Oireachtas Joint and Select Committees
Thursday, 30 November 2017
Public Accounts Committee
Comptroller and Auditor General 2016 Report
Chapter 20: Corporation Tax Receipts
9:00 am
Seán Fleming (Laois, Fianna Fail)
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We are joined today by Mr. Niall Cody, chairman of the Revenue Commissioners, Mr. Declan Rigney, assistant secretary in the planning division, Dr. Keith Walsh, principal officer, and Mr. Liam Woods, principal officer. We are dealing today with the Comptroller and Auditor General's 2016 Report.
I apologise - I should have said Mr. Keith Walsh.
We are dealing today the Comptroller and Auditor General's report from 2016 and specifically with chapter 20 on corporation tax receipts. We are joined from the Department of Finance by Mr. John Hogan, assistant secretary, Mr. John McCarthy, assistant secretary, and Mr. Rónán Hession, principal officer.
I remind members, witnesses and everyone in the room that all mobile phones must be switched off or put into aeroplane mode. I advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to this 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 nor make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the provisions of Standing Order No. 186 to the effect that the committee should refrain from inquiring into the merits of a policy or policies of Government or a Minister of the Government or the merits of the objectives of such policies.
In the context of today's meeting, that last statement is important. Corporation tax is a very important issue for the economy. We want to deal with the accuracy and collection of corporation tax forecasting and receipts. We will be trying to ascertain what accounts for what appears to be some inconsistencies in forecasting. I will now invite the Comptroller and Auditor General to make his opening statement.
Mr. Seamus McCarthy:
The Revenue Commissioners collected a net €7.35 billion in corporation tax receipts in 2016. This was the highest level of corporation tax receipts recorded in any year, accounting for 15.3% of net tax and duties receipts. Receipts in 2016 were 7% up on the previous year and followed an exceptional and unexpected 49% increase in net receipts recorded for 2015. My examination was carried out to try to gain a better understanding of what factors lay behind the 2015 increase. Although corporation tax applies to a very broad base of companies, the receipts are highly concentrated among a small number of companies and in a number of key sectors. In 2016, some 70% of receipts were paid by the top 100 taxpayers or 0.2% of taxpayer companies. By comparison, the top 1% of corporation taxpayer companies in the UK accounted for 54% of corporation tax receipts.
Three sectors of the Irish economy accounted for around 70% of the total corporation tax receipts in 2016, namely, financial and insurance activities, manufacturing, including pharmaceutical manufacturing, and information and communications service providers.
Members will be aware that the effective rate of corporation tax paid by a company may differ from the statutory or headline rate of corporation tax due to the impact of a range of allowable tax reliefs. The availability and use of such reliefs complicates international comparisons of corporation tax rates and also impacts on the amount of tax received in Ireland from year to year. The method used by the Revenue Commissioners defines the effective tax rate as tax due as a proportion of taxable income. The standard statutory corporation tax rate applicable to most trading income is 12.5%. Using the Revenue approach, the effective tax rate that applied to all companies in Ireland in 2015 was an estimated 9.8%. I understand that since the report was finalised in September, Revenue has received more complete data in this regard. The accounting officer will be able to outline the impact of this.
The examination looked at the effective corporation tax rates of the top 100 companies in Ireland ranked by tax due and ranked by taxable income. For the top 100 companies ranked by tax due in 2015, the average effective tax rate was 12.4%. The effective tax rate averaged 9.3% when the top 100 companies are ranked on the basis of taxable income. As indicated in the diagram on screen now, eight of the 100 companies with the highest taxable income had an effective tax rate of zero, including some who had negative rates, that is, instead of paying corporation tax, they received rebates. A further five had an effective rate of less than 1%. These very low effective rates reflected the use by the companies of significant tax credits and reliefs, in particular, double taxation relief and research and development tax credits. However, it should also be noted that 79 of the highest earning companies had effective tax rates of 10% or more and that almost two thirds of the highest earning companies had effective tax rates of 12% or more.
Seán Fleming (Laois, Fianna Fail)
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I thank Mr. McCarthy and now invite Mr. Cody to make his opening statement.
