Oireachtas Joint and Select Committees

Tuesday, 28 November 2017

Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach

Review of Ireland's Corporation Tax Code: Discussion

7:15 pm

Photo of Paddy BurkePaddy Burke (Fine Gael)
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I welcome Professor Seamus Coffey of University College Cork. I invite him to address the committee.

Mr. Seamus Coffey:

I thank the Chairman and members for the opportunity to discuss issues in regard to corporation tax. As members are aware, a review of Ireland’s corporation tax code was announced by the Government on 2 September 2016. On 11 October, the then Minister for Finance, Deputy Noonan, set out the terms of reference and announced my appointment to undertake the review. It was delivered to the Minister for Finance, Deputy Donohoe, on 30 June 2017 and published on 12 September. The terms of reference of the review encompassed meeting international standards for tax transparency, ensuring that the corporation tax code does not provide preferential treatment to any taxpayer, implementing Ireland’s commitments under the OECD’s base erosion and profit shifting, BEPS, project and various EU tax directives, delivering tax certainty for business and maintaining the competitiveness of Ireland’s corporation tax offering. During Committee Stage of the Finance Act 2016, several members of this Committee raised the matter of the role and sustainability of corporation tax receipts and that was added to the terms of reference of the review.

As regards tax transparency, Ireland was subject to a global forum peer review in 2010 facilitated by the OECD. Ireland was one of 16 jurisdictions to receive a rating of compliant, which is the highest rating achievable. In August of this year, the global forum published its peer review report for Ireland as part of the second round of reviews, which are assessed against enhanced standards. Again, Ireland received the highest rating achievable - compliant. However, it should take account of the recommendations of the peer review.

As regards preferential treatment, the criteria applied by both the OECD forum on harmful tax practices and the EU code of conduct for business taxation to identify a potentially harmful tax regime provide the internationally accepted criteria for identifying whether features of the tax code constitute harmful tax competition. Any proposed measures to be introduced for Ireland's corporation tax code should be carefully scrutinised to ensure that they do not constitute a potentially harmful preferential tax regime.

In terms of transfer pricing, Ireland is required to legislate to apply the 2017 OECD transfer pricing guidelines in domestic legislation and it may, therefore, be timely to consider additional changes that may be made to Ireland’s domestic transfer pricing rules. At present, Ireland’s position in the global value chain of multinational enterprises, MNEs, in sectors which rely heavily on intellectual property, IP, is such that large amounts of royalties are paid out of Ireland by MNE affiliates to members of the same group in other jurisdictions. The recipient of the royalty payments receives a significant return relating to the ownership of the IP. Where the recipient of the royalty payments does not perform the requisite DEMPE functions, which are the development, enhancement, maintenance, protection or exploitation of intellectual property, or control economically significant risks, the application of the OECD 2017 transfer pricing guidelines may result in the recipient of the royalty payments being attributed a return which only reflects the risk-free or risk-adjusted return with respect to the recipient’s funding activities. Assuming transfer pricing rules apply to all trading transactions, the introduction of the 2017 OECD transfer pricing guidelines may have the impact of adjusting the consideration payable, which is the outbound royalty, downwards, having regard to the DEMPE functions and control of the associated risks by the recipient of the royalty payments. Depending on the facts and circumstances, that could have a significant impact on MNEs operating in Ireland and the quantity of outbound royalty payments which are deductible for Irish tax purposes.

On transfer pricing, Ireland should provide for the application of the OECD 2017 transfer pricing guidelines incorporating BEPS actions 8, 9 and 10 in Irish legislation. Domestic transfer pricing legislation should be applied to arrangements the terms of which were agreed before 1 July 2010. Consideration should be given to extending transfer pricing rules to SMEs. Consideration should be given to extending domestic transfer pricing rules to non-traded income where it would reduce the risk of aggressive tax planning. Consideration should also be given to extending transfer pricing rules to capital transactions. If it is decided to implement any or all of these recommendations on transfer pricing, that should take place no later than the end of 2020.

There are various components of the EU anti-tax avoidance directive that Ireland will have to transpose into domestic law over the coming years, including an interest limitation rule, anti-hybrid rules, the introduction of controlled foreign corporation rules, an exit tax and a general anti-avoidance rule. Various deadlines have been set for those to be achieved and, in transposing them, Ireland should have regard to the recommendations of the reports on BEPS actions 2, 3 and 4. The exit tax was proposed to provide that member states are in a position to tax the economic value of any capital gain created in their territory where the gain has not been realised at the time of the transfer out of the member state. The anti-tax avoidance directive provides that member states must impose an exit tax on the transfer of an asset out of its territory, the chargeable basis of the tax being the market value of the transferred assets less their value for tax purposes. The directive does not specify the calculation of the value of the assets for tax purposes or the rate of the exit tax but, rather, leaves discretion in those areas to member states.

During the public consultation, a number of stakeholders suggested moving Ireland's corporation tax base from a worldwide to a territorial base. The difficulty of computing the credit for foreign income, in particular when income arises from multiple jurisdictions, was highlighted as a competitive disadvantage. Schedule 24 of the Taxes Consolidation Act, which gives effect to the computation of the foreign credit, has been amended multiple times since 1997 in light of policy changes and to take account of judicial decisions. Accordingly, the operation of the relief for foreign credit has become more complex, which is seen as a burden on business. In the context of the introduction of the controlled foreign company rule provided by the anti-tax avoidance directive, consideration should be given to whether it is appropriate to move Ireland's corporate tax base to a territorial regime in respect of the income of the foreign branches of Irish-resident companies and, in respect of connected companies, the payment of foreign-source dividends.

