Oireachtas Joint and Select Committees
Tuesday, 13 December 2016
Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach
Scrutiny of EU Legislative Proposals (Resumed).
We will continue to scrutinise the following EU proposals on a corporate tax reform package, including the common consolidated corporate tax base: COM (2016) 683; COM (2016) 685; COM (2016) 686; and COM (2016) 687. I welcome our witnesses Ms Cora O'Brien and Mr. Aidan Lucey. We are dealing with the Common Consolidated Corporate Tax Base, CCCTB. We are delighted that Ms O'Brien and Mr. Lucey could join us today.
I wish to advise the witnesses that 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 committee. However, if they are directed by the committee 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 any person or an entity by name or in such a way as to make him, her or it identifiable.
I invite Ms O'Brien to make her opening statement.
Ms Cora O'Brien:
I would like to thank the Chairman and members for the opportunity to appear before the committee with my colleague Aidan Lucey, to talk about the Common Consolidated Corporate Tax Base, CCCTB. We appreciate the committee has had detailed discussions last week with the Department of Finance, the Revenue Commissioners and the European Commission on the Commission’s latest corporate tax reform package. This comprises proposals on CCTB and CCCTB as well as measures dealing with hybrid mismatches and dispute resolution.
Today, however, I will focus my comments on issues arising from the CCCTB package. Let me outline the global context. There have been huge efforts made by all countries to update the global corporation tax rules. The OECD and the G20 have been working tirelessly on this agenda for the past three years with over 100 countries globally. International consensus has been reached after thousands of hours of discussion and debate and countries and companies are now in the process of implementing this vast set of changes.
All of the 15 Base Erosion and Profit Sharing, BEPS, actions agreed are already being implemented by the EU as a whole, through a range of measures – the Anti-Tax Avoidance Directive, the Joint Transfer Pricing Forum, the EU Code of Conduct Group and separate EU measures on exchange of information, mandatory disclosure of tax avoidance schemes and dispute resolution. Changing the tax regime for multinational companies requires global and consistent action – countries must act collectively and the tools are now there to deal with these issues.
CCCTB would create an entirely new framework for corporate taxation with a whole new tax base and an arbitrary formula to allocate profit rather than the arms’ length basis agreed globally only last year. If this were to happen, the EU would effectively be moving in a different direction on tax in a global economy at a time when it is also struggling to activate investment and promote innovation in the member states. It would put Europe out of sync with other OECD countries who do not form part of the European Union.
There are some key elements of the proposal that could impact Ireland and those doing business here. Without doubt the CCCTB proposal is very complex and wide reaching. Analysing the full potential impact that it might have for Ireland and those doing business in Ireland could take some time. As negotiations proceed some of the key elements are likely to change. However, at a first analysis, there are four troubling aspects to these proposals for Ireland. There are concerns in respect of loss of sovereignty. Ireland would retain the right to set a single corporate tax rate but only one rate. The rest of the corporate tax system for CCCTB companies would be determined entirely by the EU as a whole, with Ireland being one voice at the table. Technical points would be determined directly by the Commission through the power of delegated acts and Irish courts would have no role in determining legal disputes, which would be heard by the Court of Justice of the European Union in Luxembourg.
Also to be considered is the loss of control over tax policy matters.A country's tax policy should be matched to the individual social and economic needs of its citizens. For each country, these needs will be different. Ireland has a unique set of circumstances in Europe as a very small open economy on the periphery of the Continent. What is good tax policy for Ireland will not necessarily be good tax policy for France, for example, and vice versa; we are not all the same in the EU.
Countries need the flexibility to adapt their tax policy if problems arise or individual circumstances change. One of Ireland's unique strengths is that we can adapt quickly to change when the need arises. This has served us well and is not something to surrender lightly.
We are concerned about the impact on the Irish Exchequer. The allocation formula has three equally weighted factors, of sales, assets and labour. This has been described as "a formula based on Victorian manufacturing" by the President of the UK Chartered Institute of Taxation. As a contributor from one of Europe's largest economies, he observes that "The allocation factors ... won't work for smaller economies which might manufacture goods or provide services to other countries". Ireland clearly falls into this category.
The allocation formula also ignores the existence of intangible assets, which are a major part of modern global business. Ignoring the existence of intangible assets is not a realistic way of allocating profits to locations where economic value is created. It runs contrary to the EU growth agenda based on digital advancement, at a time when the Commission itself has told us that there are 1 million unfilled roles in the EU for people with IT skills.
According to the allocation formula proposed, one third of a CCCTB company's profits would be allocated across the EU based purely on the location of its customers. EU member states already collect huge amounts of tax as a direct result of their consumer base in the form of VAT. Furthermore, a sales element in an allocation formula will always reduce the profits attributable to small economies such as Ireland, which are export focused and have fewer domestic consumers. The Irish population of consumers is 4.7 million, compared to a population of 66 million in France and 81 million in Germany. In any exercise where one third of a company's profits are spread across the EU on the basis on sales, Ireland will get only a tiny allocation.
Profits from trade outside the EU that are currently taxed in Ireland would also be reallocated to other member states based on an EU-wide assets and labour formula. In order to stimulate growth and diversify risk, particularly in light of Brexit developments, businesses are trying to develop more non-EU markets. Profits from this non-EU business would also be impacted by a CCCTB formula and reallocated to other member states.
