Ciarán Lynch (Cork South Central, Labour)
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We will now deal with item No. 6 of today's meeting, namely proposals from international institutions to reform the global system of corporation tax. I welcome Mr. Philip Kermode, director of the Directorate-General for Taxation and Customs Union of the European Commission, and Mr. Liam Lynch, head of insurance and tax adviser, KPMG, Dublin. Mr. Kermode is accompanied by Mr. Tim Hayes, European Commission Representation in Ireland. The format of the meeting is that Mr. Kermode and Mr. Lynch will make some opening remarks, to be followed by a session of questions and answers.
By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. If they are directed by it to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against a person or an entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair that members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.
I invite Mr. Kermode to make his opening statement. I will then call Mr. Lynch.

Mr. Philip Kermode:

In my opening statement, I will speak a little about the European Union and taxation in general. I will put the matter in context so that when we discuss individual questions later, we will see the limits of what the Union does and the constraints that apply to it, in addition to the possibilities for making progress.

Within the European Union, we are constrained by the legal bases that are provided for under the treaties. In practical terms, this means that the sort of work we do in the department I represent is on customs, indirect tax and direct tax. I mention this because it gives an indication of the degree to which the European Union has advanced towards greater integration, bearing in mind the different elements of these taxes. The customs union, for instance, is a customs union in the sense that it is entirely an EU competence. It is ruled by regulations agreed by all member states in Brussels and which are directly applicable. In the case of indirect taxation, we have a treaty basis which provides specifically for the harmonisation of indirect taxation and particularly value-added tax on the basis of the need to ensure the functioning of the internal market, which is the EU's internal market without borders, and taking into account the need to avoid distortions of competition.

Direct taxation is in a different category because there is no formal legal basis for binding legislation other than the general mechanism providing for the approximation of laws dealing with the functioning of the internal market. That is an important context into which to put any proposal of the Commission because it puts a framework around what the Commission can propose and what is likely to be agreed by the member states. The other point is that, for binding legislation, we require unanimity among all member states. A particular piece of binding legislation - on direct taxation - cannot be passed without the agreement of all.

Within the area of direct taxation, corporate taxation in particular, which I understand is the subject of the committee's discussions, there is an amount of already-existing EU legislation, but it is quite small. It relates largely to the issue of avoiding double taxation. In particular, there is a directive on cross-border mergers, one on parent subsidiaries and one on interest and royalties, the idea being to simplify transactions within the Union.

The area that may have been subject to the most progress in recent years has, in fact, concerned co-operation between tax administrations. There is a quite developed corpus of legislation on how tax administrations can help each other in ensuring their tax laws are respected. This extends from the extreme of automatic exchange of information on investor income for individuals to the area of assistance in the recovery of taxes between different jurisdictions in the Union.

One of the driving forces in the work that takes place in the European Union relates to the treaties themselves. The treaties provide, among other things, for the internal market, which is based on the four freedoms.

Over the years, a substantial jurisprudence has evolved at the Court of Justice, which has been based on the court striking down provisions which are effectively discriminatory between member states. It is largely because many of these tax systems were built up at a time when the treaty considerations were not important or even relevant.

On top of that, within the Union we have an exercise of what we call co-ordination which has been ongoing for a number of years. In the Commission, we have been trying to encourage member states to take common positions on interpretation of EU law so that they apply similar provisions without necessarily having binding legislation. It is a question of general co-operation. This has a number of practical aspects that I will not go into at the moment.

As it is topical, I should mention that there is an issue about state aid concerning taxation as well. The EU rules on state aid apply to taxation as they apply to other activities within the Union.

I want to mention two other things briefly. One is the code of conduct on business taxation, which falls outside the sort of framework I have been talking about. This entails EU member states meeting together in the Council to discuss tax competition and to examine individual tax regimes in member states to see if they fulfil the criteria already agreed between all member states and, on that basis, to remove those that are deemed to be harmful. This is probably the most important policy discussion that takes place in the Union concerning the question of tax competition. It has been ongoing for 12 or 13 years.

The final point concerning the framework is the European semester. The European semester exercise concerns the co-ordination of macro-economic policies in the Union. The Commission makes recommendations under this, some of which now concern taxation, but these tend to be broader in scope and are part of an overall attempt to help to rebalance the different economies.

In general, we do not make specific recommendations on detailed points under this, but it is good to know that it is there.

Ciarán Lynch (Cork South Central, Labour)
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Sure.

Mr. Philip Kermode:

If I could trespass on your good nature, Chairman, I will say a word about the action plan and what we are doing now. There are two aspects I ought to mention. One is the famous, or infamous, CCCTB or common consolidated corporate tax base. That proposal was made by the Commission in 2011 and it remains on the Council table but has not been agreed as it stands. This was the Commission's take on finding a solution to the complexities of taxation in the corporate field for corporate groups. I am sure the joint sub-committee is familiar with the subject.
The second point I wish to mention is the action plan. In 2012, the Commission adopted a so-called action plan to deal with tax fraud and evasion, but also to tackle issues of avoidance. It did this because the heads of state and government asked the Commission to come forward with some concrete measures. A list of measures was proposed and these varied quite considerably. One of the more important things that came out of this was an indication in the action plan that member states needed to use the instruments they have better. In addition, there needed to be greater co-operation using the existing instruments. In some areas there was not a need to legislate, per se, but there was a need to co-operate more closely.
The Commission made two recommendations at the time. One was in relation to non-co-operative jurisdictions. This was part of the wider EU policy that has been on the table since 2008 encouraging jurisdictions to apply so-called good governance. Our good governance formula included exchange of information and transparency on harmful tax practices. If we wanted to go out towards non-EU states, as the Council asked, we needed to promote these ideals with others. Part of the underlying logic of this is to get the degree of co-operation required to avoid the need to put in place counter measures and aggressive strategies which have a negative effect on all types of business, whatever they might be.
These two recommendations - the second of which was on aggressive tax planning - were adopted in 2012. The Commission is in a process of discussion with the member states, NGOs and business organisations in a so-called platform of good governance, on the follow up to these and how they can improve the general situation. If needs be, Chairman, we can talk about the detail of those.
I will now deal with the base erosion and profit shifting, or BEPS, exercise. I understand that the joint sub-committee has had Mr. Pascal Saint-Amans of the OECD here to speak on the subject. It is an ambitious project that the OECD has undertaken with a tight timetable. There are a number of areas where this base erosion and profit shifting exercise impacts on issues of EU law. The Commission has been following these matters closely.
It is worth mentioning a couple of issues, in particular, but the joint sub-committee may wish to deal with others later. One is the whole question of harmful tax practices, to which I have already alluded. There is more pressure in the base erosion profit shifting exercise to come up with agreements on what is, or is not, harmful. It is clear that if the wider G20, OECD plus and other jurisdictions wish to come to agreements on changing the general rules on international taxation, there has to be some sort of accommodation on what is, or is not, acceptable tax competition. That underlies the work the OECD is doing in this area, which is similar to the work going on with the EU's code of conduct. That has helped to defuse some of the tension in the area of international taxation.
The other question concerns hybrid loans and hybrid entities - essentially mismatches between tax systems. This is something we discussed with the member states in the code of conduct group from the viewpoint, at the beginning, of trying to decide if they were harmful tax practices according to the criteria that the code group itself uses. That essentially defines a harmful tax practice as a form of predatory, ring-fenced regime which offers a lower tax rate than the general tax rate in a given member state.
This exercise of looking at the hybrids started from the viewpoint of trying to define whether they were harmful. One of the most important conclusions of the group - and it is an indication of the sort of thinking we like to see - was that it is not anybody's fault in particular in this case. One cannot tie it down to one or other of these jurisdictions, but we all agreed that it has harmful effects so we should do something about it. The upshot of that was an agreement in the group about how all member states would apply the same solution to tackling it. It was fairly clear from a short examination of the problem that it not only concerned two member states together, but that it could also have effects on a third.
They agreed on the way to do it and then the question was how to implement it. This has now come forward in a change to the existing EU parent-subsidiary directive whereby we are now close to an agreement between all member states about how to close this particular loophole. This helps to give a bit of impetus in general to the solutions concerning mismatches, not only within the EU but also outside it.
I would also like to mention the so-called digital economy. The Chairman may be aware that the Commission has asked an expert group to look into the taxation of the digital economy. A report has been produced which we see as being a useful input, not only into discussions within the Union but also in wider discussions in the OECD. That is something we can touch on if members of the joint sub-committee have questions about it. For the moment, the Commission has not given a formal view as to what actions it would take on the basis of that, but there are a number of encouraging signals for us in it.

