more costly in tax terms for a business to operate through a company compared to operating the business through sole ownership, even though the prevailing company rate of 12.5% is far lower than the top rate of income tax, 40%, plus USC and PRSI. That is because money leaving the company is taxed under the income tax regime while money remaining in the company is taxed under the corporation tax regime and then potentially surchargeable at a rate up to 20%.

One of the consequences of the close company legislation is that relatively few companies in Ireland pay corporation tax, and those that do pay small amounts. Most corporation tax is typically paid by non-close companies, that is, publicly quoted companies or multinationals.

There are other special classes of company that feature in the Irish tax system. For example, real estate investment trusts allow investors purchase shares in investment property while taxing the returns as if the investors had directly bought the investment property and rented it themselves. Charities are subject to an exemption from mainstream taxes. A section 110 company is a particular type of company used to facilitate asset management in the International Financial Services Centre.

There are also particular tax regimes that can apply depending on the nature of the company's activities. Incentives exist for investments in intellectual property, for the development of intellectual property through research and development, and for the exploitation of intellectual property recognised under the knowledge development box rules. We have provided an outline of the rules applying to these special classes of companies and incentives in the briefing document.

The Irish Corporation Tax system also works within a framework of international agreements and conventions, not least our undertakings by virtue of our membership of the European Union.

No taxes can be modified by the European Union without unanimous agreement among the 28 EU member states. In terms of corporation tax specifically, there exists a number of EU directives to ensure that, within the confines of EU member state borders, no double taxation accrues when EU-based companies pay each other dividends, royalties or interest, nor should there be a tax penalty when companies seek to merge their businesses across EU member state borders.

The EU treaties also provide for the safeguarding of four fundamental freedoms – the freedoms of movement of people, goods, services and capital. All Irish law, not just corporation tax law, must be compliant with these principles. Under the state aid rule, no country can grant a selective advantage to a company or to a sector of which other companies or sectors cannot avail.

Beyond EU membership arrangements, Ireland is also party to more than 70 bilateral double taxation treaties, which attempt to ensure that a company cannot be taxed twice in two different jurisdictions on the same profits. These relieving measures are mainly policed by systems of withholding taxation.

To conclude these opening comments, we were asked to describe the discretion available to the Revenue Commissioners in the pursuit of their responsibilities under the taxes Acts. In so far as Revenue officers have any discretion available to them, that discretion is circumscribed by the legislation. We have described in the briefing note the main circumstances in which discretion or judgment might be applied. I would be happy to expand on these further and, indeed, on any aspect of the briefing note.