We heard the Commission confirm to this committee last week that all income will be treated in the same way in a CCCTB regime so that Ireland would no longer be able to apply higher 25% and 33% rates to passive income and capital gains. Our Exchequer yield would almost certainly be impacted by the loss of two key higher tax rates. It is also likely that Ireland's corporate tax base, which is wide by international standards, would be narrowed. How much it will be narrowed and the extent of the impact on the Exchequer will not be clear until an analysis is carried out by the Department of Finance. However, any corporate taxes forgone would have to be replaced. Does this mean higher taxes elsewhere or cuts in spending? In its latest fiscal assessment report, the Fiscal Advisory Council said the total available fiscal space for 2017, for example, has already been allocated to spending increases and tax cuts in the budget, leaving no room for additional spending without offsetting tax rises or spending cuts.
Research carried out by the ESRI in 2014 found that an increase in Ireland's corporation tax rate would negatively impact foreign direct investment. Thus, there is little scope to increase the 12.5% rate to compensate for the narrower tax base that would arise under a CCCTB.
What about the impact on business? The way the allocation formula has been designed means that companies operating in Ireland are very likely to see profits currently earned here and taxed at 12.5% being reallocated to countries with higher tax rates. In our view, this will have a direct impact on competitiveness, not only for Ireland but also for the EU as a whole.
There is a lack of certainty about the new rules. We have almost 200 years' experience in Ireland of dealing with company tax. Much of the legislation and case law that has evolved over that time could become redundant with a new regime, new rules and new definitions, creating huge uncertainty for business and Revenue.
Although there could be some administrative benefits for business from having a common set of rules, independent research commissioned by the Irish Tax Institute on the 2011 CCCTB proposal concluded that it would result in net higher administrative costs for companies. Time saved in preparing local tax returns would be outweighed by the additional work required to manage the consolidation process and deal with queries and disputes with tax authorities EU wide.
In summary, we believe the common base and consolidation proposals from the EU would represent a major challenge for Ireland and businesses operating here. As we have outlined, these proposals do not make sense from economic, job creation and competition perspectives. We cannot see the logic of their design for a small open economy like Ireland, or indeed other small countries.
I welcome Ms O'Brien and Mr. Lucey from the Irish Tax Institute and I thank them for their opening remarks. As they know, we had a detailed hearing last week with the Revenue Commissioners, the Department of Finance and the Commission to inform us in taking a view on the current proposals. Ms O'Brien has given a quite detailed overview of the proposals as they stand. Hers is a quite negative assessment overall. What is the view the of the institute on the analysis carried out by EY on behalf of the Department a number of years ago - in 2012, I believe? At the time, it was based on data from 2005. This was applied by the ESRI recently in its assessment of CCCTB. That was based on the 2011 version of the proposal. It concluded that the loss would be around €325 million in corporation tax receipts if the arrangement had been applied in 2005, representing a reduction of approximately 5.7%. In terms of today's receipts, that would be a higher figure in nominal terms. One might have believed the impact would be even greater than that predicted by the ESRI. Could Ms O'Brien give us her view on that? Is the conclusion based on certain assumptions? The presentation of Ms O'Brien is even more negative, perhaps, than what the ESRI's data might lead one to conclude.
Ms Cora O'Brien:
Even leaving aside the economic numbers, with which my colleague Mr. Seamus Coffey might be more involved, the main point, based simply on taking a look at the exercise that would have to be done if we were to work out today the impact on the Irish Exchequer, is that there are so many unknowns. Just taking the base, there will now be more generous expense deductions than before. There is a new deduction for increases in equity and an exemption for foreign dividend income. We have a credit system at the moment and there is relief for cross-border losses. We have currently got a best-in-class research and development regime which could also be affected. There is also the complication that the system is mandatory now. Having said that, other smaller companies might want to opt in if they seek benefits. Therefore, we would need to bring that aspect into the analysis. Those are the issues associated with trying to work out the impact because of the base changes.
Regarding the impact if we were to consolidate and reallocate based on this formula, I believe it would be so difficult. One would need to know each of the affected businesses' pan-European operations, where they have assets and where they make sales and have customers. If one does not have those data, one cannot estimate what the new position will be under the triple CCCTB. That is a very complicated task. We know the non-EU sales will now be reallocated to other EU countries. If the arrangement is introduced, one will have to consider the cost of administering the two systems because some of the smaller companies might prefer to stay in the existing system. All of this really just takes account of the static changes. There are also the dynamic changes. Would businesses move functions and operations in a CCCTB environment if they believed they would be paying a lot more tax? The potential cost to the Exchequer is very significant and very hard to measure.
Does Ms O'Brien believe that we would receive fewer corporation tax receipts overall from companies that are already here if the current proposals were adopted and that Ireland would be less attractive as a destination for inward investment?
Ms Cora O'Brien:
That would almost certainly happen because a high proportion of our corporate tax comes from the multinational sector and, in turn, a high proportion of that comes from the US and non-EU sectors. Their sales would be reallocated to other European countries with higher tax rates. Accordingly, the allocation formula envisaged just would not work for a country like Ireland. The asset sales and labour factors are going to be low in Ireland in comparison to other member states, whatever way one looks at it, particularly the sales one. For a continent trying to promote innovation, it does not take any account of intangible assets. I accept there are challenges with valuing intangible assets but ignoring them is not the answer and will not give a fair result for countries like Ireland.
On the calculation of the base, we heard last week from the Department of Finance that the Irish rate applies to a much wider base than that provided for under the methodology set out in these proposals. The Department gave several examples - the Irish Tax Institute referred to some of them too – such as the deductibility of business expenses, broad exemptions for foreign income and the anti-avoidance rules are less specific in the Commission's proposals than they currently are in Ireland. Would we be looking at a considerably narrower base, as opposed to what we have under our Taxes Consolidation Act?
Ms Cora O'Brien:
Yes. We would be looking at a considerably narrower base. Until we have a conversation like this about the CCCTB, common consolidated corporate tax base, we do not realise how wide the base in Ireland is. We have a low rate but we have very few deductions. The deductions we have are very targeted at innovation and research and development. Beyond that, we are very open and transparent. Other countries have way more deductions from their base. Ours is only going to go in one direction.
