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.