Another issue that comes from the base erosion and profit shifting, BEPS, discussion is treaty abuse. A substantial discussion is happening about the extent to which double tax treaties can be manipulated to cause so-called abuse. This has considerable implications under EU law, partly for the reasons I set out earlier, namely, that the jurisprudence of the court takes a very dim view of a discrimination practice between member states, and many anti-abuse laws can be construed in a way to cause discrimination. This discussion will have an impact in the EU, probably later in the year, again, under the parent-subsidiary directive and the interest and royalties directive, which are existing pieces of community law, as member states attempt to square the circle of providing effective anti-abuse measures that do not conflict with EU law or create situations that make life even more complicated for businesses. Over the years the Commission has made various proposals, legislative and non-legislative, in the area of corporate tax, and our starting point has invariably been the interest of the internal market and ensuring businesses can do business and not just fill in forms. That was the underlying logic behind, for example, the common consolidated corporate tax base, CCCTB.

We are entering a very important period, given the progress being made on the BEPS project. Between now and the end of 2015, jurisdictions and the EU will have to take a decision as to whether they want to take further action and how. While there are very many different options, even in the OECD there is a discussion of multilateral solutions, and I suspect there will be a relatively complicated geometry to try to ensure some of the results of the BEPS exercise can be applied on the ground. One of the most important general conclusions of our expert group on the digital economy was the need for member states to try to speak with one voice on some of these matters and lever their political and economic power to act together on taxation as they do in other areas. This depends very largely on an acceptance of what is acceptable tax competition and what is not, and an acceptance that in some cases there are arguments for greater simplification of rules, which may have effects in one way or another but which would be justified if we can promote trade and business.

Mr. Liam Lynch:

I have been a tax partner with KPMG for the past ten years and have more than 20 years' experience in international tax matters. As head of insurance in KPMG Ireland I have particular experience in that area, but my clients spread over many companies, areas and countries. I was recently elected vice president of Chartered Accountants Ireland, where I chaired the tax committee for a number of years. The work of this committee is very important regarding informing the Oireachtas on the current debate on international taxation and how it affects Ireland and I thank the members for that. I will first talk about the global tax framework as it stands and how it is developing, and then discuss some areas of concern from an Irish point of view that are worthy of consideration here.

The global tax framework grew up piecemeal over time. There were national policies and there were responses to national imperatives from time to time. There are three classes of countries. First, there are the large countries which were focused on encouraging the outward expansion of their domestic businesses, such as the US in particular, whose tax policies are based very much on that. Second, there are the intermediate countries, which could be called conduit countries, small islands dependent on those large countries and used by them to facilitate international trade. Third, there is the class of countries with the simple imperative of attracting international business investment and international trade and providing for jobs locally. Despite any commentary to the contrary, Ireland is very definitely in the third category of countries.

Ireland has many international companies employing hundreds of thousands of people directly and indirectly across the economy, with real substance. It is clear that the global tax framework needs reform and investigation, and that leaves open whether such reform should be of a revolutionary or evolutionary nature, and this may be a question of time. From a business perspective it should be evolutionary, and that is along the lines of many of the BEPS proposals, including dealing with perceived hybrid and treaty abuses and considering the appropriateness of current transfer pricing standards. This is because a degree of certainty must be maintained for businesses. We know from experience that constant changes to a framework or rules that are difficult to interpret or get one's head around add to an environment which degrades entrepreneurship, discourages business and, ultimately, reduces tax revenue. Uncertainty in tax law results in businesses declining to make commercial decisions and this retards growth, and I have seen this in numerous countries.

This committee has already examined the global framework in place and how it is largely driven by bilateral treaties, the OECD at global level and the EU here in Ireland. The G20 has only recently become a driver in the BEPS project, which has much to recommend it. It is a genuine attempt to put order on the tax systems of the world and how they interact with each other and deal with mismatches in the laws. If BEPS is to succeed, and we all have a part to play in this, it is important it does not become a vehicle for protectionism and national self interest, which is a fear.

While EU countries are subject to all the controls, if we rely on the four freedoms and state aid within the EU we run the risk of creating a fortress Europe, and while it is important to encourage internal trade, external trade is also important and we do not want to strangle it. Fair tax completion in this context is universally accepted, and has been endorsed by the EU Commission. In Ireland's case it is encapsulated in the 12.5% corporation tax rate. This has been very important and has helped offset the natural pull of the centre for economic development and has been a model for peripheral development of which we should be proud.

Some of the BEPS proposals would hinder peripheral development and international trade. I will refer to four examples of this. The economies of most countries are by now interconnected and rely on foreign as well as domestic capital. Foreign ownership operates side by side with domestic ownership, and is a mark of economic freedom. However, the limitation proposals on double tax treaties being discussed in the BEPS proposals almost exclusively favour domestic ownership over international ownership. If we were to follow that line, particularly for small countries such as Ireland-----

Ciarán Lynch (Cork South Central, Labour)
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I must interrupt. Many members of this committee are also members of the Select Sub-committee on Social Protection and there is a vote taking place there now. Please continue.

Mr. Liam Lynch:

One BEPS proposal is to limit access to treaties to domestically owned enterprises of the two signatory countries. If that were to happen, it would limit the access of businesses not completely owned within Ireland to international capital and markets, and that would be a dangerous move.

Similarly, there are some best proposals dealing with company residency. In order to deal with some of those issues, one of the proposals is that it be dealt with by mutual agreement. I have dealt with mutual agreement and in my experience mutual agreement with states is a very lengthy process. Outcomes tend to be subject to the vagaries of what happens at the time and are uncertain. That does not help from a business expansion perspective.

We all agree that transparency is important in the tax process. The country by country reporting module is helpful from a tax authority point of view. It is important when we get to exchange of information on a country by country report to remember how sophisticated data protection rules on that are in Ireland. If we are going to share data and information with all countries in the world, it is important that the same standards apply wherever we are sharing that data. Also the extent of the mandatory reporting needs to be within the ability of businesses and Revenue authorities to deal with it.

The standardisation of transfer pricing documentation is welcome. It is important that it be standardised rather than set at a minimum in order that companies can deal on an even basis across the world. There is a huge opportunity here to cut down on administration but if there is simply a minimum standard, what happens is that countries add to it bit by bit and it loses its effectiveness both for business and the taxing authorities because it leads to a situation where one has unequal information.

Mr. Philip Kermode mentioned work on hybrid mismatches. That is always an awkward issue. It is a mismatch where a company or a transaction is treated differently in one country versus another. That is the case because of the way the system grew up piecemeal. Work on that issue is long over due. One of the proposals about which we need to be careful is the imposition on businesses to look in non-controlled circumstances as to what is the treatment on the other side, rather than in control situations. Overall, it is a worthy project to modernise the global tax framework and I hope it succeeds.

As Ireland is home to a large number of substantive international businesses which at the end of the day employ, directly and indirectly, hundreds of thousands of people, it is clear that the Irish tax system places a premium on substance in Ireland and as such Ireland has much gain from the modernisation of the system. Clearly, we need to look on the other side to what works best. What happens here has to be revolutionary and represent a consensus between all countries. We must take care to ensure the process is not hijacked by national or sectional interests and that the final proposals are practical and easy to implement.

Ciarán Lynch (Cork South Central, Labour)
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I thank Mr. Lynch. As we must be cognisant of the time I suggest that questions and answers be concise. Perhaps Mr. Philip Kermode can indicate where the European Union and the OECD are co-ordinating their position in regard to of the base erosion in profit shifting initiative. What is the interface between the European Union and the OCED and how is that working currently?

Mr. Philip Kermode:

There is clear political support in the European Union for the BEPS project as expressed by the ECOFIN Ministers, the Finance Ministers, but also by Heads of State. In practical terms, this is operating through a process whereby the Commission and the member states are supporting the work in the OECD and there is a process of too and fro between some of the working parties in the Commission and the Council and the OECD. Of particular importance, this is recognised also in Paris where the OECD meets, is the need to ensure that the solutions arrived at are solutions that can actually be applied by EU member states. There is a risk in starting from a blank slate that proposals are made that are simply incompatible with the treaty requirements of the EU, in which case our member states will not be able to apply them. This is something we try to avoid. In the areas I mentioned, we have particularly close contacts in the case of the discussions on the digital economy where we are very mindful of the risk of all sorts of new ideas being floated, some of which could be detrimental to the development of the digital business in the European Union as a whole. We are reading carefully from the results of expert group on that issue.