On the attribution of the base between the different member states, under the Commission's proposals it is one third, one third, one third in terms of the weighting between where the sales happened, the staff are located and where a company's assets are. The Irish Tax Institute made the point in its opening statement that this will be an arbitrary formula to allocate profit rather than the arm's length basis agreed locally only last year. Will Ms Cora O'Brien clarify what the difference will be? How will that compare with what was agreed at OECD level in terms of the arm's length arrangements for allocation of profits? What is the key difference?
Ms Cora O'Brien:
With an arm’s length basis, one is looking at transactions within a group. Where one does not have a price because it is an intergroup transaction, then one has to find an arm's length price and do one’s best to get the best arm's length price. A whole part of the OECD BEPS, base erosion and profit shifting proposals, is making sure there are tighter rules about those arm's length prices and they are closer to reality. They will seek to ensure there is more of an onus on companies to do more analysis and share more information about them. This is about entity by entity, trading with each other, based on arm's length prices. One brooks profits and losses to places where value is created. Corporation tax is about profits and they are supposed to be measured, based on value created.
In such a model, one will sometimes get double taxation. That is where double tax treaties will come in so as to eliminate that. They go hand-in-hand as a tax system globally. That is the one the OECD is working on improving.
We then have the Commission’s separate proposal, an almost artificial way, of taking all the separate entities within a group within the EU, or anybody with a presence in a member state, of putting them all in together into one pie. This is then divided, based on these factors, which are arbitrary. They do not actually match the economic model of the company and are not based on the way it does its business. They do not take account of where its operations are based, where its management and control is located, where its intellectual property is held or where its risk takes place which should be driving where its profits are. Instead, it is just based on these three factors. That is where the difference lies.
It is very hard to put those two systems together without causing cracks and creaks in the regime. There is an acceptance we need to get the rules better on corporate tax. However, I do not think they are going to be better if we try to superimpose a second regime on top of the arm's length regime.
I thank the witnesses for attending.
This is quite a complex proposal. I do not doubt there is not a politician across Europe who will have questions about the modalities of the Commission’s proposals.
One point the Commission raised with the committee concerned the treatment of research and development. It stated the 2011 proposal for full deductibility of research and development costs was a one-off. There was no capitalisation depreciation of research and development over several years. This regime had been retained under the relaunched proposals with the exception of immovable property. What is the immovable property element? Over the past several years, this country has focused on the knowledge box and the research and development tax credit. There is an 80:20 split between the domestic and foreign direct investment sectors. What would be the effect of the Commission’s proposals on domestic companies?
Ms Cora O'Brien:
Ireland has worked hard to design a research and development regime which makes a positive contribution to the economy. The Department of Finance has done much analysis on this as it is a costly regime. All of the economic analyses on it show it actually gives back more in business and jobs than it creates in revenue. It is not the most straightforward regime and there have been many changes to it, as we have refined and improved it to make it more suitable. One element of it involves a deduction from profits and another is a credit against the tax that one owes. Overall, when it is put together, it is an attractive regime.
The regime proposed in the CCCTB, which is called a super deduction, is still not as good a regime as the one we have worked hard to get to - our best in class. We have also knitted this research and development regime in with our knowledge development box. This is one of the first patent boxes which meets the OECD test of substance. The idea is that, hand in hand, the company gets a tax deduction for the research and development it carries out. Provided it does the work on the ground, has the factories and the white coats here, and commercialises the research and development, one can get a lower rate on the commercialised product. That is where they work together. That is us trying to match our tax policy towards our economic policy.
I appreciate that. The fear we have in this committee is that the work Ms O'Brien just described in regard to creating the research and development regime, if one likes, in terms of attracting foreign direct investment is undermined in any way by virtue of the proposals people would have serious issues with that, while wishing to continue working with the proposal.
I am trying to get an understanding of the arbitrary figure of €750 million in relation to the turnover and the common base. There is an 80:20 split between the domestic and non-domestic sectors. My instinct tells me that loopholes could be created to circumvent that. Perhaps I am wrong. Does Ms O'Brien have a perspective on that also? How does one calculate the €750 million threshold? It is conceivable that people might not come up to that base for all sorts of reasons or they could be very creative in ensuring that they do not come up to that base so as not to hit the threshold, so to speak.
Ms Cora O'Brien:
In terms of Deputy Sherlock’s point on the R&D regime, the other concern about the loss of control and sovereignty is that if we signed up to this and said, for example, in the whole scheme of things our research and development regime would not be as good but we would accept that because of other compensating reasons and then two or three years down the road we found a really serious impact on the economy it would be very hard to change it again because one would have to get all the member states to agree to re-open the issue. The veto is there and people can exercise a veto for different reasons. It might not be because they do not like the R&D regime.
I appreciate that. There is a long way to go on this proposal but it important that we have perspectives on the tax implications for R&D in particular.
Are other taxation institutes across the 27 or 28 member states flagging these concerns and is there collaboration between the Irish Tax Institute and others on these bespoke issues?
Ms Cora O'Brien:
We are part of an umbrella organisation of tax institutes in Europe called the Confédération Fiscale Européenne. This is a big item on the agenda. Institutes in a number of countries are concerned about the issue. It is a little bit like the member states in a way in that there are institutes in some countries that are more concerned than others. Sometimes that is the way it goes. On the technical analysis, there are some very serious concerns.
Mr. Seamus Coffey:
The presentations are possibly complementary. The information I would like to give relates to looking at some of the numbers underlying the common consolidated corporation tax base, CCCTB, proposals and the implications for Ireland. I will run briefly through some of the points I made in the document I submitted.
