Dr. Dermot Coates:

I thank the committee for the invitation to participate in this meeting of the committee. I am chief economist in the Department of Enterprise, Trade and Employment and I am accompanied by my colleague, Mr. Felix O’Kane, professional accountant in our economic and tax policy unit.

With regard to the matters under consideration today, it is important to note that the Department of Enterprise, Trade and Employment is not involved in determining which tax expenditures will be selected for review in a given year. My understanding is that the Department of Finance generally follows guidelines as laid out in the guidelines for tax expenditure evaluation which were published in 2014. While the Department of Enterprise, Trade and Employment has an interest in the tax expenditures on which we are concentrating today, in addition to a number of other similar tax incentives, it does not have a role in deciding which expenditures should be reviewed or when those reviews should take place.

Officials from the tax policy unit in our Department tend to engage regularly with officials from the various taxation areas within the Department of Finance. Each year our Department prepares a pre-budget submission which proposes options for adjustments to aspects of the tax system, including tax expenditures, often in the form of proposals for amendments to existing legislation aimed at enhancing the taxation landscape for enterprises. This document is the Department’s primary means of communicating enterprise tax proposals to the Department and Minister for Finance. In the event that a tax expenditure review has been decided on by the Minister for Finance, officials may discuss aspects of the review, for example, timelines would frequently come up for discussion, but these discussions tend not to guide the focus of the review.

With regard to tax expenditures more generally, it is useful to point out that many such expenditures can also be considered as tax incentives. There is little doubt that from an enterprise perspective, tax incentives can bring about many positives. Indeed, the OECD states that the tax regime is a key policy instrument that may negatively or positively influence investment and the achievement of wider policy goals. While our Department is supportive of ongoing and timely reviews of tax incentives, it is important that the members of the committee appreciate that measurement of the revenue forgone relating to a specific incentive is unlikely to provide a complete picture of the impacts of that incentive. Benefits resulting from the changes in behaviour which incentives drive are extremely challenging to assess and cost-benefit analyses should be used where possible, but even these will have limitations. It is often the case, therefore, that evidence must be generated from a wider variety of sources than would ideally be the case.

Looking at the research and development tax credit, for example, establishing the counterfactual position around innovation investment in the absence of the incentive would be very challenging, so we must seek other evidence. In the case of this tax credit, it is instructive to see that similar innovation incentives are offered by 25 of our fellow EU member states. Recent contributions to the ongoing review of the research and development tax credit also reinforced the importance of the credit in incentivising activity in Ireland. For example, a KPMG survey found that 74% of respondents would markedly decrease activity in Ireland in the absence of the incentive. Similarly, the American Chamber of Commerce reported member feedback indicating that in the absence of the credit, there would be a significant reduction in the proportion of research and development activities taking place in Ireland. These contributions back up findings from the 2016 review of the credit by the Department of Finance which found that 60% of research and development activity conducted by firms since 2009 was additional research and development activity which would not have occurred in the absence of the tax credit.

The Department of Enterprise, Trade and Employment believes that to best support enterprise to achieve its potential, a mix of direct expenditures and tax incentives will work best. There are instances where each method of support is more appropriate. Some of the advantages of tax-based supports are that they tend to require a lower degree of administration, they are more generally accessible and they are more flexible than direct supports in that they allow the taxpayer to largely determine the nature of the expenditure within defined legislative parameters. These benefits lend themselves to innovative activities, in particular where the prescriptive nature of direct subsidies can inhibit progress in fast-moving sectors of the economy.

In conclusion, while the Department has no role in the selection of tax expenditures for review, it does feed into the review process on an ongoing basis via our interactions with Department of Finance officials and our engagement in the budgetary process. The Department is supportive of regular review of these expenditures and acknowledges the presence of the expenditure review guidelines and adherence to them as being an important advance which provides protection for the Exchequer and ultimately the taxpayer. Regular reviews present opportunities to examine the effectiveness of incentives and make changes if they are not achieving their desired policy objective.

We look forward to participating in the discussion.