Ciarán Lynch (Cork South Central, Labour)
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Recently, the Department of Finance published its own consultation document on the BEPS. What is Mr. Kermode's view of that document?

Mr. Philip Kermode:

I think it is a useful declaration of the intent of the Irish Government to pursue this issue. Obviously, what will matter is the replies that are received and how they are analysed. It is an important aspect of the exercise to consult. It is something that we in the Commission try to do as much as we can in order to test with people in the world exactly how they feel about these things. The OECD has already done the same type of exercise in the BEPS but the risk in the BEPS exercise in general is a risk related to the very ambitious timetable. The risk is that in order to have a solution or a resolution, we may end up in situations that are even more complex than those we have now and that is something about which we are very concerned.

Ciarán Lynch (Cork South Central, Labour)
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In addition to the risk of there being a timetable, it is also means everybody trying to move globally at the same time to a unified position. There is a suggestion that many of the problems of aggressive tax planning are caused due to US tax routes. What is Mr. Kermode's view on that issue?

Mr. Philip Kermode:

The question one has to ask is whether we can be surprised that there are these issues of aggressive tax planning in a situation where tax systems are so different and where some jurisdictions actually promote the use of particular forms of tax incentive with the objective of moving profits from other jurisdictions. There is a distinction between the question of localisation of genuine business and the question of taking profits from other businesses, that is, other jurisdictions, and taking them through jurisdictions to tax havens so that there is a substantial difference in the way these are seen. To return to the question, the United States obviously has to take measures, if it wishes, to deal with what it would see as aggressive tax planning. Therein, one sees a large part of the problem, that what is aggressive tax planning in one jurisdiction may not necessarily be considered for the moment as being in the other and it requires a sea-change in the way people think of international taxation, away from the idea of a simple bilateral bargaining situation to a more multilateral approach which means people have common standards.

Ciarán Lynch (Cork South Central, Labour)
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As I understand the process, it is not meant to lead to complete harmonisation of the tax code in every country but it is to put some sort of order in it. I used the analogy previously when discussing the offside rule that rather than speak to the clubs we need to speak to FIFA and UEFA which is appropriate given the week we are in. The position is that there is a dilemma, that is, that in trying to agree a set of rules there is always the question of what is individual national advantage in this debate. Given that we have heard much commentary from other jurisdictions with regard to this country, such as from the UK and the US, what is Mr. Kermode's view of that commentary? Is it motivated as much by national interest as is it to try to arrive at a global answer where large multinational corporations appear to be maximising their tax advantage under the current structure?

Mr. Philip Kermode:

One can turn around this subject whatever way one likes but one finally comes back to the question of what is acceptable to different jurisdictions as competition and what is not, which I why I think it is such a critical issue to it. It is clear that in some jurisdictions the whole issue of taxation is presented as being a real competitive element. Certainly, in the Commission we have never had a difficulty with the idea of what we would regard as fair tax competition, that a good simple straightforward tax system is an asset. There is no doubt about that. What is problematic is putting things in place which are, by their nature, predatory. Particularly in the European Union, it is a problem because of the limitation that member states have in the anti-abuse permissions they can place. Either one says, we must have some agreement on the basis of how we work, in which case one does not need this panoply of protective measures which create the burden on businesses, or one tries to find another solution, but another solution is quite difficult.

One can expect in this debate that many jurisdictions will point the finger at others and it is quite possible the finger can be pointed back.

Ciarán Lynch (Cork South Central, Labour)
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What is Mr. Lynch’s interpretation of the reports critical about this jurisdiction?

Mr. Liam Lynch:

I think much of this goes back to the success Ireland has had in attracting large substantive businesses which actually operate within Ireland. On a global level, the US is still the largest economy in the world and the largest source of outward investment, as well as inward investment into Ireland. Ireland has managed to attract a fair share of that, so therefore, it is not surprising that Ireland will feature prominently in discussions of how the US tax system interacts with other tax systems.

Ciarán Lynch (Cork South Central, Labour)
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Was the Governor of California, Mr. Jerry Brown, correct when he said during the week that if California had a tax take like Ireland’s, it could go independent? I felt that was somewhat disingenuous as there is no big pool of tax out there.

Mr. Liam Lynch:

I only saw the comment as reported in the media. It is a question again of that interaction between how the US tax system deals with companies versus countries outside of the US.

Ciarán Lynch (Cork South Central, Labour)
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How committed is the US to the OECD’s base erosion and profit shifting, BEPS, project?

Mr. Philip Kermode:

That is a question the Chair ought to put to the US. It is certainly heavily involved in it but, like any jurisdiction, it will have particular points of interest and others which might not be so important. The Chair’s point about the US having to make changes to deal with its problems with aggressive tax planning is a fair one. Everyone is aware of the issues of the so-called “check the box” and the problems driven in part by that. There is so much political capital tied up, particularly at G20 level, in this exercise that something will have to happen. The risk is that it is something that is too complicated. It is not about just trying to get the OECD countries on board but the other G20 countries and big players, such as the BRIC countries, Brazil, Russia, India and China, some of which have had little influence in designing international tax rules. It is far from a straightforward issue. For example, the discussions on the treaty abuse issues seem to be centring on the idea of having several measures together. The Americans have an interest in the limitation of benefits type clauses which restrict very much the benefits of a tax treaty. There are others who prefer a main purpose test. If this is an approach replicated throughout the BEPS project, there is a risk that one is adding to the protective measures without dealing with the problems at their base. That is why one of the critical issues would be dealing with transfer pricing because that will set the tone for much.

Ciarán Lynch (Cork South Central, Labour)
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The BEPS process is being worked out by the OECD, the European Union, G20 and others. Does the process have a relationship with Ireland’s 12.5% corporation tax rate?

Mr. Philip Kermode:

I do not see a relationship there.

Ciarán Lynch (Cork South Central, Labour)
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There is no connection whatsoever, then.

Mr. Philip Kermode:

No, there is no connection.

Ciarán Lynch (Cork South Central, Labour)
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This is not a process which will involve Ireland having to change its 12.5% corporation tax rate.

Mr. Philip Kermode:

It is fair to say that the concept of base erosion is about individual jurisdictions being able to protect their own tax laws to the greatest possible extent. It is not about extending somebody’s tax laws to somebody else.

Ciarán Lynch (Cork South Central, Labour)
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What is the European Commission’s view on the Irish rate?

Mr. Philip Kermode:

Over many years, the Commission has expressed a view that rates are not an issue on which it wishes to pronounce, other than to say that in the discussions on the common consolidated corporate tax base, CCCTB, it was clear the Commission’s proposal did not deal with rates, meaning the question of the setting of rates was a question for national jurisdictions. It is a different category from, for instance, that of value added tax where an argument about having a minimum rate was based on distortions created by cross-border shopping.

Ciarán Lynch (Cork South Central, Labour)
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On this morning’s announcement, is it correct the Commission is not investigating the Irish corporation tax rate of 12.5%?

Mr. Philip Kermode:

Yes. The transfer pricing issue is being investigated in a very specific case which concerns one company in Ireland but there are two other cases with two other member states.

Ciarán Lynch (Cork South Central, Labour)
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Is it correct that for state-aid to exist, less tax must have been charged than should have been applied under normal tax rules and, in addition, this must have distorted the competition laws in some way?

Mr. Philip Kermode:

Yes. The issue is very much one of a selective advantage being given to a company or a group of companies by a reduction in the bill for tax they would normally have to pay.

Michael McGrath (Cork South Central, Fianna Fail)
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I welcome our guests. On this morning’s announcement of the investigation into Apple in Ireland, is it correct that it will fall under the portfolio of the competition Commissioner, Joaquín Almunia, while Mr. Kermode works for the Directorate-General for Taxation and Customs Union?

Mr. Philip Kermode:

Absolutely.

Michael McGrath (Cork South Central, Fianna Fail)
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Mr. Kermode’s office would be involved, although state-aid rules fall under the competition directorate-general.

Ciarán Lynch (Cork South Central, Labour)
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Can we avoid naming specific companies or countries?

Michael McGrath (Cork South Central, Fianna Fail)
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They were named today.