First, the initial CCCTB proposals are perceived to be narrower than the existing base under domestic legislation. While a lot of the emphasis tends to be on the impact on multinationals and the distribution of the tax base there, if the base under this proposal is narrower, domestic companies, which come under the €750 million threshold may voluntarily choose to opt in if they can get a reduced taxable income using this system. That could be through the treatment of research and development expenditure. As Ms O’Brien mentioned, we do have quite a good regime with the R&D tax credit and the knowledge development box but in terms of the treatment of the expenditure it can be a 100% deduction plus an additional 50% under the CCCTB proposals. Equally, for something like entertainment expenses which are not deductible under the Irish regime, there would be a 50% deduction allowed under the new proposals. It could be that domestic companies would choose to opt in whether they are close or even at the €750 million threshold for turnover. It is difficult to assess the impact that would have but it is a possibility.
Second, as discussed before the committee previously, would be the impact on some of the rates Ireland applies. I refer, for example, to the 25% rate that is generally perceived to apply to non-traded income but it does apply to the traded income of those in mining and extractive industries which have some presence in Ireland. Equally, our 33% rate as applied to the capital gains of companies, although it is paid under corporation tax, it is paid at a 33% rate. In 2014 Ireland had approximately €2.5 billion of taxable income that was taxed at the 25% rate. If we were to go to a single rate and if that rate was 12.5% then, notionally, there would be a reduction in the gross tax due of €300 million simply by taking the amount of income that would be subject to the 25% rate and applying a much lower rate to it. How that translates in terms of actual tax revenue is quite difficult because some credits could be applied to that or if the next step is taken and the tax base is apportioned we do not know how much we would get. At present, our 25% rate brings in about €600 million in gross tax due a year.
It is also worth noting that for the capital gains tax, again looking at the most recent figures for 2014, companies had about €600 million of gains taxed at the 33% rate. Again, if that was at 12.5% one would be looking at a reduction in the gross tax due of €125 million, subject to the provisions about apportionment.
When it comes to looking at the broader impact of the common consolidated corporate tax base on Ireland, a number of studies have been undertaken. Ernst & Young, EY, was commissioned by the Department of Finance to undertake a study that was published in 2012 based on the 2011 CCCTB proposal. The Commission itself published an update on its revenue assessment impact of the most recent version of the CCCTB back in October. Both of the outcomes seem to be very benign from an Irish perspective. According to the EY analysis the loss in corporate tax revenue would be about €325 million and according to the European Commission analysis the loss would be equivalent to 0.14% of GDP, which based on 2014 figures would be €250 million of a total loss in corporate tax revenue for Ireland. I have major doubts about the veracity or applicability of either of the approaches to estimating the impact on Ireland. The studies used individual company data, which really does not follow geographic boundaries. It tells one what a company does but if one gets a company reporting on Ireland and one has information on its revenue, profit and tax that does not mean that all happened in Ireland. If one takes the EY and the Commission approaches, neither of them know where the companies make their sales.
A company's financial reports do not tell one, by and large, where the sales happen so both studies had to imply it. The EY approach was to do it with export shares, which may be the final destination of the products and the Commission simply ignored it. It applied an output measure as its way of attributing the information. We know in the case of Ireland the output is quite large but of course all the sales happen elsewhere so either of those factors would have major implications in terms of their applicability to the Irish situation where we know, first, that 80% of our corporation tax is paid by foreign-owned companies and, second, that the top 10% of payers pay 40% of the corporation tax and, third, there is an overexposure in Ireland of companies from the US. If the companies in the analyses do not reflect that they are not reflecting the corporation tax landscape in Ireland. One could ask how we will go about overcoming that. One way would be to try to look at aggregate data. One sector that is very important for Ireland is the manufacture of pharmaceuticals.
In any given year that sector contributes about one sixth of our corporation tax. For the years I have looked, from 2008 to 2012 where full data are available, we collected about €700 million per annum in corporation tax solely from the manufacturing of pharmaceuticals.
If we consider the tax base around Europe, we can try and proxy this with a national accounting concept called gross operating surplus. In accounting terms, it is akin to earnings before interest, tax, deprecation and amortisation. It is close to the tax base but it has some differences and, crucially, it does not take account of depreciation. If we get a measure of the distribution of gross operating surplus across Europe, we can get a measure of the distribution of the tax base across Europe. Ireland has about one quarter of the tax base in the manufacturing of pharmaceuticals in the EU and from that we collect about €700 million in corporation tax per annum. The figure is probably higher now but for the five year period from 2008 to 2012 it was €700 million per annum.
If we consider what the CCCTB might do, on the basis of allocating profits on sales, employees, employee compensation and fixed assets, Ireland would not do too bad on the fixed assets. Approximately 8% of all fixed capital investment in the EU for the manufacture of pharmaceuticals takes place in Ireland. When it comes to employees and employee compensation, we have about 3% of both, but when it comes to sales, Ireland has less than 1%, simply by the nature of the size of our market. If the CCCTB was applied with the one third equal weights for sales, employees and fixed assets, we would get about 4% of the European-wide tax base. It would go from 25%, as it is now, to 4%, if the CCCTB was to be applied. That is making many assumptions but is based on the aggregate data. It would mean a loss in tax revenue of over €550 million for Ireland if we were to move from having the value added that is created or taxed here to having it allocated on the basis of sales, employees and fixed assets.