An alternative to a territorial corporation tax base is to review schedule 24 of the Taxes Consolidation Act 1997 with a view to effecting a policy and revenue-neutral simplification of the computation of the foreign tax credit for all forms of foreign income. That would achieve the competitiveness advantages associated with moving to a territorial corporation tax base while avoiding the introduction of additional complexity to the corporation tax code by new anti-avoidance measures.

A number of submissions to the public consultation emphasised the importance of public consultation and stakeholder engagement in the design and implementation of tax legislation. That can increase certainty for taxpayers and ensure that the views of all sections of the community are taken into account, including the views of NGOs active in developing countries. It is recommended that a number of proposed changes suggested in the review are carried out subject to consultation to reduce uncertainty regarding the proposed changes and to better inform policy making. To reduce uncertainty and ensure that Ireland protects its corporation tax base, Ireland should ensure an adequately resourced competent authority.

Several independent factors that arose together that contributed to the level shift increase in corporation tax receipts in 2015. It is unlikely that any reversal of those factors would similarly coincide. While that suggests that corporation tax receipts are sustainable at a new higher level, at least in the medium term to 2020, the inherent volatility of corporation tax receipts will remain and some of the factors that led to the 2015 level shift could unwind individually. Given that uncertainty, we can never be sure of the sources and permanency of such revenues and it would be wise that policy should be suitably cautious in terms of introducing increases in spending or permanent reductions in taxation.

In order to ensure some smoothing of corporation tax revenues over time, the review recommended that the limitation on the quantum of relevant income against which capital allowances for intangible assets and any related interest expense may be deducted in a tax year be reduced to 80%.

This recommendation is being implemented via section 21 of the Finance Bill 2017. I look forward to our discussion and hope I can address any questions on the review.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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Thank you Mr. Coffey.

Photo of John BrassilJohn Brassil (Kerry, Fianna Fail)
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I thank Mr. Coffey for bearing with us for this considerable period of time. I will be very brief in light of the time. Does the witness think that transfer pricing will lead to more revenues and, if so, how much? Will it have a behavioural impact on our multinationals?

Mr. Seamus Coffey:

I am unsure on the impact it will have on revenue. That will depend on the second element of the Deputy's question, the behavioural impact on the multinationals. There is no doubt that it will change the practices of the multinationals. One of the guiding principles of the whole BEPS process has been to have a greater alignment of profit and substance. What many US multinationals, in particular, have been able to achieve is to have a large amount of their non-US profits routed to what are essentially cash box operations in small islands where they have no substance. The rules propose that such cash box operations should only get a return based on the funding that they provide. I refer to interest rates and return on capital, not on the actual profits the company generates, the substance of which happens elsewhere. There is no doubt that the companies will adjust. One change that we have seen some evidence of to date in Ireland is that they could move their intangible assets to Ireland simply because they already have the substance here. That could lead to an increase in tax revenues in Ireland. It will definitely lead to an increase in the gross profits declared in Ireland. It could have knock-on positive consequences for revenue. I do think a behavioural response will be seen. The impact on revenue is less clear but it could be positive.

Photo of John BrassilJohn Brassil (Kerry, Fianna Fail)
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How quickly does the witness think this could happen? Mr. Coffey states in his summary that "given this uncertainty we can never be sure of the sources and permanency of such revenues and it would be wise that policy should be suitably cautious in terms of introducing increases in spending or permanent reductions in taxation". How fast does the witness think that could all unwind?

Mr. Seamus Coffey:

We had a 50% increase in one year in 2015. I do not expect that we will see the set of events that came together in 2015 unwinding together. However, they could unwind over time. Corporation tax is the most volatile of our main taxes. If a tax can rise by 50% in a given year, it shows the uncertainty that is there. I think at least to 2020 it will remain at the higher level. Depending on how international changes go that could be sustainable for longer. We will see inherent volatility. We have not seen a reduction in corporation tax receipts on an annual basis for a number of years. I think that is unlikely to happen soon. It will remain at the new higher level. It is hard to identify. I looked at the elements that led to the increase in 2015. They were relatively broad, yet dominated by the multinationals. It did not necessarily lead to an increase in concentration. Our corporation tax receipts are concentrated but that did not increase in 2015. It was spread across a number of companies and it was related to a number of different factors. I do see risks there. It is more a medium term risk. It is unlikely that we will see a 50% drop in a single year, even though we did see a 50% rise. Any return to the lower level would happen over time.

Photo of John BrassilJohn Brassil (Kerry, Fianna Fail)
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What is Mr. Coffey's opinion on the setting up of a rainy day fund for such eventualities as a large loss of revenue in this volatile market? Does he see that as a good way forward?