Ciarán Lynch (Cork South Central, Labour)
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Yes, I accept that but I do not want us drifting into other spaces.

Mr. Philip Kermode:

The way our structure operates is that I report to the Commissioner for Taxation and Customs Union, Audit and Anti-Fraud, Algirdas Šemeta, on tax policy issues and legislation. Joaquín Almunia is responsible for the competition department. As one could expect, these competition files are dealt with under conditions of great confidentiality. The actual facts of the individual cases are left to the competition personnel. We are obviously aware of this particular issue and it has been well-known since the summer of last year that our competition authorities were looking at this issue in general, namely the question of tax rulings. They seem to have tied themselves down into the position where they see potential problems with this transfer pricing issue. These are problems, however, that are the subject of a formal investigation which is a first formal step in the exercise.

Michael McGrath (Cork South Central, Fianna Fail)
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How long can we reasonably expect such an investigation to take? Can Mr. Kermode give us a background to similar investigations into tax rulings and transfer pricing?

Mr. Philip Kermode:

For the moment, there are the three that were announced today involving three different member states. I would hesitate to give the Deputy an absolute time as this falls within the responsibility of the Commissioner, Joaquín Almunia. It is well-known practice that these investigations operate to a reasonably tight timetable. I do not expect it to extend forever.

On the other hand, everyone accepts it is a complex subject. The transfer pricing rules are the subject of considerable discussion in the BEPS exercise. The whole question of establishing what is an appropriate transfer pricing between related companies is of necessity a complex exercise.

Having said that, in the past the competition authorities in the EU have examined the impact of individual tax ruling cases and notably, if my recollection is correct, a matter involving Belgium in the early 2000s. Three different cases in three different jurisdictions were involved, but all were aligned on the issue of rulings on transfer pricing. It is clear the Commission has no issue with the concept of tax rulings per se. The question is whether the tax rulings on which investigations have been opened are problematic. It is clear there are situations where being able to give a tax ruling provides a degree of certainty to business about what it can or cannot do. It is only problematic when it could be state aid.

Michael McGrath (Cork South Central, Fianna Fail)
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Where does authority rest for transfer pricing rules by which countries must abide and by which taxation authorities must ensure companies abide? Are they OECD transfer pricing rules? Where are they enshrined?

Mr. Philip Kermode:

They are effectively OECD standards established through the OECD model tax convention and its commentary. It is clearly a very complex issue because it is all based on the concept of arms length pricing, that is, attempting to define arms length pricing between related members of a group. It has been well known for many years that this is a source of added cost to businesses as well as being an area open to manipulation, particularly when one considers the use of intellectual property rights. In practical terms, the Commission has been working for a number of years on trying to simplify the procedures on transfer pricing under a joint transfer pricing forum which brings together business and administration. Some of the work of this forum has been fed back into the OECD, particularly on documentation, master files and local files, in an attempt to bring a little bit of standardised practice to what goes on. While standards have been established in the OECD, they are implemented through bilateral agreements between individual jurisdictions based on the model tax convention.

Michael McGrath (Cork South Central, Fianna Fail)
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Essentially what this probe is checking is whether Ireland has correctly applied the OECD transfer pricing rules on its tax treatment of one company.

Mr. Philip Kermode:

Yes.

Michael McGrath (Cork South Central, Fianna Fail)
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That is the issue. What are the possible outcomes of this investigation? I presume the Commission can conclude there is no case to answer or make other conclusions. What are the possible conclusions? What are the consequences of these conclusions?

Mr. Philip Kermode:

One possible conclusion is that there was no state aid, in which case that will be the end of it. There is also the possibility that it is found to be state aid, in which case there will be an issue about potential repayment. At this stage it is far too early. This is a complex area. The initial information the Commission competition authority received suggests there is an issue. It will require a significant amount of examination.

Michael McGrath (Cork South Central, Fianna Fail)
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I wish to ask Mr. Lynch about base erosion and profit shifting, BEPS. He made the point it is important it is not hijacked by national or sectional interests. The reality is every country will consider BEPS through the prism of its own national self-interest. This is the reality of the world in which we live. In general, does Mr. Lynch view BEPS as a threat to or opportunity for Ireland? I presume the desired outcome internationally is that multinationals would pay more tax. What is Mr. Lynch's overall view? He went into some detail in his presentation on a number of specific aspects and the concerns he has. In general, what is his view of BEPS and Ireland?

Mr. Liam Lynch:

My overall view on BEPS is that anything, including the BEPS project, which facilitates international trade and commerce is a good thing from an Irish perspective. My only concern around the edges of BEPS is that there are areas where national interests will conflict. We should be aware of what our national interest is in this regard and ensure it is looked after. I am also concerned that there should be nothing in there which hinders international trade rather than helps it. There is no point in applying tax to a particular transaction with the aim of raising more tax if by applying that tax the transaction does not happen.

Michael McGrath (Cork South Central, Fianna Fail)
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With regard to the mechanics of BEPS, what is the process for final decision-making? It is being driven by the G20 and the OECD but how many countries are directly involved in BEPS and the negotiations? What are the requirements for decision-making? Is it unanimity or majority? What are the mechanics of the applicability of decisions to all countries when we get to the end game of BEPS?

Mr. Philip Kermode:

That is an interesting question. One of the work streams within BEPS is how the outcomes might or might not be implemented at the end of the day. At present, the technical work is taking place at OECD level and when this is completed the OECD will report back to the G20 on the outcomes. I understand transfer pricing and country by country reporting will be reported next January or February. The next question after this is how the compromise will be implemented around the world. Two outcomes are being discussed. The first is implementation by way of free negotiation of bilateral agreements and double tax agreements between countries. This would take a huge amount of time over a long period given that more than 200 countries are involved in 3,000 or 4,000 negotiations. A concept within BEPS is to examine a multilateral instrument which, by all countries signing it, would amend all bilateral agreements in one go. A recent OECD report went no further than stating it feels that such an instrument is feasible. A report on such an instrument will be issued in September as a way of moving forward the decision-making process. The question of how it will be implemented is embedded in the BEPS process itself.

Michael McGrath (Cork South Central, Fianna Fail)
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It all sounds fairly opaque to be honest. Does the European Union speak with one voice at the BEPS table or will countries, based on their national perspective, be able to decide whether they agree with specific proposals, step out of the process and not be bound by ultimate decisions? The Chairman asked about the role of the European Commission in BEPS. On the issue of the EU speaking with one voice, if countries do not agree with specific measures and recommendations in BEPS, can they step out from it?

Mr. Philip Kermode:

The short answer to the question is, "Yes, they can". The fact of the matter is while we see an advantage in having a co-ordinated position, in discussions in the OECD our individual member states can and do take different positions on individual files. This is no secret. We certainly see that on some issues it is difficult for them not to take a common position, such as areas where they are bound by EU law. The process, to take up the question, is likely to give rise to more political acceptance of standards than anything else. Perhaps I can draw from this an analogy with work which took place in recent years on the exchange of information on request on investor income. The OECD at the behest of the G20 pushed for a global standard on exchange of information, which gave rise to the creation of a global forum on transparency and exchange of information. The reason I mention this is because the global forum has 120 countries in it and one of the things one sees from it is the opportunity it gives to having a wider consensus which reflects the views of not just some of the big players, but all of the players at the table.

The question is whether the OECD's work is creating a situation in which it would be easier to have global standards in taxation. To date, there have been differences between, for example, the OECD, the UN model convention and other jurisdictions in the emerging counties.

Michael McGrath (Cork South Central, Fianna Fail)
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Regarding the issues of harmful tax practices, which Mr. Kermode referred to quite a bit, and acceptable tax competition, is the 10% patent box initiative introduced by our nearest neighbour, the UK, the subject of a probe by the Directorate General for Taxation and Customs Union?

Mr. Philip Kermode:

It is not the subject of a probe, but of a discussion in the code of conduct group. All of the patent boxes in the Union are the subject of an examination by that group. The finance Ministers have decided that this is the way to go. We are examining the issue in a two-phase process, the first of which is an examination of the so-called substance criteria in the code, namely, what sort of economic activity does one need in a jurisdiction to justify this sort of regime. This type of discussion is also being held in the OECD, which reflects the Chairman's comments regarding the relationship between the EU and the OECD. We expect a decision from the code group by the end of this year on whether the patent boxes of the UK and elsewhere are compatible with the code's criteria. A parallel exercise on the same issue is being undertaken in the OECD.