A big difficulty with all these analyses of the CCCTB is that they are on the basis on what companies do now. Companies engage in tax planning. A CCCTB is not going to stop that. Companies are always going to engage in tax planning, therefore, we cannot be sure how the companies will react. One issue is that in order for a country to be allocated some of the tax base, the company must have a taxable presence there, or a permanent establishment. At present a company might have a sales function in various countries and that sales function would trigger a permanent establishment. It might not be very profitable because it might not be where the company creates a value but, under the system of the CCCTB, it would be enough to create a permanent establishment. We could have companies in a sense changing. They would not set up permanent establishments or tax presences in various countries. Perhaps they could outsource the sales to an independent import distributor if it was possible for them to do so. They could concentrate their activities in certain countries. We are not sure how that might play out and as Ireland is a peripheral country that is a little distant from the large markets in the EU, I do not think they will be concentrating their activities here. In terms of the impact a CCCTB will have, we must recognise that the companies will respond. They will not simply continue with their existing activities and have an entirely new tax system imposed on them and not react to it.
Equally, the CCCTB in its objective of reducing tax avoidance will still make transfer pricing necessary for extra EU transactions. In the case of Ireland, this is hugely important, given the presence of US companies here and the fact that their operations here use technology and platforms that are developed in the US, and they must be paid for through various patent royalties, etc. This pricing will still exist under the CCCTB. This proposal would not necessarily increase, on its own, the amount of taxable profit in the EU. If we have US companies, they will still be able to allocate their profits to the various research and development, R&D, that takes place in the US, and rightly so. The CCCTB would simply redistribute the profit to be taxed around the EU. It would not necessarily change the amount of it. In view of that, there might be an incentive for smaller countries not to be as strong on transfer pricing. Why would Ireland or another small country engage in very aggressive transfer pricing when the benefits of that will be distributed, mainly to the larger countries in the EU? There is a bit of mismatch of incentives there.
The CCCTB presents a significant threat for Ireland. We clearly have had the impact of multinationals and we know that 80% of our corporation tax comes from multinationals but, equally, if domestic companies want to avail of a lower rate or a narrower base, they may opt into the system. Given the large amount of Ireland's corporation tax that comes from exports from either domestic or foreign owned sectors, and we know that possibly the top ten companies that pay 40% are all likely to be huge exporters, it is not unduly pessimistic to say that Ireland could lose up to 50% of its current corporation tax base if the CCCTB was introduced and there are likely to be further knock-on consequences as companies react to the introduction of such a system. At present as well as around €3 billion of corporation tax, US companies pay €6 billion of salary costs in Ireland, undertake an average of €3 billion in fixed capital investment and buy around €3 billion of goods and services from Irish suppliers. That is a €15 billion contribution to the Irish economy every year.
As has been outlined, there is no doubt that the system of taxing transnational companies has not kept pace with the modern economy and it is in need of reform. However, it is hard to imagine any reform, even unilateral US tax reform, posing a greater threat to the huge gains from Ireland's most successful economic policy of attracting foreign direct investment than the proposed the CCCTB.
I thank the two witnesses for their presentations. The Minister has not been able to answer a question and I wonder if Mr. Coffey has a view on it. Is the knowledge development box, as operated in this State, compatible with the proposed CCCTB, and would it be included as part of the tax base for the purpose of a common tax base?
The issue of the 25% non-trading rate and the 33% rate is very important. It is nice to hear the witnesses from the Irish Tax Institute argue for the retention of the higher bands for once. If I understood Mr. Coffey correctly, the combined effect of abolishing those two rates would mean €425 million less to the Exchequer. Is that correct?
Mr. Seamus Coffey:
That is based on simple financial assumptions. If we were to change the current tax rates of 25% and 33% to 12.5%, the loss would be in the region of that amount. If the proposal was to go further and consolidate the tax base, it would be very difficult to determine what the loss would be, but in the initial phase of the common tax base, the loss would be in the region of that amount.
Unlike the 2011 proposal, the Commission is focusing politically at this time on the role of the CCCTB on combating tax avoidance, from what we have heard today, we would be abolishing the higher rates and letting very large companies shift to a narrower tax base. Does Mr. Coffey think the Commission is trying to hijack the genuine and justified public anger at corporate tax avoidance to push a political project?
Mr. Seamus Coffey:
The honest answer is that I do not know. The Senator is correct that the wider debate on corporations is having an impact here and probably political pressures are being placed on certain organisations. The OECD may be making its moves through the base erosion and profit shifting, BEPS, programme. Certain parts of the Commission are undertaking various investigations into the tax practices in various member states. Even the European Parliament has set up a wide-ranging committee that has looked at the issue of corporations' tax practices. Every organisation wants to have their contribution and there is an issue of being involved in the debate. It is a lively debate but whether that is a basis for sound policy is a different question, but there is definitely a significant political element to all of this.
Is there not a fundamental issue here in that only acting at the EU level will not work as long as there are countries outside the EU that will still happily facilitate avoidance? How would the witnesses suggest that we progress that issue? For instance, Oxfam suggested creating a global tax body to lead and co-ordinate international tax co-operation that includes all countries on an equal footing ensuring that global, regional and national tax systems support the public interest in all countries. Do they see that as an admirable goal for which to aim? Ms O'Brien might address that.
Ms Cora O'Brien:
My strong view is that we have a very good set of proposals here on the BEPS agenda to deal with tax avoidance. To reassure the committee, some of the measures to deal with these concerns, even about permanent establishments and the ability to avoid paying tax in countries because one does not have establishments there, are being tightened under the BEPS proposals. It would be in everybody's interests if we consistently, properly and carefully implemented them in such a way that the rules were the same for everybody. We have the tools, and many countries and companies argued about and debated this. We need to let BEPS play out. It is only starting to be implemented now. It is only due for its first review in 2020, and many of the measures are specifically targeted at some of the concerns that have been raised. Much work is being done on this. The EU itself, in fairness, is being very careful in implementing many of these anti-avoidance measures. We will have a big consultation next year on the anti-tax avoidance directive in this country and how we will implement these tax avoidance measures in Ireland. To start trying to do other things on another track could be counterproductive to that.