Mr. Seamus Coffey:

Yes, there are various proposals on how Ireland could or should establish a rainy day fund. I favour looking at the amount of corporation tax receipts we collect and setting a certain amount of that aside. The contributions to the fund could be based on the corporation tax receipts. I have a previous proposal that looked at setting aside 50% of the corporation tax that comes from the multinationals. That would offer two things. It would offer savings in future and if there was volatility at least half of it would be taken out by setting those revenues aside. We cannot be guaranteed that these revenues would flow into the future. When we do need them to achieve other economic objectives then the fund will be there. I see advantages in looking at an annual budgetary process, stripping out some of the corporation tax receipts from the multinational sector and operating a balanced budget on the basis of what is left. That is actually saving the money.

Previously, we had a savings fund in the last decade, the National Pension Reserve Fund. The money was not necessarily taken out of the budgetary process. A commitment was made to make contributions. However, it all remained within the general Government sector. The Government deficit and balance itself was calculated on the basis of spending money outside of the general Government. I would take those funds out of the budgetary process and balance the Budget outside of that. I made that proposal back in 2015 and there have been variations in the rainy day fund since. The key issue is to consider what the rainy day fund is to achieve. The proposal I outlined would be about treating the corporation tax receipts as a sort of temporary bonus, like some countries do with setting aside oil revenues. Alternatively, a rainy day fund can be used for counter-cyclical purposes. Money can be taken out of the economy when it is performing well. It does look like the current proposal is going in that direction, if not to a huge degree.

Photo of John BrassilJohn Brassil (Kerry, Fianna Fail)
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I thank the witness.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I thank Mr. Coffey for bearing with us. None of us thought we would be here at this hour. We thought we would be putting up our election posters in west Donegal. I have a couple of questions. I want to commend the witness in regard to his work and also in regard to the blog that he put up which teased out one of his proposals. That is the 80% cap that has been enacted on budget day. It allows for the intangible assets transferred here to remain within the 100% ceiling. Has the witness concerns in regard to that? I know from Mr. Coffey's blog that he estimated that if that provision did not exist in our Finance Bill, then we could potentially, based on a number of scenarios looking forward and looking back, achieve about an extra €850 million in tax per year. Is there any reason why that should not happen? Would it not be retrospective taxation as some would claim?

Mr. Seamus Coffey:

No, I do not believe it is retrospective taxation. It does not change the amount of capital allowances that are available. The total quantum of capital allowances remains the same. All that changes is the amount that can be claimed in future years. That is limited to 80% of the taxable income that is earned. It is not retrospective taxation. More taxation is not being collected from the investment by reducing the limit because the amount of the capital allowance remains the same. Those who would suggest that it is a retrospective change should be questioned as to why they think the tax would not be collected in the future. A retrospective change would imply that more tax was being collected and when the capital allowances run out we would not be collecting the money. In my view, the only way there can be a retrospective change is if more tax is being collected from the investment decision. The internal rate of return on those investments remains the same, whether there is an 80% cap or a 100% cap. If more tax is collected with the 80% cap it does suggest that the tax was not going to be collected when the capital allowances run out.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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It comes as no surprise. I agree with what Mr. Coffey said. On this committee I have to question things that I do not agree with. Would companies have taken their intellectual properties onshore based on 100%, which was the existing law at the time? They took these corporate decisions based on the capital allowances that they believe would be available for them for them over the next number of years? Would changing those rates not be seen as an act of bad faith from the State?

Mr. Seamus Coffey:

Yes, there is no doubt it would be seen as changing some of the underlying parameters behind those investments. It would not change the overall amount of tax that should be paid. There are companies who would have moved their intangible assets here before 2015 when the 80% cap last applied, albeit that the vast majority of the claims currently being made are for intangible assets that came post-2015.

The extent to which such a change is seen as being in bad faith is hard to determine. The Deputy would have to ask the companies themselves that but the overall impact on their tax should not be huge. It should be a matter of timing unless it is expected that the tax will not be paid when the capital allowances run out.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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That is possible in some of these cases. On the change that took place, from 80% to 100%, does Mr. Coffey think we could be walking into a dangerous space with regard to state aid issues?

Mr. Seamus Coffey:

Not in general. The change itself is not necessarily offering preferential treatment with regard to the regime. The granting of capital allowances for acquisitions of intangibles is common across almost all tax regimes, particularly those that apply tax depreciation. We looked at 27 of the 28 EU countries that offer it and the country that does not has a cash deduction system - an upfront deduction for the amount one spends. The common consolidated corporate tax base, CCCTB, has capital allowances for intangible assets and there is no cap on it. The cap is a base protection measure. Even at 100%, the cap offers protection that other countries will not necessarily have in place because we do not want a situation where if a company was to overpay for an asset and did not generate profits, if it still had the capital allowances, it could claim them every year and generate losses. The treatment of losses in the tax code is different to the treatment of capital allowances because losses can be distributed around a group so if a company overpaid for an asset and did not have profits, those losses could be used to offset profits elsewhere. The 100% cap prevents those losses from being generated. It limits the capital allowances used to the amount of profit. The cap itself is a base protection measure that some other countries may not have. I do not see risks of state aid in general from the change from 80% to 100%.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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What about the change from 100% to 80%? Compare a company today that can only carry forward 80% to a company making profits in two years. One company can carry forward 80% and the other company can carry-----

Mr. Seamus Coffey:

The total capital allowance does not change. If they both spend €100 on an intangible asset under either cap, they are both entitled to claim €100 of the capital allowance. It is a reflection of the amount of expenditure the company incurs. Regardless of whether the cap is 80% or 100%, the total capital allowance remains the same. It is not offering preferential treatment with regard to the overall tax. A year is just an arbitrary period we use to calculate tax. Over the term of an investment, an 80% or 100% cap should not affect the overall amount of tax paid. In general, I do not see a state aid risk.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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That is a timing issue but in any given year, there is a difference.