The underlying concern that some member states have about the patent box is about whether it really does what it says, that being, support innovation and research, or whether it can be abused so that the benefits can be obtained simply by having a relatively small substance somewhere while channelling the profit flows through it. This matter is the subject of considerable debate and we expect a first phase report to the finance Ministers, perhaps as early as June.

Michael McGrath (Cork South Central, Fianna Fail)
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If it is deemed incompatible by the code group, where will the process go?

Mr. Philip Kermode:

The code group is not a traditional EU instrument. It is the member states of the Union meeting in the Council. It operates a form of peer review. Until now, when a regime has been found to be harmful, it has been rolled back or removed or those harmful aspects that were identified have been changed. It would be a difficult political situation if all other member states in the code claimed a member state's regime failed the criteria but it did not change.

Michael McGrath (Cork South Central, Fianna Fail)
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I thank Mr. Kermode.

Ciarán Lynch (Cork South Central, Labour)
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Is Deputy Twomey sharing time?

Liam Twomey (Wexford, Fine Gael)
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Yes, with Deputy Murphy. Regarding the discussion on the appropriateness of current transfer pricing standards, to paraphrase Mr. Lynch, will he elaborate on that issue? When people assert that something is complicated, it sometimes means that it is open to interpretation and, as such, jurisdictions' taxation authorities can view them differently. Are these standards reasonably standardised or are they open to interpretation by taxation authorities? What is the difficulty with the standards?

Mr. Liam Lynch:

Most of the world operates with the OECD's transfer pricing standards, but these are implemented in individual countries through domestic legislation, which can differ between countries. Currently, the standards are based on the protection of each individual country's tax base. They operate as one-way standards. As such, the issue becomes a discussion between countries as to where the profit should be recognised, with each country acting in its own national interest by trying to ensure that the highest amount of profit is recognised therein as opposed to elsewhere. This is essentially how the standards are put together, although there are variations in how they are implemented. Some countries veer more away from the OECD's standards than towards them.

Within the transfer pricing regime, the one element that tends to differ substantially between countries is the amount of information and documentation that a particular tax authority might want on a particular transaction. The same transaction might result in different documentation being prepared in one country versus in another country. This leads to a degree of complexity on the one hand but, on the other, a degree of additional administration and cost for businesses. As such and if feasible, the base erosion and profit sharing, BEPS, project presents an opportunity to devise a regime that is more standardised across the world where the information is available. The standard would be set rather than be a minimum.

Liam Twomey (Wexford, Fine Gael)
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I thank Mr. Lynch. I ask the same question of Mr. Kermode.

Mr. Philip Kermode:

There is a question not only of the rules, but also of what they must be applied to and the facts of the case. In many instances, it is not easy to find a comparable transaction to the one being examined between related parties. This poses a difficulty. The concept is relatively straightforward. What the tax administrations or, at least, the transfer pricing rules are seeking to do is create a so-called arm's length relationship between group company members that would be similar to that between two third parties carrying out a business. By the nature of large groups, complex transactions are conducted, some of which may not make sense in a normal environment between third parties. Putting a value on them is a difficult task.

For this reason, the idea of a formal apportionment was proposed as part of the discussions on a common tax base that the Commission tabled. The intent was to cut through all of the attempts at creating artificial distinctions and find a formula that people could accept. We are discussing the allocation of profit between different jurisdictions in a situation that, by its nature, is somewhat different from a third party-to-third party transaction.

The Union's arbitration convention has existed for many years and has attempted to provide some form of arbitration in the case of transfer pricing disputes. Perhaps this aspect has not been touched on at this meeting in the context of BEPS. Dispute resolution would be an important aspect, particularly if the new rules turned out to be relatively complex. There will have to be some system that ensures, for example, that companies do not end up paying for a situation in which tax administrations are at loggerheads. This situation can arise. Anything that moves the issue in the direction of simplification has to be good. We in the Commission are still pondering how to pursue this idea of arbitration in a way that would be well balanced between the interests of business and administrations.

Liam Twomey (Wexford, Fine Gael)
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Is the concept of arbitration currently in practice?

Mr. Philip Kermode:

Yes. Interestingly, in Article 25 of the OECD model tax convention, there is a process recommended for arbitration. Mr. Lynch also referred to mutual agreement procedures. In practice, however, there is little take-up in the Union of formal arbitration procedures, particularly those involving third parties. The Deputy can understand that some jurisdictions are reluctant to allow third parties to decide on the allocation of revenue in such situations. There must be some solution to this problem.

Liam Twomey (Wexford, Fine Gael)
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That is interesting. The Commission's investigations boil down to the question of transfer pricing standards, yet the witnesses are saying that there are basically no standards or that they can be open to interpretation.

Mr. Philip Kermode:

I cannot comment on an individual case. In terms of defining an arm's-length transaction, there are cases that are more straightforward than others. There are cases that are more complex, that is for sure. What one would have to examine is the extent to which any case deviated substantially from the agreed standards. There are large grey areas particularly around certain types of transaction. There are, of course, cases where individual jurisdictions would contend what other jurisdictions would say. I do not believe that thus in itself totally invalidates all transfer pricing. In terms of an approach to this matter, the OECD has essentially taken the line that the arm's length pricing system works in the vast majority of cases but there are an important group of minority cases that are not dealt with.

Ciarán Lynch (Cork South Central, Labour)
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I wish to inform the committee that I will shortly ask Deputy Twomey to take the Chair. Is that agreed? Agreed.

Dara Murphy (Cork North Central, Fine Gael)
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My first question is to Mr. Lynch. The objective of this committee is an examination of where we are now, the BEPS process and where that might lead us. I welcome that Mr. Lynch believes that as a country we should embrace our open and transparent tax regime. He also mentioned that there are four areas about which we should be concerned. Perhaps he would elaborate on the issue of domestic ownership and the reasons this should be of concern for Ireland and what, if it materialises, we could do to prevent it being a problem for us into the future.

Mr. Liam Lynch:

Perhaps I should explain the background to this a little further. Within the BEPS process and in the context of action on treaty abuses one of the questions raised was whether a limitation on benefits clause should be inserted into the treaty. Whether a company qualifies to access the treaty would be dependent on where the company is owned. For example, if a company were entirely or more than 50% owned within the signatory state it would qualify for treaty benefits. That is the basic premise of this. In the US, this type of limitation on benefits clause, with a number of exclusions, applies. To make it work, the clause in terms of provisions runs to many pages in the Ireland-US treaty. It can work for very large economies from that perspective. The fear is that if, when dealing with a small economy like Ireland, one applies this across the board because many Irish operations are owned outside of Ireland - even small operations would have foreign capital coming in - if they want to trade internationally and cannot access the treaty because of their ownership they are at a disadvantage to companies of larger countries.

Dara Murphy (Cork North Central, Fine Gael)
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The same would apply in all small countries and not only Ireland.

Mr. Liam Lynch:

It becomes a bigger issue the smaller the country and internal capital sources and so on. The more open a country's economy the bigger the issue it is. It still remains an issue for many countries within the EU, including medium-to-large countries because of the level of cross-border ownership. It does create issues. Mr. Kermode might like to comment further but in my view it does create issues within the EU framework and how it is put together.

Dara Murphy (Cork North Central, Fine Gael)
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Mr. Kermode referred to the Commission's desire that there would be co-operation between tax systems and competition between tax systems. Obviously, there will be points where these bang up against each other.

On the three cases being investigated, in respect of the Netherlands, Luxembourg and Ireland, as I understand it specific transactions rather than the companies concerned are being investigated. Am I correct that in Ireland's case, the Revenue Commissioners and a specific company are being investigated?

Mr. Philip Kermode:

The subject of the investigation is the tax ruling in each case.

Dara Murphy (Cork North Central, Fine Gael)
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Made by who?

Mr. Philip Kermode:

Made by the revenue authorities in each of the jurisdictions. It is a ruling. By that ruling, the risk is that state aid was given. That is the logic behind it. It is based on the fact that this time last year the Competition Authority started to look into the question of rulings in general, sought information from the Irish authorities, received information and on the basis of that information decided to open this formal investigation. That is a part of the formal process. Up until now they had been seeking information. To take the matter any further a formal investigations is required.