Mr. Niall Cody:
I thank the Chairman for the opportunity to make a short opening statement. I am accompanied by Mr. Liam Gallagher, Ms Jeanette Doonan and Mr. Keith Walsh. The focus today is on chapter 20 of the 2016 report of the Comptroller and Auditor General which is entitled Corporation Tax Receipts. While chapter 20 does not contain any recommendations for Revenue, in the time available, I will provide a short briefing on corporation tax receipts. At the outset I want to draw attention to my obligation to uphold taxpayer confidentiality as provided for in section 851A of the Taxes Consolidation Act 1997 which prevents me from commenting on the tax affairs of any individual or entity.
The Comptroller and Auditor General's 2016 report and Mr. Seamus Coffey’s review of the corporation tax code, which was published in September 2017, both contain useful analyses of recent trends in corporation tax receipts. Both reports also highlight the volatility in corporation tax receipts over the past decade or more. Over recent years, Revenue has sought to contribute to the analysis of trends in corporation tax receipts by publishing a number of research and analysis papers containing statistical information and aggregate data from corporation tax returns and payments.
Since 2015, there has been a significant increase in corporation tax receipts. In 2015, net receipts increased by 49% to €6.87 billion and this upward trend continued into 2016, when €7.35 billion was collected. Corporation tax receipts to the end of October 2017 are €5.42 billion, which is 4% ahead of target. While volatility in this area makes forecasting difficult, the Coffey review points to the level shift in corporation tax receipts since 2015 as being sustainable over the medium term to 2020.
In an effort to facilitate better understanding of the recent increases in corporation tax receipts, Revenue has analysed the available statistical information, including corporation tax returns and receipts. In 2016, Revenue published a paper analysing receipts in 2014 and 2015 based on a review of available tax return and payment data. In April 2017, coinciding with the publication of our 2016 annual report, Revenue published a research paper containing an analysis of 2015 corporation tax returns and payments made in 2016. Both papers have been provided to the committee as part of Revenue’s briefing on the Comptroller and Auditor General's report.
The analysis for 2015 is based on a review of corporation tax returns for accounting periods ending in the calendar year 2015, the majority of which were filed towards the end of 2016. Revenue’s analysis of 2015 returns revealed that the increase in corporation tax receipts in that year was attributable to a number of factors, the main one being an increase in trading profits across nearly all sectors. In 2015, trading profits increased by 51% to €48 billion. However, some of that increase was offset by increased claims for reliefs, including capital allowances and research and development tax credits. There was a significant increase in claims for capital allowances in 2015, with claims relating to intangible assets increasing by over €26 billion. The number of companies paying corporation tax was another contributor to the increase in receipts in 2015. In 2015, some 39,900 companies paid corporation tax, as compared to 35,700 companies in 2014. Companies that paid tax in 2015, but not in 2014, accounted for a €470 million increase in 2015 corporation tax receipts. Generally speaking, companies newly paying corporation tax are either start-up businesses, or companies returning to a profit-making position. Over 7,900 companies that carried forward losses into 2014 did not carry any losses into 2015.
While this is evidence that some companies have fully used up their legacy losses from the economic downturn, more than €200 billion of trading losses were carried forward at the end of 2015 and will be available for the relevant companies to use against income of the same trade in future accounting periods.
In April 2017, Revenue published an initial analysis of corporation tax payments in 2016. The majority of these returns were only recently filed and it will take some time to analyse the data in depth. Revenue will analyse the returns to provide further details on the factors underlying the payment trends in 2016 and this analysis will be published in April 2018.
I will now address the source of corporation tax payments in 2016. As has been highlighted by the Comptroller and Auditor General, by the Coffey review and by Revenue’s own published research papers, there continues to be a high concentration of corporation tax receipts from a small number of large multinational enterprises. Revenue records show that in 2016, more than 80% of total corporation tax receipts came from companies dealt with by Revenue’s large cases division and 37% of total corporation tax receipts were paid by the ten largest corporation taxpayers in the State. This is a lower level of concentration than in 2015, when the top ten tax-paying companies accounted for 41% of total corporation tax payments.