Mr. Seamus Coffey:

There would be a difference in any given year. If there are identical companies, one of which had brought the assets onshore prior to the recent change, it could offset its entire taxable income using capital allowances, whereas if a company does it now, it will be 80%. There is a difference in treatment but I am not sure that change opens a state aid risk. The Commissioner has suggested that she is looking into some of these changes.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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On the reputational damage-----

Mr. Seamus Coffey:

I will make a final point. The issue itself probably relates more to the particular facts and circumstances of each individual case because the regime has a provision to ensure, from our perspective, that capital allowances and expenditure are not incurred in any way towards tax avoidance and there is a specific provision in our legislation that looks at that. One approach to state aid could be to see whether that specific provision in specific cases was applied correctly.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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We will let the Commission work that one out. On a previous point with regard to applying the 80% for all intangible assets that have been onshored, how would that make it more reliable, for want of a better word, for our tax base?

Mr. Seamus Coffey:

It would reduce the volatility. With the 80% cap, one is ensuring that some amount of the gross profit is included in taxable income every year. One is collecting some corporation tax in each year the asset is here and each year it is generating a profit, whereas under the 100% cap, depending on the way the profits go, one could end up with a position where very little tax is collected on an ongoing basis because the capital allowances almost fully offset the profits. One then faces a big jump. As long as the asset remains and the profit remains, one goes from having maybe all of it being offset by the capital allowance to very little. If one had a cap at a certain level, each year some corporation tax would be collected, and then if there is a jump at the end, it would be at a lower level, because there would be a move from having some profit in taxable income to having a greater amount, but at least there is some to begin with. It reduces the volatility of corporation tax which, as I said earlier, is our most volatile main tax. It would offer benefits.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I want to talk about the real and the perceived. I will not debate what is real and what is perceived but does Mr. Coffey believe the discussion on this change - which also coincided with the Paradise Papers, Apple's tax structure and The New York Times, for example, linking this change from 80% to 100% to it - has caused any reputational damage to the State? Issues Ireland has been fast and loose with have been revisited. It closed down the residency rule and has started to phase out the double Irish. Have we brought more reputational damage on ourselves? If that is the case, does Mr. Coffey believe there is any risk with regard to companies or corporations locating here?

Mr. Seamus Coffey:

On the public debate, I am surprised it took so long for the issue to get traction. I felt it had become an issue even before I started the review and I would have discussed it at the Committee on Budgetary Oversight in September 2016 about the likely increase we would see in the amount of capital allowances we claimed. The data only came out perhaps seven or eight months later and even during the review, I felt it could possibly get a lot of attention before the review was published. Even when the review was published, I was surprised it did not get a significant amount of attention, given the scale of the increases and the potential amount of tax revenue involved. Everything needs a hook to grasp that attention and the stories published by the International Consortium of Investigative Journalists offer that hook. It provided some focus on the issue.

The question of reputational damage also arose around the time of the Apple state aid case. We have not seen companies viewing Ireland in a negative fashion and not wanting to invest here because of the spotlight on Ireland. The foreign direct investment and employment continues to increase. We seem to be in a sweet spot at present. We are getting investment in physical goods. I know we have the intangibles but we are also getting investment in physical goods, the plant and the machinery. We are now also getting the corporation tax receipts. We cannot be sure how long that sweet spot will last but I do not think, with regard to investment decisions companies are making, that we are seeing knock-on reputational damage in a negative sense because investment continues to flow.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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The facts speak for themselves in that case. I questioned Mr. Coffey on the day he published his report on intangible assets but it did not get much traction because that hook is needed. I have a question about Mr. Coffey's recommendation on consideration to extending domestic transfer pricing rules to non-trading income where it would reduce the risk of aggressive tax planning. Will Mr. Coffey talk to the committee about what he means by that or what aggressive tax arrangements regarding non-trading income these domestic transfer pricing rules could deal with? Is he familiar with or aware of any structures or schemes being used for Irish non-trading income?

Mr. Seamus Coffey:

The key element of non-trading income that could be in question here would be interest and the creation of loans. If one looks at the Irish data on the balance of payments received, there was a substantial increase in lending both in and out of Ireland, running to hundreds of billions of euro in recent years, but we are not seeing a change in interest flows. It suggests, to a certain extent, that many of these are interest free loans that have been set up because transfer pricing rules do not apply to these non-trading transactions.

It seems these loans are being set up because transfer pricing rules do not apply to these non-trading transactions. The scale of it is now quite large and it runs into hundreds of billions. That is the impact of it.