Dara Murphy (Cork North Central, Fine Gael)
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Rulings are normal parts of how companies large and small interact with revenue authorities throughout Europe. There are two types of rulings, namely, binding and non-binding. Which does the Commission prefer?

Mr. Philip Kermode:

In the context of the state aid investigations what matters is the affects. One of issues we have been pursuing over the past few years and, again, in the context of discussions in the group, is the need to ensure a degree of transparency in tax rulings and for a number of reasons. First, to ensure that treatment is fair and second to ensure that jurisdictions are aware of rulings given to companies which might have an affect on them. This could be positive or negative. This raises the question of whether rulings should be made public, although not, perhaps, the full detail, so that people know what has been given. What is problematic in the case of a ruling is a ruling that is confidential and actually infringes the legislation of the country in question. That would be a genuine problem.

Dara Murphy (Cork North Central, Fine Gael)
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Mr. Kermode mentioned the importance of confidentiality in the process and the impact of a ruling on a third party and so on. Why did the Commission name the three companies?

Mr. Philip Kermode:

It is part of its investigation process.

Dara Murphy (Cork North Central, Fine Gael)
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So it is willing to name them but say no more because the case is confidential.

Mr. Philip Kermode:

The investigation process must be transparent. The Commission is exercising considerable powers in the area of competition and, therefore, the formal rules that it follows have to be extremely clear also.

Dara Murphy (Cork North Central, Fine Gael)
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I have one final question, if I may.

Liam Twomey (Wexford, Fine Gael)
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The Deputy can come back in later. I want to give everybody an opportunity to get in once before 4 p.m.

Pearse Doherty (Donegal South West, Sinn Fein)
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I welcome the witnesses. On the formal investigation initiated by the Commission into Apple's conduct-----

Liam Twomey (Wexford, Fine Gael)
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The Deputy should refrain from mentioning any person or body.

Pearse Doherty (Donegal South West, Sinn Fein)
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The Commission and the Department have released statements today naming Apple.

Liam Twomey (Wexford, Fine Gael)
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I am reminding the Deputy of a committee ruling.

Dara Murphy (Cork North Central, Fine Gael)
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Sinn Féin are anti-Apple even though it employs 4,500 people in Cork North-Central. The Sinn Féin Deputy appears to be quiet about that.

Liam Twomey (Wexford, Fine Gael)
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The same rule applies to Deputy Dara Murphy, whom I also ask to refrain from interrupting.

Pearse Doherty (Donegal South West, Sinn Fein)
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I take exception to that. Sinn Féin supports the jobs that are created by Apple. We want to keep multinational companies here.

Dara Murphy (Cork North Central, Fine Gael)
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I find that very hard to believe.

Pearse Doherty (Donegal South West, Sinn Fein)
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Nearly two years ago, when I called for the establishment of this committee I warned about the issue of reputational damage. We now have the Senate investigating Ireland's tax practice with Apple and the European Commission has initiated a formal investigation. We cannot send our Taoiseach abroad without governors-----

Dara Murphy (Cork North Central, Fine Gael)
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The greatest damage to Ireland's reputation was caused by Sinn Féin commentary internationally reported.

Liam Twomey (Wexford, Fine Gael)
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Deputy Murphy please refrain from interrupting.

Pearse Doherty (Donegal South West, Sinn Fein)
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I am glad that members of the Government think that my influence is that big in the global taxation world.

A formal investigation into Apple has commenced.

It was mentioned that there has been informal information gathering since last year. We know the Revenue Commissioners complied with all the requests for information over a lengthy period. The witness mentioned the expansive powers the Commission has, and it has examined the information and rulings the Revenue Commissioners have provided relating to that company over the past ten years. It has been indicated that there is enough in that to initiate a formal investigation. The witness mentioned the Commission powers but how will it act differently from how it has done in the past? We understand the Revenue Commissioners have provided the relevant rulings and data so what can we now expect the Commission to do?

Mr. Philip Kermode:

There is probably a limit on what I can say about this subject. The information requested previously, as I understand it, regarded types and numbers of rulings and sought to establish if there was a systematic practice. In this case, competition authorities have identified a particular ruling and seek to look into it further. In order to do so, they must start a formal process. It is also clear that the revenue authorities co-operated very much with the competition authorities in providing this information, as was indicated quite clearly in Commissioner Almunia's statement today. From that perspective, we are merely part of the process, and as I indicated a few moments ago, the process is one where at a certain stage, these elements must be formalised if they are to be taken further. That is the stage at which we are now.

Pearse Doherty (Donegal South West, Sinn Fein)
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One of the actions required if the Commission found state aid issues would be that money would have to be paid back. In the Irish case, Apple would have to repay money to the Revenue Commissioners. Is that correct?

Mr. Philip Kermode:

It is too early to prejudge the outcome but as a matter of principle, in certain cases repayments would have to be made. That would depend on the decision.

Pearse Doherty (Donegal South West, Sinn Fein)
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The company that benefited from state aid would have to repay the money to the Revenue Commissioners. Is that the principle?

Mr. Philip Kermode:

I would not like to give the impression that the Commission has in any way prejudged this case.

Pearse Doherty (Donegal South West, Sinn Fein)
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No.

Mr. Philip Kermode:

As we stated at the outset, this is a complex area but if there is state aid in it, the Commission is determined to take action. The normal processes will flow from that and if state aid is found, there will have to be a further decision as to whether repayment must be made.

Pearse Doherty (Donegal South West, Sinn Fein)
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So there would be a further decision rather than an automatic consequence.

Mr. Philip Kermode:

The Commission would first have to take a decision on the state aid nature of the case.

Pearse Doherty (Donegal South West, Sinn Fein)
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Could other action be taken against the State if it were proven that the Revenue Commissioners made rulings that involved state aid? Would the company be the only party affected?

Mr. Philip Kermode:

The case is relatively straightforward. Rules provide that if state aid has been given unlawfully, in certain circumstances that must be recovered. The wider issue of what this would mean for other rulings would have to be considered as a policy issue. The focus of this investigation is very much on a specific case and ruling. It is the same not only for the Irish case, but also for the case involving the Netherlands and Luxembourg. The Deputy may have noted the issue as it pertains to Luxembourg, which is somewhat different because that country's authorities have contested the initial request for information. That will lead to a court decision in due course.

Pearse Doherty (Donegal South West, Sinn Fein)
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This is a significant development in an Irish context. The committee heard last year from the Minister and officials from both the Department and the Revenue Commissioners. When we questioned them about the issue, it was broadly accepted that they did not expect the process to go any further, as the Commission was trawling for information across a number of member states.

As has been noted, the company involved in the Irish context is a large employer in the State. Two companies have been named by the Commission and one of those recorded €74 billion in income over three years and paid no taxes. That information comes from evidence in a US Senate sub-committee. These are large sums of money. If there was state aid, it would be open to the Commission to demand that the money would be repaid to the Irish Revenue Commissioners.

Mr. Philip Kermode:

It is clear that some of these large companies deal in very large amounts of money. Many of them are highly successful and make very large amounts of profit. It is the natural outcome of an examination in a case like this.

Pearse Doherty (Donegal South West, Sinn Fein)
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Is it correct that the Commission only has powers to examine issues over a ten-year span?

Mr. Philip Kermode:

Is the Deputy still speaking in terms of competition?

Pearse Doherty (Donegal South West, Sinn Fein)
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Yes.

Mr. Philip Kermode:

I have to admit to being not particularly well informed about how far we can go back in certain cases. I am not sure I understand the purpose of defining the period covered.

Pearse Doherty (Donegal South West, Sinn Fein)
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The Department issued a strong statement before the Commission statement was made. It defended its position and indicated the period covered was between 2004 and 2014. The evidence provided to the US McCain hearings with the company's chief executive was that since the early 1990s, the Irish Government had calculated Apple's taxable income in a way so as to produce an effective tax rate in the low single digits, with the rate varying from year to year. Since 2003 it has been 2% or less. We know the statement was clarified after a phone call from an official in the Department of Finance. If the investigation can only begin in 2004, and the chief executive of Apple gave evidence to the US Senate that these opinions were given as far back as the early 1990s - one of the companies in question was incorporated here in the 1980s - does the Commission have tools at its disposal to reach into the earlier decisions, when the structure was put in place?

Mr. Philip Kermode:

I am not familiar with the details of this particular case as competition authorities have launched it. This relates to the confidentiality matter I mentioned. I cannot tell the Deputy the answer at this stage as I honestly do not know it. When it comes to how far the investigation may go back, it is largely a decision for the competition authorities and it will depend on the nature of the case being examined. I cannot give the Deputy any more precise detail.