The Comptroller and Auditor General's report includes an examination of the effective rate of corporation tax in Ireland. There is no internationally-agreed standard for calculating effective rates of tax. In 2014, the Department of Finance published a technical paper on effective rates of corporation tax in Ireland, which identified eight different methodologies that are used to calculate the effective rate of tax, and set out the two most appropriate methods to measure the effective rate of Irish corporation tax. One of these, the tax due as a proportion of taxable income, is identified as appropriate to measure the effective rate of Irish corporation tax on the total profits that are subject to Irish tax. Consequently, this is the measure used by Revenue. The most recent year for which information is available from which to calculate the effective tax rate is 2015. The effective overall corporation tax rate for 2015 calculated by Revenue is 9.6%. The figure of 9.8% in the Comptroller and Auditor General's report was based on provisional data available earlier in the year and I can confirm that the final figure is 9.6%.
As noted in the Comptroller and Auditor General's report, the average effective tax rate for the 100 companies with the highest amounts of taxable income in 2015 was 9.3%. Of the top 100 companies, 13 had an effective Irish tax rate of less than 1%. Each of these 13 companies was either in receipt of large amounts of foreign dividends, in respect of which double tax relief was available to offset Irish tax payable, or was a claimant of research and development tax credits. I will briefly explain the impact that both of these claims have on the effective Irish corporation tax rate.
On foreign dividends, Ireland applies a credit system to ensure that foreign-source income, including foreign dividends, is not doubly taxed. This means that an Irish-resident company in receipt of foreign dividends is chargeable to Irish tax on that income at either 12.5% or 25%, depending on the country from which it is paid and whether the dividends are paid out of trading profits. Where certain criteria are met, however, a credit will be available against Irish tax in respect of any foreign withholding taxes applied in the country of payment, as well as in respect of foreign tax suffered on the profits out of which the dividend has been paid. In certain circumstances, what is called an additional foreign credit may also be due. This is a credit that Ireland introduced in 2013 in response to a decision of the Court of Justice of the European Union that foreign-source dividends should not be subject to tax at a higher level than nationally-sourced dividends. In summary, a company in receipt of substantial foreign dividend income will have substantial taxable income. However, the tax due element of the effective rate calculation only takes account of the Irish tax due, as reduced by the credit for foreign tax, and this results in a low effective tax rate for the company in Ireland. When foreign taxes are factored in, the company will have paid significantly higher rates of tax on its income. Our records show that if the effective tax rate of the relevant companies with substantial foreign dividend income is calculated before the application of a double tax credit, each company would have an effective tax rate of 12% or more.
The research and development tax credit is a targeted measure designed to encourage companies to undertake high-value added research and development activity in Ireland. A report published by the Department of Finance with budget 2017 states that the research and development tax credit is responsible for 60% of the research and development being conducted in Ireland. Research and development tax credits, which are available at the rate of 25% of relevant expenditure on research and development activities, can be offset against Irish corporation tax payable and, in certain circumstances, may give rise to payable credits. Where claimed, they will reduce a company’s corporation tax liability and result in the company having a lower effective tax rate. As the committee is aware, the Comptroller and Auditor General reported on the operation of the research and development credit in his 2015 report and the committee examined its operation with me at my last appearance before the committee on 1 June last. In summary, if the effective tax rate of each of the 13 companies is calculated before taking account of double tax relief and the research and development tax credit, each would have an effective tax rate in excess of 12%.
Since the publication of the Comptroller and Auditor General's report, and as the committee is aware, certain information and allegations originating from the so-called Paradise Papers, have emerged. As the committee will be aware, yesterday evening, I addressed these issues in detail before the Committee on Finance, Public Expenditure and Reform, and Taoiseach, at its invitation. A copy of my opening statement to that committee is available for members' further information.
I thank the committee and I will answer any questions raised by members on these issues, subject, of course, to taxpayer confidentiality constraints.