It is hard to know what companies are undertaking because there is not much visibility about it. There is a suggestion that it is possibly related to the activities of some of the so-called inverted companies that have set up headquarters in Ireland in recent years, simply because they are of the size and on the scale of companies involved. One consequence of applying transfer pricing to non-traded income arises. There are legitimate reasons for companies to loan between each other. It may not be the case at present that they do that on an interest-free basis. If we start applying transfer pricing rules and companies have to start charging interest, the company collecting the interest will be a non-trading entity. It is a lending company and it may be subject to tax at 25%. The company paying the interest would be a trading entity and would get at deduction of 12.5%. Therefore, we could have a transaction happening wholly within a parent company that is getting a 12.5% deduction while the subsidiary paying the interest is paying tax at 25%. That may be a concern for indigenous companies that have a cash company at their centre moving money from one entity to another. I would advise caution on the move to apply transfer pricing rules to non-trading companies on that basis. Given the scale and nature of the loans we are seeing in and out in Ireland, it is something worth considering.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I have two other groups of questions. The first relates to what is being proposed in Italy by way of flat-rate taxes on sales from digital and online advertising. We know a group of countries is trying to move ahead with reform of taxation of the global giants. Ireland is resisting that because we are the beneficiary of taxes from Google and Facebook.

If I understand it properly, Italy is proposing that when a company buys an advertisement from Facebook or Google, a flat-rate tax will apply. It will amount to approximately 6% of the value of the sale. That amount will be withheld and paid to the Italian authorities. We know that the likes of France and Germany are looking at similar legislation.

I realise it is only one part of the picture, but it is a sizable part because it relates to the tech industry. Does that threaten in any way the sustainability of our tax base? If we cannot get that type of movement or co-operation in Europe, then individual countries can start introducing a withholding tax, which is what Italy is looking at and what other member states could possibly do. Therefore, the attractiveness of what we offer would somewhat diminish. Does Mr. Coffey have any concerns in that regard?

Mr. Seamus Coffey:

This is not something I have studied in any great detail. Maybe as the proposals are fleshed out we might get to see what the countries envisage. One key difference is that it appears to be some sort of turnover tax rather than a profits tax. It may be another layer of taxation that is different to what is in force for profits at present. The legality of some of these proposals may be subject to question, especially for sales within the EU. Various EU directives prevent the charging of withholding taxes on flows between EU member states. Maybe the royalties directive could be changed. At present, withholding tax could not be charged on those transactions.

To what extent would it have an impact on Ireland? It could potentially be significant but it is very difficult to say. How does this relate to our overall corporation tax and corporation tax base? The information and communications technology companies do not make up the most substantial proportion of our corporate tax base. Far more important for us is the manufacturing sector. The foreign direct investment sector is the largest source of our tax base and the largest source of tax revenue. The largest individual sector that pays corporation tax is now the financial sector. The financial sector has surpassed manufacturing as the largest sector, with the ICT sector placed third.

I am unsure of the impact on or of the behavioural response of these companies. Currently, they have central trading companies set up in Ireland that operate their sales through all their various markets. Would a turnover tax along the lines suggested limit the impact of these? I am unsure how the companies would respond. It is an issue and something that we should be concerned about, but I would find it difficult to quantify the impact and to predict the behavioural response of the companies. At the outset I would question the legality, especially for intra-EU transactions, of introducing such turnover taxes. If there is agreement at EU level to change some of the directives, they could be implemented.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Let us go back to the Paradise Papers. One of the members of the International Consortium of Investigative Journalists mentioned by Mr. Coffey is the journalist Simon Bowers. He was before the European Parliament today. He gave testimony on "many references by corporations in the data included in the Paradise Papers to using the Single Malt as a possible workaround to the phaseout of the Double Irish". It has been named the "single malt". The structure has been known about but there has not been much traction with the name. Perhaps we need to start giving these tax avoidance schemes fancier names to get some traction for them.

First, it is an issue in terms of Irish legislation and how our tax law interacts with other legislation. It causes serious reputational damage to the State as well. It should not be happening. Does Mr. Coffey have any concerns in respect of this type of tax avoidance scheme? It is a matter between ourselves and Malta but it could equally apply between ourselves and several other jurisdictions. It need not necessarily be Malta. What can be done to tackle it?

I am unsure whether it was the Taoiseach or the Minister for Finance and Public Expenditure and Reform who said to me last week that he was going to start to look to see whether this was being used. We all know it has been used for some time. Does Mr. Coffey have any concerns or views on the matter?

Mr. Seamus Coffey:

I have views on it. Previously, I commented on not referencing the Deputy's raising of the intangibles issue. Deputy Doherty's party has raised the issue of using Malta for similar structures in various fora. I will offer a general comment. When the double-Irish was being discussed, it was frequently said that it was not a provision of Irish tax law and that Ireland could not change it on a unilateral basis. I tended to agree with that. It is not a surprise to find other countries outside the tax havens in the Caribbean where it can be established or set up. However, it is simply not a feature of Irish tax law. It arises from the interaction between the tax codes from several jurisdictions. Even if we were to change the arrangement with Malta, I imagine we could find other countries where similar tax outcomes could be achieved. The key issue is the amount of tax that is levied at the destination. If Malta chooses not to levy profits tax on intellectual property generated outside its jurisdiction, that is Malta's choice and I am unsure what we can do about it. It is a Maltese decision not to levy tax on these profits.