Pearse Doherty (Donegal South West, Sinn Fein)
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At the centre of this is the payment of royalties, licences and profit shifting. With Ireland, and considering the 2007 figures for multinationals, the royalties and licences transferred out amounted to €18.6 billion. The 2012 figures are provisional but they amount to €32 billion, or almost double the amount from 2007. Nevertheless, profits dipped from €26 billion in 2007 to €25 billion in 2012. Over five years, the taxable profits of multinationals in the State reduced by €1 billion but the amount transferred out, which avoided taxation, nearly doubled in the time. Does that raise alarm bells for the Commission?

Mr. Philip Kermode:

The Deputy has put his finger on an important issue in the context of BEPS, which is the relationship between the payments made between group companies and the value creation that they make in different jurisdictions. It is clear that within large corporate groups payments are made for various services and for royalties. It is also clear that one of the issues at the heart of the BEPS discussion is the treatment of intangibles and how one deals with royalty payments from a tax point of view. It is almost impossible to make a judgment on an individual case unless one knows the full details of what is happening, but everybody recognises that the treatment of intellectual property and the transfer pricing rules that apply are a major issue where more clarity is required. We must be able to have rules in place that ensure that the royalty payments made reflect reality and are not just used to shift profits from one jurisdiction to another.

Pearse Doherty (Donegal South West, Sinn Fein)
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To follow up on that, and Mr. Lynch is welcome to intervene on this as well, I am not asking Mr. Kermode to go into details about an individual company, although we have discussed Apple because it is in the middle of a formal investigation and it is encompassed by these figures in a big way. However, this is applicable across the State. Perhaps the best way to look at this is to compare it with other European jurisdictions. I am sure Mr. Kermode is knowledgeable of them. Is this what is happening across Europe, namely, that the average profits of multinational companies over the last five years have remained the same while the payments of royalties or licences have doubled, or are we an outlier in this regard? We know transfer pricing is a major issue globally and must be resolved on a global level. However, is Ireland in line with what is happening in this area, whether we like it or not, or is it an outlier whereby more transfer pricing has been taking place in this State than in other states?

Mr. Philip Kermode:

I suspect Mr. Lynch will have more to say on this than I have, but I caution the Deputy about this. The way any given number of multinationals treat royalty payments depends on where their headquarters are and where they do their business. If one looks at other jurisdictions that do not have the same mix of multinationals and domestic companies or the same the mix in business terms, one might find very different reactions. However, as I said earlier, the underlying feature of BEPS is that there is a recognition that multinationals can use intellectual property and royalty payments to shift profits between jurisdictions in a way that would be seen by many as being artificial. One of the key points of the BEPS exercise is to try to deal with the so-called transfer pricing aspects of this and to put prices on the intellectual property transfers and on the dealings between these different elements of corporate groups so they reflect a business reality. However, this is far from being a simple exercise.

Liam Twomey (Wexford, Fine Gael)
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Deputy Doherty's time is up, but does Mr. Lynch wish to comment on that?

Mr. Liam Lynch:

I am not familiar with the figures to which the Deputy is referring, so I apologise for that. I can add a couple of comments with regard to the transfer pricing practices. Without looking at the individual companies and how the figures build up it is not clear to me what drives some of these figures. Some of it might be driven by issues which are being looked at as part of the BEPS process but in my experience, and I would have been involved in these as well, some of it may also be driven by other countries applying their own transfer pricing rules and saying that a company should be charging its Irish company for the IP that is owned here as well. Quite an amount of this, and I do not know to what extent, may also be even transfers for IP within the EU which is being charged for and which is actually being subjected to quite robust transfer pricing in countries at present. To the extent that the figures relate to that or to some other matter, I cannot tell from the general figures the Deputy has quoted.

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I thank the witnesses for their contributions to the committee. It was reported recently that in 2012 Google had revenues of €15.5 billion from its Irish operation, but it paid only €17 million in tax. That is an infinitesimal amount of tax. The reason it succeeded in paying so little tax is that it charged €11 billion of the €15 billion in administrative expenses to another one of its subsidiaries that was not tax liable here. That is quite extraordinary. It tallies with something somebody whom one might call a whistleblower who previously worked for one of these companies told me, that the amount these companies charged to administrative expenses, royalties, patents or whatever happened to be close to what they made in profits. It was blatant abuse of transfer pricing.

The point is that it appears to be self evident that Ireland is facilitating this practice to a far greater degree than anywhere else, which is why there is such an uproar about Ireland's position. One can compare the effective tax rate that the example I mentioned would give, which is approximately 2%, with the rates of other countries in Europe. In the UK the rate is 18.5% - these are not nominal rates, but effective rates - in Germany it is 20% and in France it is 35%. Some of these figures are disputed, but they are all considerably higher than the effective rate that the example I have given implies. Is it not self evident and obvious that whatever way we are applying the rules or directives on transfer pricing we are facilitating this tax avoidance to a far greater extent? In fact, it is not just tax avoidance but tax evasion. If one is abusing transfer pricing to this extent, it is tax evasion. We are facilitating that to a far greater extent than any other European state. Is that not the self evident conclusion one would draw from such examples?

Mr. Liam Lynch:

Obviously I cannot comment on an individual case or company of any nature in respect of that or on individuals-----

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I am reading it from The Irish Times.

Liam Twomey (Wexford, Fine Gael)
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Perhaps I should read out something, even though you have been members of the committee for the last three years. You are directed that only evidence connected to the subject matter of these proceedings be given and you are asked to respect the parliamentary practice to the effect that, where possible, you should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable. That is our own rule.

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Okay.

Dara Murphy (Cork North Central, Fine Gael)
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It is totally broken as usual.

Liam Twomey (Wexford, Fine Gael)
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It would be good if we respected our own rules.

Pearse Doherty (Donegal South West, Sinn Fein)
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One can make statements of fact. Otherwise we would be unable to talk about any entity in this committee, be it a financial institution or whatever. One can make statements of fact, but one is not allowed to make charges.

Liam Twomey (Wexford, Fine Gael)
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We will discuss our rules in our own time.

Dara Murphy (Cork North Central, Fine Gael)
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A clear charge was made. I will not repeat the charge.

Liam Twomey (Wexford, Fine Gael)
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We will have a meeting on this, but since our visitors are respecting the rules perhaps we should do the same.

Mr. Liam Lynch:

My understanding with regard to the effective tax rate charged in Ireland is that it is relatively close to the headline rate. Irish companies and companies that are-----

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I do not mean to cut across the witness but I must stop him there. That is not the point I am making. We can debate that and there is much dispute about it. We have many figures about what the effective rate might or might not be.

In the example that is in the public domain - I shall not mention the company again - the effective rate implied, and from the company's records, is about 2%. Whatever about the wider question of Ireland's effective rate, somehow the company is managing a 2% tax rate because it charges a huge amount of its revenues to administrative expenses in another subsidiary that is not tax liable here. One can argue that is acceptable and legitimate, within the law or whatever but it is 2% and not anything else. That same situation does not seem to happen elsewhere in Europe. Why does it happen here more than anywhere else?

Mr. Liam Lynch:

There is only one comment that I can make on the matter without talking about affairs I know nothing about regarding individual companies. The Base Erosion and Profit Sharing project is a global project that is delivered by the G20 and is not an Irish specific project. If it were then I could take the point made by the Deputy. However, it is not an Irish specific project. It is a global project that looks at the way in which the tax systems of various countries around the world interact with each other. It is part of the BEPS project to look into these questions. It considers how best the tax systems, in those countries, can interact with each other much better and closes any perceived gaps that may exist between them.

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I ask Mr. Kermode to comment on the same thing. There is an investigation happening into the situation and particular transactions in Ireland, and also in Luxembourg and Holland. Does the investigation centre around the question of how that happened and whether the tax ruling that allows for it to happen is legitimate or predatory tax competition?

Mr. Philip Kermode:

There is a distinction to be made between the cases that the Commission is pursuing. They are cases on specific decisions involving certain transfer pricings and the very general issue of whether or not the international rules, at the moment, allow a situation whereby profits can be shifted in a way that people find unfair. That essentially is what it boils down to and in BEPS this is the issue. As Mr. Lynch rightly said, this is not a peculiarly Irish issue in BEPS.