Mr. Seamus Coffey:
I agree with much of what Ms O'Brien and the Tax Institute have just said. When it comes to the international debate on tax avoidance, one of the most serious issues is the ability of companies to declare large profits in jurisdictions in which they simply have no substance. This is definitely not the case in Ireland and clearly not in the EU as many of the companies have substance and operations here. One of the key underpinnings of the measures and proposals at international level led by the OECD is to try to correct this issue of companies recording significant profits where they have no substance. Some of the proposals regarding permanent establishment and reforms of transfer pricing go about addressing that, but the CCCTB proposal does not address it because it happens somewhere else. It is going in the opposite direction to trying in a sense to amend and update the current system, which clearly has not taken pace with the change in the international economy. It is part of the global corporate tax avoidance debate but it could be missing some of the key points.
Mr. Coffey and the Tax Institute specifically mentioned the issue of court jurisdiction. We know we must have a referendum on the EU patent court, and my party has received legal advice to the effect that the TTIP agreement would require a referendum as TTIP sets up its own court above and beyond our courts. On this basis, is the Tax Institute saying it believes there may be a constitutional issue here?
Ms Cora O'Brien:
I would be careful to say that because I am not a lawyer. At the moment, the European Court of Justice in Luxembourg deals with tax issues, so my guess is that it would continue to do so. Some very technical matters go through the court on double taxation and cross-border issues, but it is very small. It hears many VAT cases because VAT is more of a European tax. Therefore, I imagine that would have to be expanded because an awful lot more cases would go through the court if we had a CCCTB as it would be the only place to resolve technical issues.
More broadly, as we know the committee's scrutiny remit is technical but we must decide solely whether the proposal breaches the principle of subsidiarity rather than on politics. Do any of the witnesses have a view as to whether legally the EU should be doing this based on the principle of subsidiarity?
Ms Cora O'Brien:
In putting forward the proposals, the Commission has said it has two objectives, namely, to tackle tax avoidance and promote growth. My view is that there is nothing in this proposal that does anything to tackle tax avoidance beyond all the measures already being carried out elsewhere by the EU and the OECD. Therefore, it does not contribute anything to the tackling of tax avoidance. I certainly do not think it promotes growth, especially having listened to the presentation we have heard. It therefore does not meet its own objectives, if that answers the question about subsidiarity and whether there is a reason to have it.
Mr. Seamus Coffey:
I am not a legal expert on this area, but it is interesting that when the proposals were published, they included the anti-tax avoidance directive, which has already been published and is part of the European legislative process of coming through. This gives an indication that the Commission feels that to meet the subsidiarity criteria, it must add the anti-tax avoidance directive, which has already been published.
I will be just a few moments. I wish to hear Mr. Coffey's view on one issue I zoned in on in his submission, and perhaps he will have to repeat himself. The document states that the European Commission study does not have data on sales by destination and that in this instance, rather than try to impute the location of sales, the study proxies sales with output. Could Mr. Coffey give us a layman's view on what he means by this, particularly for people watching the proceedings of the meeting who are very interested in this subject?
Mr. Seamus Coffey:
One of the elements of the formulary apportionment, that is, the calculation that apportions the taxable base across EU countries, is sales, and the proposal clearly states "sales by destination". Therefore, when the company sells to its own final customer, which does not necessarily have to be the final purchaser of the product, once the product leaves the company or group of companies, by and large, any further exchanges relating to that product are not included in financial data. Therefore, it is not known when that happens. There is a financial statement which shows either turnover, revenue or whatever else, and the Commission essentially takes those figures, looks at the output maybe from a certain sector and assigns that to a certain country. In the case of Ireland, we know that the output or the turnover from pharmaceuticals, for example, is huge, but the sales are not happening here. The Commission therefore makes no attempt to figure out where the sales are happening, applies the output on revenue figures and calculates their weights on the basis of that. This will obviously show Ireland in a relatively positive light because the stuff is made here but is not sold here.
Mr. Coffey refers specifically to the pharma sector and the €15 billion impact it has on payroll, supply and so on. He seems to critique the proposal by the Commission on the basis that it only uses company financial data. I do not want to put words into his mouth, but my ears are telling me that the Commission's fundamental proposal is quite flawed, or at the very minimum can be seriously critiqued, because it does not delve into the very factors to which Mr. Coffey refers. A country such as Ireland has a huge dependence on foreign direct investment and notwithstanding global tax justice, all these are issues that are sometimes raised, including and the BEPS process under way through the OECD. To be fair, Ms O'Brien is right that we must give that process a fair wind and a chance to settle. However, there could be serious permutations for Ireland's ability to continue to attract FDI and maintain it. The pharmaceutical sector, for instance, has a regional importance in the south, east, west, north and north west. I am not being too parochial; it spans the whole country. If I were in the pharmaceutical sector considering these proposals and if I were a lead on a site making strategic decisions from a corporate point of view, I would be potentially quite worried by these proposals as they stand.
Mr. Seamus Coffey:
It depends what weight would be put on their actually happening. I think the weight would be relatively small now but if the risk were to grow and if it was likely to be introduced it would be feeding into the decisions in corporate board rooms. At present I do not think it is but based on how it is set up it would be a significant issue.
Ceteris paribus, as they say in economic terms, if the proposals are taken as they are presented to us and if they were given effect in law that could have serious consequences for our ability to maintain foreign direct investment. It could have a big impact on payroll.