What do we want Ireland to do? We are looking at companies and their residence, which is a central part of this from the perspective of US companies. However, the residence does not really matter. The primary reason that US companies use subsidiaries registered in the same country is because in the US tax code there is a provision called the same-country exemption. It means that if an organisation moves money between companies in the same country, it does not trigger the US tax payment but maintains the deferral. However, if an organisation moves royalties between two companies registered in two different countries, that organisation is potentially liable to pay the US tax at 35%. There is a plethora of ways an organising can generate the deferral, for example, the check-the-box and the look-through rules. However, one issue with these is that they are temporary provisions of the US tax code and they are subject to a sunset clause - they could end. In contrast, the same-country exemption is a permanent feature of the US tax code and would require a vote in the US Congress to change. US companies go for two companies registered in the same country because of that.

The recent Amazon state aid case in Luxembourg featured a similar structure. The two companies were registered in Luxembourg. Money was flowing from one to the other. Again, it was a decision taken in Luxembourg not to levy tax on the profits accumulated by the ultimate company.

Again, the single malt is something that has been achievable for years. It was not introduced necessarily in Ireland. In any event, it is a Maltese decision not to levy tax on those profits. If a company was registered in Malta and carried out all its business in Ireland, where should it be resident?

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Is it not the case that because we closed down the double-Irish-----

Mr. Seamus Coffey:

We did not close down the double-Irish, although we got great credit for doing so. I was rather surprised at the credit we got for it.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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We closed down that structure. The problem is that it left several other jurisdictions open to continue using it.

Mr. Seamus Coffey:

It is the same structure, so I do not know how we can have closed down something that is still available.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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It is not available in the same jurisdiction as it was, however.

Mr. Seamus Coffey:

It cannot be done in Bermuda. It cannot be done in countries with which we do not have a tax treaty.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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That is the point. It was closed down to a certain extent because we changed our law to change it. The problem is that where there is a taxation treaty-----

Mr. Seamus Coffey:

I would not necessarily say that that is a problem. If a company is registered in Malta, and does all its business in Ireland, where should it be tax resident? We would want that company to be tax resident here. If all it has in Malta is its registration and all its business is carried on here, we would want it to be subject to our tax rules, not theirs. If we have a company that is registered here and does all its business there, we cannot be inconsistent about it. That is what the tax treaty aims to achieve. It addresses issues where there is a conflict between two countries claiming taxing rights over a company. It is a common provision around the world that if two countries claim the tax residence of a company, the tie-breaker is the place of effective management and control. Those rules are being reformed, in a sense, through the various base erosion and profit shifting, BEPS, actions at the OECD. Countries can now negotiate it on the facts of each company. The Irish tax authority might be able to question it and look into it in a different fashion, but it will still come down to a tie-breaker, that is, where a company does its business. As these companies do their business in Malta, we cannot be inconsistent about it. Their operations are in Malta.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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To say that they are doing their business and are managed and controlled may be a stretch. A company can be managed and controlled but do no business.

Mr. Seamus Coffey:

Ultimately, they are companies that do not have significant substance. Management and control is essentially just board meetings.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I know.

Mr. Seamus Coffey:

However, as long as those board meetings take place in Malta rather than Ireland, Malta can claim the tax residence of that company, just as we would do in the reverse situation.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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We have done that. That is the reality.

Mr. Seamus Coffey:

On these overall structures, we were told for years that Ireland could not change them because they were not a provision of the Irish corporation tax code by the Minister for Finance. The Minister for Finance then made changes to the residency rules and said he was shutting down the double Irish arrangement. Those two statements cannot be true. One of them has to be wrong. Either it is not a provision of Ireland's tax code and we cannot change it, or the Minister can change something and say we are getting rid of it. The Minister was wrong on one of those occasions. I believe he was right to say we could not change it, because as we have seen, the structures still exist, and the single malt-----

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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We did change our residency rules. There is no doubt about it. The only problem is that they do not apply to jurisdictions where management and control is a feature of the taxation code and with which we have taxation treaties. Where management and control is not a feature, the double Irish is closed down.

Mr. Seamus Coffey:

No. Countries that only have the test of incorporation will still claim companies that have all their business there, using the test of management and control. The test of incorporation is the first base that companies use. If a company is registered in Ireland and does all its business in France, the French authorities will first apply the test of incorporation. However, if a company is registered in Ireland and does all its business in France, the French look to that company and say that it is resident in France because its place of effective management and control is there. That is the tie-breaker between the two. It is not the case that national authorities just use the test of incorporation. They do use it. However, if companies do all their business in those jurisdictions, they will seek to make those companies resident in those jurisdictions. That is a standard feature right around the world. I am sure there are hundreds of double tax treaties that have that provision at their heart. One might say that the USA does not have this doctrine. The USA is an outlier in some of these areas. Most other countries would, however.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I thank the witness.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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I welcome Mr. Coffey. I have two questions. The USA levies taxes based on where a company is incorporated. We tax based on where management and control are located. Am I correct in my analysis there?

Mr. Seamus Coffey:

To a certain extent, yes. Incorporation is hugely important from the American perspective.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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There is an inconsistency worldwide in the way individual countries tax their corporations. Is that correct?

Mr. Seamus Coffey:

There are differences in how countries treat the income generated by companies in their jurisdiction.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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That can often lead to a vacuum. Is that not being looked at by the OECD as part of BEPS?