The OECD countries have recognised that the architecture that they put in place, over many years, finds it extremely difficult to deal with multinational companies, given that they are always starting from a position that was considerably different when the rules were put in place. One had jurisdictions that were largely independent, company structures that were different and one had much less reliance on intangible property. Now one has the situation where the rules have stayed more or less the same but the capacity for businesses to move around their income has changed quite dramatically.

As a general point, there is a big issue which is what BEPS is trying to deal with and I would echo what Mr. Lynch has said. On an individual case it is not possible to make a judgment unless one knows the case inside out and one knows all of the facts and figures that go into same. Even then, that would be a question for people to debate here in Ireland. It would be a very specific application of the problem.

I wish to re-enforce the point. The reason there is discussion at international level which, in some cases focused on Ireland but in other cases focused on other jurisdictions, is this general recognition that people feel that the current architecture does not give a fair result, and does not allow the tax to be focused where the value is created.

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I accept all that. I accept that we are dealing with a new economy, particularly in digital. There is also the issue of intellectual property rights, big global companies and where exactly value is being generated. These are, I accept, complex questions.

Ireland, the Netherlands and Luxembourg - although I know less about the latter two - still seem to be complete outliers in terms of dealing with this phenomena. It is a global, new and complex phenomena but we still seem to be complete outliers. Nobody has accused the French of having a 2% rate. There have been debates questioning its effective rate but nobody has accused France of having a 2% rate. Nobody has accused Germany of having a 2% rate. There seems to be a specific problem here and in the Netherlands and possibly in Luxembourg. For a long time Luxembourg has had a reputation as a place where one could avoid tax. Now Ireland has entered that category. Is that self-evident? Why have accusations been levelled against Ireland and not against Germany, France or Italy?

Mr. Philip Kermode:

The issue of reputation was raised earlier. The question of how people react to the reputational damage caused by public interest in what is going on is an important issue. In the public forum certain cases have been identified which has pushed the discussion but one cannot say much more than that.

There is definitely a problem with the global architecture. There is no doubt about that. There is a problem with the differences between the way jurisdictions treat certain types of transaction. There are problems with mismatching hybrids that we talked about. Where these are more exploitative than other places depends entirely on the given situation. The Deputy mentioned the digital economy. It was one of the conclusions of our digital economy group, or at least it was mentioned in its report, that they felt that in the digital economy there is perhaps more scope, or greater scope, for manipulation of some of these rules.

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I have made my point. It seems obvious to me that all of those things are true but it still seems to be heavily concentrated in Ireland and other places.

Fair tax competition was mentioned as against unfair tax competition but I find it difficult to accept the distinction between the two. Let me spell it out. Competition in the area of tax is not competition on making things that are useful. It is not useful competition in real economic activity and it is not competition in producing real wealth or value but it is competition in poaching profits or investment. I do not see how one can talk about a fair regime in what is a predatory practice by definition. Surely once there is competition in this area inevitably people will try to get around the rules, bend them which is followed by a race to the bottom in terms of the contribution that corporations are likely to pay. Historically, the pattern has spanned the period from the 1970s to now. Is it not self-evident that the tax contribution by corporations and companies has fallen steadily since the 1970s leading to the sort of incredible situations that we have now with huge profits being avoided or evaded? Is that not the result of bringing competition to bear in the area of taxation? Is it not futile to regulate tax competition rather than stamp it out?

Liam Twomey (Wexford, Fine Gael)
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A final comment.

Mr. Philip Kermode:

With regard to tax competition, since 2000 we have lived, in the Union, with an accommodation for harmful tax competition. That is in line with what I said earlier about the code of conduct and predatory ring-fenced regimes.

If we look at it from the point of view of extremes, we either have no competition at all, which suggests we all do the same thing, or we can have more virile competition. One of the things that has driven us over the years is the desire to have a degree of simplicity in systems to support business. If individual jurisdictions continue to attack one another on the basis that they do not like the other countries' tax systems, we create more barriers to business and it is the opposite of what we have been pushing for in the Internal Market. We do not see why we should be encouraging barriers built on protective measures. It underlies the thinking of the jurisprudence of the court. People have differing views on where the lines on competition should be drawn. We have a clear indication of how important the EU, and the OECD and the G20, consider this by the fact that the coming to an accommodation on harmful tax practices is a key element in the BEPS process. It conditions the acceptance by others of the elements and standards that need to come together so that people can work together. At the risk of repeating myself, we do not want to see the situation becoming ever more complex and costly. That would not be in the interest of Ireland or the Union, with its significant place in world trade.

Ciarán Lynch (Cork South Central, Labour)
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Mr. Lynch is under time pressure but may want to make a final comment.

Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Can I ask a one-line question of Mr. Lynch concerning his presentation? He expressed a little scepticism about whether anything coming out of the BEPS process might be applicable in reality. Did I pick that up correctly?

Mr. Liam Lynch:

The point I made was that anything that comes out of the BEPS process needs to be practical and capable of implementation. I did not say that it was not capable and our scepticism is not that it will happen but rather that something of an evolutionary nature will stand a greater chance.
With regard to fair tax competition, countries and regions have different strengths and different attractions vis-à-visone another. When we look at the centre, it has a certain attraction compared to the periphery with regard to economic activity. Ireland has been very successful in using fair tax competition associated with the 12.5% tax rate and using it as part of what we have overall to attract hundreds of thousands of jobs to Ireland. It is a model for the way the periphery and the centre can interact without imposing a single rate or a centralised regime for everything.

Kieran O'Donnell (Limerick City, Fine Gael)
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I have a question for Mr. Kermode.

Pearse Doherty (Donegal South West, Sinn Fein)
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I have question for Mr. Lynch that stems from his paper about the boardroom and tax planning. I am sure Mr. Lynch was the partner in KPMG who wrote it. He talked about the morality of tax planning, how it has become fashionable to talk about aggressive tax planning and morals and how we should not consider tax and morals because we get into trouble and that we should just look at the law. Is that the view of Mr. Lynch? That goes to the core of the matter. He talked about what is fair. What is fair if we are not talking about morals? Should we just implement the letter of the law, which is what many of the bankers did? We can look at the mess they got us into. Should we not have some morality in respect of tax planning or what Mr. Lynch does not like to call aggressive tax planning?

Ciarán Lynch (Cork South Central, Labour)
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We told Mr. Lynch he could go at 4 p.m and the Deputy is catching him at the last minute with a question that he might like to spend more than a few seconds discussing.

Pearse Doherty (Donegal South West, Sinn Fein)
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I am sure he is delighted I am quoting papers he wrote five or six years ago.

Ciarán Lynch (Cork South Central, Labour)
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I am sure Deputy Doherty is delighted but I do not want to delay Mr. Lynch. I do not want him to miss his flight explaining what he has been writing.

Mr. Liam Lynch:

I thank the Deputy for mentioning that it was five or six years ago because that was the only paper I could think of in that area. From the point of view of implementing and advising on taxation, there is a need for us to rely on the rule of law and how the law applies and is interpreted by reference to the rule of law. Deputy Pearse Doherty overlaid that with ethics but the law is written for a particular purpose and with a particular purpose in mind.

Ciarán Lynch (Cork South Central, Labour)
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I thank Mr. Lynch for that explanation.

Kieran O'Donnell (Limerick City, Fine Gael)
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The OECD is looking at global tax, which is a global issue rather than one that applies to one specific country. Will this be taken into account in its deliberations? It provides a degree of uncertainty. Will there be a timeframe on when the deliberations are concluded? Ireland has a single rate and it is transparent. Other European countries have a myriad of rates. Will this be reflective of changes happening in the worldwide system and will there be relatively quick closure in respect of the uncertainty it causes?

Mr. Philip Kermode:

I think I understand the Deputy's perspective. I understand he is still talking about the investigations by our competition authorities. I cannot give an end date for its work and it is only something it can conclude control. It is entirely within its responsibility but I know it considers it to be an important issue.

I do not think the rates issue bears any relation to this. The subject identified is a very specific and individual case relating to transfer pricing and there is not a question hanging over the application of the rate in this case, as I understand it, nor is there a question mark over the overall corporation tax regime in Ireland. It is a very specific case as to whether state aid has been given to this company. That is how state aid competition rules are applied. It is separate to the discussion on the BEPS about changing the international architecture.

Ciarán Lynch (Cork South Central, Labour)
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I thank the witnesses for attending.