Mr. Seamus Coffey:
Yes huge, because we are a peripheral country. The economic literature suggests that one way that peripheral countries can attract investment is through having lower taxation than core countries with larger markets. If that advantage is to be removed, as this proposal would suggest, it would prove quite difficult to attract this high value investment to Ireland. We have a reputation for delivering. Many of the pharmaceutical companies have been here for 20 or 30 years, spending hundreds of millions of euro on plants that operate efficiently with little down time and do what the companies want them to do. If the tax advantage is taken away, however, they will consider alternatives.
I thank the witnesses today because if we can parse or delve deeper into their submissions and use them as part of our response to the Commission before the 20 December deadline it would be very useful for this committee.
I remind all members that we are having a private session once we have concluded with this and discussing the reasoned opinion and whether we go forward with one and we have scheduled another meeting tomorrow to deal with that in advance of the deadline.
I thank the witnesses for their detailed presentations. Ireland has made huge inroads in dealing with tax evasion and reforming its corporation tax policy. The "double Irish" loophole has been closed, there has been detailed examination of the section 110s and an expert has been commissioned over the budget period to review the corporation tax policy, which will be very welcome.
There has been a watering down of our sovereignty and ability to set our own tax rules. We will always have legitimate debate on how much corporation tax companies pay and where they pay it. It is fundamental, however, to the process that as a member state we retain our right to set our own tax rules. That is a cornerstone. Would Ms O'Brien agree with that?
Ms Cora O'Brien:
Yes, fully. This is one of our top three taxes and we need to have the right to change it, whether in the context of tax avoidance to move to close something that becomes apparent and that needs to be done quickly, or because an incentive such as research and development is not working. Whatever it is, we need the ability to adapt our regime to what the people want, and what politicians are trying to deliver. It will be very cumbersome to try to do that when some of those intricacies might not be important for other countries at the table of 28.
We are engaging strongly with the base erosion and profit shifting, BEPS, process and that should be given time to be teased out and with the different reporting requirements from companies. The jurisdiction of the High Court is also important. If the CCCTB were to come to fruition the sustainability of a High Court decision on tax would come into question if it was to affect other EU member state tax yields. Would that be a fair comment?
Ms Cora O'Brien:
That certainly needs to be teased out because it would be a European set of rules so perhaps there would be a role for the courts at an initial stage in determining whether something goes forward to the European Court of Justice, but the ultimate decision would be taken out of the hands of the Irish courts.
That would be critical for our sovereignty. In respect of additional costs for companies the consolidated accounting profit of a group is going to be markedly different from a CCCTB. We are, or would be, increasing the cost if the European Commission increases the cost for businesses producing to this requirement.
Ms Cora O'Brien:
There is a risk that we are increasing the tax businesses could expect to pay in Europe because more profits are going to higher jurisdictions. More important for them, because they are so accustomed to getting this right, for most of the big ones all their systems are geared to deal with country by country tax reporting. The cost of amalgamating all that would be huge. They have to keep their systems open for the non-EU transactions to be at arm's length and take cognisance of transfer pricing. They are running two systems that way. Their tax is higher and their costs are likely to be higher, albeit that there would be some savings because of the common base. Our research showed that it would be outweighed. One can imagine how many disputes there will be between tax authorities over allocation factors. The uncertainty and cost of that would be extensive.
On that point when the European Commission was here I put to it the prospect of setting up a pan-European revenue collecting authority to manage the day to day collection of taxes and adjudicate to an extent over differences. It was clear in saying that it would not set one up. It is very difficult to see how this would work without a basic authority to collect the taxes. Would Ms O'Brien agree with that?
Ms Cora O'Brien:
I would. I think the European Commission is trying to replicate a model that it started for value added tax which it calls a one stop shop. A country is picked more or less as the parent and takes responsibility for the filing, the audit and so on. In theory it sounds great but countries will not want to give up their tax dollars so there will be arguments about the allocation and who gets what profits even if only one country runs it.
In terms of accountability would there be qualified majority voting? What process would there be for holding that authority to account because it could be dangerous to some member states? This would ring-fence corporation tax for the member states. Offsets are an important component of cashflow but many companies would seem to be in trouble because if the corporation tax is ring-fenced for the member states it is not available for offset against other tax heads in the sovereign state where it originated.
Ms Cora O'Brien:
I heard the Deputy raise that question with the Commission last week. In fairness I think the Commission did undertake that the allocation, if, for example, Ireland is allocated a certain amount of corporation tax for a particular company, that is the company's liability and if there were refunds on other taxes they could be offset against that. Although the method of calculating it has changed-----
If the rules are changed that would be a concern. The basic reason for tax policy is to respond to emergencies or sectoral issues within the sovereign state and if this proposal came into being, which I hope it does not, it would affect the jurisdiction of the sovereign nation to change corporation tax policy forever.
I thank Ms O'Brien and Mr. Coffey for their presentations which teased out many of the points we wanted to cover. To summarise and maybe cover points not dealt with, we are dealing with a narrower base than we had before, more generous expense deductions and various other issues, such as deductions for increases in equity and exemptions for foreign dividend income and cross-border losses, yet we are saying we do not have scope as a nation to increase our corporation tax rate, and we would not want the message to go out that we want to increase it.
Clearly, even before we start reapportioning the three one thirds, and all the rest, we will have a lower base to start from. Is that correct?
Ms Cora O'Brien:
We are in a unique position in Ireland. The research that has been done by the ESRI and others suggests that we have in some ways been so successful with our brand that we cannot change it now without the risk of it seriously impacting FDI. Although I do not know if this point has come out, the Commission's own impact assessment has actually built in that countries would change their rates.