Mr. Seamus Coffey:

Absolutely. The OECD project is essentially about trying to align profits with substance. One of the big difficulties concerns the US treatment of the transfer pricing. Does the US tax US companies on the basis of what they do in the US jurisdiction? The US has a different view of transfer pricing to most of the rest of the world and has very different views of transfer pricing than those proposed in the 2017 guidelines.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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The point I am making concerns the moral argument versus the technical and legal one. If a company effectively deals with the tax laws that are in situ at any point in time, it has not broken the law. Is that a fair comment?

Mr. Seamus Coffey:

Absolutely. One of the issues here is that some of the laws and processes involved in taxing companies simply have not kept pace with the way companies have changed. Transfer pricing emerged in the 1920s and 1930s. The principles of residence have developed from case law and moved on to reflect incorporation. The companies and their advisers are looking for gaps that they can fall through. The BEPS project of aligning profit with substance will close an awful lot of those. However, a problem will remain with US companies. They will be able to attribute a large part of their non-US profit - their sales to non-US customers, whose location should not determine where tax is owing, as opposed to their non-US activities - to licence holders or companies that have intellectual property. Those are companies that do not need substance. Everybody else is trying to align profit with substance, and the US is not moving. That is creating some of these problems.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Will it be impossible to get to a position where there is a level playing field unless there is alignment with the US?

Mr. Seamus Coffey:

It is a dance that will always continue between national tax authorities. With a lot of these companies, the problem is not that they pay no tax. A lot of it is the question of where they pay the tax. Should it be paid where the original activity is? In the case of the US companies, that activity is the research and development that generates their intellectual property, that is, the brands and reputation. Alternatively, should it be taxed where the customers are? Traditionally, corporation tax has been paid where the activity is. The US is not collecting a lot of that tax, so other countries wonder if they can collect it. The companies themselves are paying significant amounts of tax. The issue is around where it is being paid.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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I must ask the witness three questions. In the recommendations in his report, Mr. Coffey wrote:

Although it is impossible to be definitive and the volatility in receipts will remain the level-shift increase in Corporation Tax receipts seen in 2015 can be expected to be sustainable over the medium term to 2020.

Why did he make that bold statement? How does he stand over it?

Mr. Seamus Coffey:

There were a number of caveats that offered some leeway in that. The year 2020 is when the current BEPS project is supposed to reach its conclusion. That is when the OECD will try to assess the impact of it and see if they have achieved their goals. At that point, we may see the move to a BEPS II, that is, a different project that tries to address further some of the problems that have arisen. One of the unintended winners of the currently ongoing BEPS process is Ireland. The level shift in corporation tax that we have seen could perhaps be attributed to some of the proposals that came out of the BEPS project. Companies set themselves up in a different fashion to pay more tax in Ireland. Again, this concerns changing the location where tax is paid. If there is a subsequent change to the rules, maybe-----

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Mr. Coffey's basic point is that, assuming profits continue as they did in 2015, when companies changed their system, the level of tax they pay will be-----

Mr. Seamus Coffey:

I will make a point about what happened in 2015. When it happened, there was a risk that it was just a one-off, but we saw it in 2015 and throughout 2016. Next Monday we will get the key Exchequer returns for 2017, and I think we are likely to see it again.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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I have two further questions. Mr. Coffey wrote: "To reduce uncertainty and ensure that Ireland protects its corporation tax base, Ireland should ensure an adequately resourced Competent Authority." Does this refer to the Revenue Commissioners?

Mr. Seamus Coffey:

That concerns the Revenue Commissioners. That is a phrase that is used internationally to describe tax authorities. We call ours the Revenue Commissioners.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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What does Mr. Coffey mean by that?

Mr. Seamus Coffey:

We have seen increased disputes between countries over the location of profits. In whose country are the profits located? There is likely to be an increased incidence of such disputes. The perspective of the taxpayers is that they would like certainty that the country in which they are operating and declaring their profits is, in a sense, supporting them. From an Irish perspective, the issue is the protection of our tax base. We do not want countries reaching in, grabbing profits from our tax base and taxing them in their jurisdiction.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Mr. Coffey is saying that he wants to see, for want of a better term, a beefed-up Revenue Commissioners that will be able to deal with all technical aspects as they arise.

Mr. Seamus Coffey:

The Revenue Commissioners should have the required transfer pricing expertise, which is not cheap.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Does Mr. Coffey believe that expertise is there at the moment?

Mr. Seamus Coffey:

It is not there at present. Things are improving but more is required.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Does Mr. Coffey think that may have brought about some of the uncertainties with regard some of the companies that we are hearing about now? In terms of companies like Apple, that certainty was not there or that level of expertise.

I can see Mr. Coffey's point. Essentially he is saying that this is going to become the norm in terms of Ireland battling in the international tax arena.

Mr. Seamus Coffey:

Yes, absolutely, and particularly if more companies move their intangible assets here because the level of profits associated with those intangible assets is very large.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Does Mr. Coffey believe that the common consolidated corporate tax base, CCCTB will become a reality or is it like a continuous movie with no ending?

Mr. Seamus Coffey:

I think the implementation of the CCCTB is very unlikely. It is currently a proposal at European Commission level but we are not sure what political or country support there is for it. Even if it is to get as far as a recommendation to the European Council, we are not sure what it will entail. We have the current proposal which is based on assets, employees and sales. If there were to be an ultimate proposal, we are not quite sure what it would involve. All of that said, I think it is unlikely.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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What difference would a territorial as opposed to a residency basis for corporation tax make to Ireland?