Seán Fleming (Laois, Fianna Fail)
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I thank Mr. Cody. I want to ask the Department of Finance a question first about Ireland's arrangement on corporation tax, which is the topic we are discussing today, and about the decision by the European Commission on the illegal state aid arising from our corporation tax arrangements with multinational companies. It was decided in August 2016 that €13 billion was to be collected by Ireland. That was 15 months ago. Ireland was given a number of months to do so and has not met the deadline. Six months after the deadline expired, the Commission indicated that it may take the case to the European Court of Justice given that Ireland is not complying with the Commission's decision. We are not here to discuss the case or the merits of what is due or where it is due. This is not a discussion for the Committee of Public Accounts today. That will be decided at European level. Pending that decision Ireland was instructed to collect that money. I am aware of the complexities involved in that. I know it is not a simple question of opening up an account in Dublin Castle and sending over the money. We know this and the Department does not need to tell us this. I understand that an arrangement has to be put in place for an escrow account to be opened. I understand the account will have to be managed for the entire duration and that management must be in place for the issue of the interest rates and be responsible for the handling of gain or loss on that investment. I understand that the account will probably have to be held in bonds instead of cash - or a combination of both. The Minister has indicated during oral statements in the Dáil Chamber and written answers to parliamentary questions that investment managers would have to be appointed by mid-November. I also understand that in July 2017 the National Treasury Management Agency, NTMA, started the procurement process in respect of appointing advisers on this matter. This was six months after the deadline by which we were told by the European Commission to collect the money. Perhaps the Department could tell the committee - as we sit here - where the €13 billion is, given that the European Commission decision was for €13 billion to be collected by Ireland arising from our corporation tax arrangements with multinational companies.
Seán Fleming (Laois, Fianna Fail)
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Everything I have said is in the Official Report of Dáil proceedings, so there is no confidentiality issue in any matter I have discussed. It is all on public record and quoted by the Minister in the Dáil Chamber and discussed in that House. I have not mentioned any company.
Mr. John Hogan:
I believe that the company the Chairman is speaking about is Apple and the state aid decision the Commission issued in August 2016. The alleged state aid calculated by the Commission at the time was in the region of €13 billion. The Chairman asked where we are in that regard. The Chairman is right that we will not discuss the appeal, which is before the European Court of Justice as, obviously, there are limitations on what we could say on the appeal. Notwithstanding the appeal, and the difference in view between the Ireland and the Commission on the case, Ireland is committed to respecting the decision of the Commission in this regard.
The Chairman has touched on some of the challenges we have in respect of this case. It is an unprecedented amount for state aid recovery. It requires a bespoke solution. It is complex in terms of the nature of the volume of the alleged aid involved and it is set against the particular backdrop of a negative interest rate environment. We looked at the options around what could be done on this. In many cases the idea of an escrow account is a solution but an escrow account in this case would have been a sub-optimal solution because we have a large amount of money that has to be managed in a particular way, as the Chairman have noted. Given that it is likely to be the subject of management for several years until the final conclusion is reached in the case, we have been careful in terms of how we have put in place infrastructure to manage it. We have been involved with the Commission on a consistent basis explaining what has been going on in the background and the extensive work done by the Department in partnership with the Office of the Attorney General and the National Treasury Management Agency, NTMA, as well as our engagements with the company.
Given the nature of the funds involved we need to look at the matter in context. A sum of €13 billion is twice the size of our existing Ireland Strategic Investment Fund, ISIF, fund. It is half the size of the National Pensions Reserve Fund, NPRF, at its height. The moneys at issue are market moving moneys. Therefore, whatever solution we put in place has to be cognisant of that scenario.
We have made a great deal of progress in recent months in reaching agreement with the company involved in terms of the nature of the fund we put in place. The Chairman is right to say it has taken far longer than we thought or anticipated that it could have taken. At one stage we were signalling to the Commission that, given the size and scale of what we have, it would be nine to ten months from earlier in this year before we would have a solution in place. It has taken a little longer than that. We are at the stage now where we expect that, in the next short while, the arrangements will be endorsed by ourselves and the company involved. That is our anticipation, against the background of what has been a good deal of work.
In tandem - the Chairman alluded to this – we issued a RFT for investment managers in the summer of this year to find custodians-----
Seán Fleming (Laois, Fianna Fail)
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Can you explain that for the listeners?
Mr. John Hogan:
It is a request for tender. The idea was to look for the types of companies that have the capacity to manage the types of funds we have in a way that would be responsible and that would adhere to the types and standards that we would expect. That competition was launched in the summer. The types of services of an escrow agent or custodian are bespoke. Such services are not issued or looked for on a regular basis. In recent months there has been engagement between interested tenderers and the NTMA. We could have taken the option of waiting until the escrow fund was in place to commence that procedure. However, in view of the commitment we had to recover the money as quickly as possible, we kicked off the procedure in advance on the basis of the information that we had at the time.