Ms Cora O'Brien:
We cannot. In actually putting in something that says this, the Commission states that corporation tax rates will be increased to compensate for differences in the rules for computing the corporate tax base. In saying that, it is acknowledging that if countries want to collect the same amount of money, they may have to raise their rates. That is built into the model, even though we do not have very clear visibility of how the model is calculated. We cannot do that without it being very risky.
Exactly. Ms O'Brien makes a point about profits from trade outside the EU which are currently taxed in Ireland, which has nothing to do with the EU. I appreciate that most people do not know much about CCCTB but it is regarded as an EU project involving internal EU trade. However, it means that transfer pricing will still apply to non-EU markets but also that other countries will now be able to take a share of the profits of sales of countries based in Ireland selling to non-EU countries. Is that correct? Ms O'Brien said:
Profits from trade outside the EU that are currently taxed in Ireland would also be reallocated to other member states based on an EU-wide assets and labour formula. In order to stimulate growth and diversify risk, particularly in light of Brexit developments, businesses are trying to develop more non-EU markets.
Is it correct that other countries will benefit from our trade with non-EU countries?
Ms Cora O'Brien:
Yes, that is correct. The logic Europe is trying to apply is that it is reallocating all the profits that arise in the EU, even if they come from non-EU sources. Therefore, it can take non-EU profits that countries earn and the pie is thereby increased for non-EU sales, which are redistributed. In overall terms-----
Ms Cora O'Brien:
Yes. There are supposed to be swings and roundabouts. If Germany sells to Brazil, those Brazilian sales get put into the European pot and, in theory, Ireland could get a bit of that. However, we will get very little, and they will get far more of our Brazilian sales than we will get of theirs. Again, it is just increasing the disparity.
We have heard about the argument on BEPS and the anti-tax avoidance directive. Mr. Coffey pointed out this is already in place and the EU is trying to bring it in to the CCCTB, almost to make the CCCTB more saleable or more attractive, even though it was already there anyway. The CCCTB in itself does nothing to deal with BEPS or tax planning opportunities, as some might call it, or tax avoidance, as others might call it. Is that correct?
Mr. Seamus Coffey:
Yes. The CCCTB itself is simply the reallocation of taxing rights; it does not necessarily increase them. The moves in the anti-tax avoidance directive are far more effective in addressing some of the problems that have emerged in trade between countries but the CCCTB on its own does not address them. That is why the EU has, in a sense, bundled all of this together. The anti-tax avoidance directive was there already.
Mr. Seamus Coffey:
I would not dispute that. Ms O'Brien has mentioned the issue of sales outside the EU. Ireland would have a significant amount of sales to the US through pharmaceuticals, to countries like Israel through computer processing and to other non-EU countries. To take an issue like withholding tax, Ireland has a huge amount of royalties flowing through the country. If we were to decide to impose a withholding tax on some of those, that withholding tax would be distributed on the same basis as the CCCTB formula, whatever proportion of the profit is allocated to Ireland. We could charge a withholding tax on patent royalties leaving Ireland, but another country would get the money.
Both Ms O'Brien and Mr. Coffey have made the point that it is a very significant undermining of our tax sovereignty, in particular our genuine sovereignty in regard to how we determine our own future. If we are going to lose the figures Mr. Coffey is quoting, and it was not just pharma he was referring to in his concluding paragraph but also the US multinationals generally, that is an enormous percentage of our tax take disappearing overnight if CCCTB is implemented. I know we do not have great visibility on the numbers but Mr. Coffey is being relatively prudent in the calculations he is making.
Mr. Seamus Coffey:
It definitely will. Ireland is the only country where foreign companies generate more of the value added than domestic companies. We are unique in the sense that the size of profits of foreign companies in Ireland is far different to other countries. We are not the same. Foreign companies pay 80% of the corporation tax in Ireland. By definition, they are multinational and transnational, and they would fall under the CCCTB. Their sales market is different to ours. Therefore, whether one is optimistic or pessimistic, the threat to our corporation tax base is significant.
Mr. Coffey had a very good handle on the figures in his opening statement. For the companies operating in Ireland who pay 80% of corporation tax, or even the ten companies paying 40% of corporation tax, has he any idea of the proportion of tangibles relative to intangibles? For companies like Google and Facebook, eBay and PayPal, much of their value is intellectual property, brands and goodwill, not the value of the offices, which are probably leased, or the value of their computers, desks or filing cabinets. Is this stripping out 80% or 90% of their balance sheets and saying we are going to allocate the sales based on the 10% that happens to be in fixed assets, given it is a fairly basic level of fixed assets?
Mr. Seamus Coffey:
One of the reasons the corporation tax system has not kept pace with the modern economy is due to the role of intangibles and profits created by brands, by computer platforms and by other things that are not necessarily bricks and mortar. The CCCTB simply ignores all of that and states that a company like Google or Facebook will be taxed on the basis of its buildings.
Mr. Seamus Coffey:
Depending on the treatment of financial leases, they probably would be counted for the purposes of the CCCTB. It has been foreseen that the companies could sell the buildings and lease them back. If they lease them, they will still count as their fixed assets in the calculation. However, it does show that this is not really in line with where the modern economy has gone and where the problems in international taxation are in terms of dealing with intangibles. The solution here is just to ignore them, which is not appropriate.
To conclude, it will be costly and unpredictable, it will result in a loss of sovereignty, it will be difficult and complex to introduce and, ultimately, it will put a huge hole in the Exchequer finances if it is implemented in anything like the way that is suggested. Is that a fair comment on both sides? On that basis, if no other members are offering to come in again, I thank Ms Cora O'Brien, Mr. Aidan Lucey and Mr. Seamus Coffey for their opening statements, their contributions and their interaction with all of the members this afternoon.