Mr. Seamus Coffey:

I thank the Chair and the committee for the opportunity to present. I am here in a personal capacity. For the purposes of my statement, I will focus on chapter 9 of the commission's report, entitled Promoting Enterprise. I will briefly consider some of the commission’s conclusions on the rate of Ireland’s corporation tax and the main reliefs and credits available under the Irish regime. I am sure other topics will arise during the course of the discussion relating to corporation tax and other issues covered in the chapters of the commission’s report identified to be covered in this meeting and I hope to be able to offer some insight to members from my work in these areas.

The terms of reference for the Commission on Taxation and Welfare restricted the set of possible recommendations on corporation tax to those that retained the 12.5% rate. Specifically, the commission was asked to consider:

how Ireland can maintain a clear, sustainable, and stable taxation policy as regards Ireland’s attractiveness to Foreign Direct Investment in a changing global taxation environment, including retention of the 12.5% corporation tax rate.

Successive Governments have held the position the 12.5% rate was a cornerstone of economic policy. The commission endorsed this view. When considering the impact of the then-proposed two-pillar solution from the OECD for ongoing international tax reform in its final report of September 2022, it noted:

Public assurances have been given by the Irish Government with regard to the retention of the 12.5 per cent rate for the foreseeable future and companies and groups have organised themselves on that basis. A change to the domestic rate now, particularly against the current backdrop of ongoing international change, could impede the stability and certainty that is granted by providing timely notice of key changes where practicable; a measure underpinning Ireland’s corporate tax strategy.

However, the previous October the Government had already announced the domestic rate would change for all companies in Ireland with annual revenues more than €750 million. At the time of the announcement it was indicated this new rate of Ireland’s corporation tax would apply to 56 Irish multinationals and to the subsidiaries of 1,400 foreign multinationals operating in Ireland. This will bring to four the number of rates applicable under Ireland’s corporation tax code. The introduction of a new 15% rate goes significantly beyond the scope of the OECD agreement. The proposed minimum tax under pillar 2 requires only that Ireland ensure that Irish multinationals have paid a minimum of 15% on their profits in all jurisdictions in which they operate. It is the US that is required to ensure US multinationals have paid 15% on their profits. We have decided to move in front of this and apply a 15% rate to the profits of all companies operating in Ireland with revenues more than €750 million. This is not retaining the 12.5% rate as set out in the terms of reference of the commission or as assured by numerous Irish Governments.

On reliefs and credits, the Irish corporation tax system is one that could be characterised as applying a relatively low rate to a wide base.There are limited reliefs and credits within the Irish corporation tax system. In that system the largest deductions from gross tax due are double tax relief granted for tax paid in other jurisdictions on foreign income included in Ireland’s tax base and the existence of the research and development tax credit, which also includes a refundable element.

Irish-resident companies include their worldwide income in their Irish tax return. Thus, Irish-resident companies can be in receipt of dividends from their foreign subsidiaries or branches on which foreign tax has already been paid.

The Irish system grants a credit for the foreign tax paid and if the amount of foreign tax paid is less than the required Irish rate, a top-up Irish payment is required to bring the total tax paid to the required amount. As the relevant Irish rate is typically lower than the applicable foreign rate, little additional Irish corporation tax is due. If Ireland moved to a territorial regime for corporation tax, this foreign-source income would not be included in Irish tax returns. The commission made no recommendations on the nature of the Irish corporation tax regime.

The other large credit available for corporation tax in Ireland is the research and development tax credit. The cost of the credit varies and in 2020 it was €658 million, of which 70% was to companies with more than 250 employees. Similar to a recent report from this committee, the commission’s recommendations for the research and development credit focused on small and medium enterprises. The research and development credit was introduced in the Finance Act 2004, and the rate was increased from 20% to 25% of eligible expenditure from 2009. For large, foreign-owned companies it should be noted that the research and development credit was introduced and enhanced at a time when the rate of the US federal corporate income tax was 35%.

One result of the introduction of the research and development credit in Ireland was to bring near equivalence between the tax benefit of incurring research and development costs in Ireland and the US. In the US these costs would be deducted from revenues, with the company’s tax bill reduced by 35% of the amount deducted. If the same costs were incurred in Ireland, the company’s tax bill would be reduced by only 12.5% of the amount deducted, in the absence of the research and development credit. The research and development credit brought the tax benefit of eligible expenditure in Ireland up to 37.5% of the amount incurred. This is 12.5% from the standard deduction plus 25% from the research and development credit.

Following the introduction into law of the Tax Cuts and Jobs Act 2017 in the US, the rate of the US federal corporate income tax was reduced from 35% to 21% from 2018. This means that the tax benefit of US firms for research and development expenditure incurred in Ireland is significantly higher than if the same expenditure was incurred in the US. An examination by the Revenue Commissioners has shown that of the eligible €3.1 billion of research and development expenditure included in corporation tax returns filed in 2020, €2.6 billion, or 83%, was undertaken by foreign-owned multinationals, with US companies in the pharmaceutical and other sectors likely to be responsible for a large share of this.

A focus on the use of the research and development credit by SMEs is warranted but the benefits of most of the current tax expenditure go to large, foreign-owned multinational enterprises. Both the additionality that this tax foregone generates, and the size of the credit needed to generate any additionality, should be subject to review, particularly considering changes in the US tax rate. I thank the committee for the invitation to attend. I look forward to our discussions on this and other issues. I hope I can assist with the questions members have.