Mr. Seamus Coffey:

We would have to assess that but I do not think from a revenue perspective it should make a massive difference. We have a worldwide system that takes the income that Irish resident companies earn abroad and includes it in our tax base. The issue is that for almost all of that income, the companies have paid tax at more than 12.5% so there is no additional tax due in Ireland. It is a completely different situation from that prevailing in the US. It has a 35% rate and a similar system so there would be substantial additional tax due. There are certain issues around the size of the foreign tax credit being claimed. There are also issues around companies that have low effective tax rates of 0% or close to zero. A lot of those companies do not have substantial activities in Ireland and the income on which zero tax is being paid in Ireland is foreign income on which the companies have already paid tax. We would not necessarily be losing revenue if we were to move to a territorial system. However, we would have to be careful that companies did not move money out. That is why-----

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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In layman's terms, if the effective rate is lower in Ireland than in the other country in which the income is being generated, then a territorial system should not have an impact.

Mr. Seamus Coffey:

It should not have an impact provided companies did not abuse the system and move profits that should be declared in Ireland to jurisdictions with lower tax rates and then bring them back in and declare that they earned the profits abroad. If the rate in the other country is lower than ours, we would lose. That is why we would need controlled foreign corporation, CFC, rules to attribute the income back to Ireland.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Finally, if we wanted to have a battle proof corporation tax system, what changes would Mr. Coffey make?

Mr. Seamus Coffey:

I think the most significant change that has to be made relates to transfer pricing. We have introduced some measures in this area but have not gone far enough. It is one of the most significant ones because countries can determine that they will not apply transfer pricing to various types of transactions and we should broaden that. That would be the key area. A second one would be the measures in the anti-tax avoidance directive, the anti-hybrid, the interest limitation and the exit tax. The last could be crucial for Ireland. Given the amount of assets that are coming here, the design and rate of any exit tax would be important. Another area is the CFC rules. If we do choose to go to a territorial system, we want to ensure that companies have the right profits here and are not shifting profits offshore just to bring them back in and declare that they earned those profits abroad and do not owe any tax on them.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Would the worldwide perception of our corporation tax system be enhanced if it was territorial rather than residency-based?

Mr. Seamus Coffey:

I am not sure it would make a massive difference. I think a worldwide regime does mean that one has certain protections and one does not need the CFC rules. If we have a worldwide regime, then profits are taxed wherever they are earned. If they are taxed at a lower rate than our 12.5%, when the company brings the profits back to Ireland, we can top the tax bill up. The issue with the territorial system is that we are one of the few countries that maintain a worldwide regime. Over recent years, several of the other countries that had worldwide regimes have moved to territorial systems because of the improvements in CFC legislation. Now tax authorities can look at companies abroad and determine whether relationships are genuine or just being set up to move profits abroad. I do not think it would make a huge difference. Our worldwide regime possibly adds to our reputation because as soon as a company is resident here, it is taxable on its worldwide income. However, it is down to the complexity of undertaking the foreign tax credit.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Is it possible that our residency-based system would be perceived to be more transparent and fairer?

Mr. Seamus Coffey:

If one implements the appropriate CFC legislation, I do not think people would view the two systems as being wholly different. When it comes to residency, the issue is the companies that we declare to be resident here rather than how we tax those that are resident.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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Do the tax avoidance vehicles that are outlined in the Paradise Papers apply to all types of business? Is it the case that any kind of business could avail of them?

Mr. Seamus Coffey:

In terms of an operation through Malta, for example?

Mr. Seamus Coffey:

Yes, absolutely. It is available to all companies. It is particularly attractive to US companies because of provisions in the US tax code that allow them to defer their taxes. Any company could set it up but whether it would reduce its tax bill would depend on the nature of the company and from where it originates. It is particularly attractive to US companies.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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Does it matter whether companies are in manufacturing or service provision, or whether they are big or small?

Mr. Seamus Coffey:

No. They can be in manufacturing or ICT and the size has no impact. Whether it would affect their tax bill would remain to be seen but they can do it.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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Would Mr. Coffey see any merit in a founders' tax, that is, a special tax rate for company founders? There might not be so much controversy about corporation tax if there was a founders' tax.

Mr. Seamus Coffey:

Is that a proposal for the personal income tax for company founders?

Photo of Paddy BurkePaddy Burke (Fine Gael)
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Yes, personal income tax.

Mr. Seamus Coffey:

I am not sure how that would operate. One is crossing the boundaries between the corporate profits tax and the income tax. We have made some provisions in Ireland for start-up companies but the interaction between the corporate profits tax and the personal income tax is hard to track. In Ireland, if one adds it up, the rates are towards the top. A lot of that is driven by our relatively high rates of personal income tax.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Most self-employed people do not make much money in the first year or two after setting up in business.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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That is true.

Mr. Seamus Coffey:

Paying tax would be a good thing if they were making profits.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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I thank Mr. Coffey for coming in to address the committee today.

The joint committee adjourned at 10.48 p.m. until 6.15 p.m. on Wednesday, 29 November 2017.