The conclusion of our negotiations with the company and the agreement in terms of how the escrow fund will operate will give us the latitude to conclude the competitions for the appointment of the escrow agent and custodian. In parallel, a competition is also under way for the appointment of an escrow manager to manage the funds. Given the links and relationships, there is a bespoke nature to the type of arrangement we have and to the types of services we are interested in procuring. We anticipate that in the next short while, we will see the necessary arrangements being put in place for us to fulfil the obligations placed on us by the Commission.
Seán Fleming (Laois, Fianna Fail)
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I take it from what you are saying today that, as we speak, €13 billion is still in the bank account of Apple. Is that correct?
Seán Fleming (Laois, Fianna Fail)
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I listened to Donald Trump on the radio this morning. He singled out Ireland again. Is there any possibility that while we are taking 15 months to do this he might have it repatriated to the United States? In other words, it will be gone by the time the Department of Finance is finished setting up the escrow account. Have you considered that?
Mr. John Hogan:
We are alive to whatever risks are operating in the international environment at the moment. We want to put in place the right deal and the right protections in the escrow account in the interests of the Irish taxpayer. The obligation is there on the company. Included in the company's publically available accounts is the indication that it will be lodging money to the escrow fund during the course of 2018. That commitment is there on behalf of the company involved.
Seán Fleming (Laois, Fianna Fail)
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You have referred to the decision in August 2016 and the transfer to an escrow fund. You have also referred to the need for agents and a manager for the fund. You are saying a decision was made in August 2016 telling Ireland to collect that money. We did not do that in 2016. You are now saying it will not happen in 2017. You are saying Apple proposes this will happen in 2018. I listened to what you said a minute ago and I have listened to what the Minister has said in the Dáil in recent weeks on the matter to the effect that this process is to be concluded shortly or very soon or by mid-November. You are now saying that it will not be concluded this year and you are confirming that Apple is saying it will not be handing over the money this year and that it will be 2018. That is what Apple has said in its financial statements. Can you understand that people are concerned about how long the Department is taking to do it?
Mr. John Hogan:
I can understand that Chairman – I do absolutely. However, in the nature of what we are trying to do here there is considerable complexity. It is bespoke in terms of the approach around the types of structures that we are trying to put in place. I can assure you there has been no resistance or lack of effort on our part in terms of what we are trying to achieve around all of this.
In tandem with dealing with the particular company involved, we have also been dealing on a consistent basis with the Commission and the Commission services team to keep them abreast of it. The Commission approach to dealing with state aid has involved taking certain actions that were disappointing, especially considering that the amounts involved in respect of this state aid case are extremely large. The Commission needs a particular structure to be put in place. This structure has not existed in terms of what we have seen thus far in other state aid cases. We want to ensure that what we have in place represents the optimal solution, especially from the perspective of the Irish taxpayer.
Seán Fleming (Laois, Fianna Fail)
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I want to clarify your comments. We are here to discuss corporation tax and that is why I am raising this issue. I understand that Ireland was disappointed with the original European Commission decision. You have now said that you are disappointed that the Commission indicated recently that it is taking Ireland to the European Court of Justice for not collecting the money before now. That is your second public disappointment with the European Commission's approach. Many Irish people support the Commission approach to how that should be handled although some would disagree with it. The only issue at stake in respect of the Committee of Public Accounts and the Department of Finance is the question that this money should have been collected and put in some account in the meantime. Naturally, all of this is pending the resolution of all those decisions and however long that takes – it will take a considerable period. Anyway, we are only talking about the actions of the Department of Finance in the meantime. It has nothing to do with the overall case. You have said the Department is working hard and doing everything. Although you have said the Department has kept the Commission abreast of the position, it is clear the Commission does not seem satisfied because Commission representatives have indicated that Ireland's delay in collecting the money as an interim situation is a matter for the European Court of Justice.
Nobody at EU level has agreed. Regarding the wider debate we will have on policy, it does not help Ireland's case that we are now being threatened by the European Court of Justice, just not to collect the money. Does the Department understand that it may not be good for Ireland's international reputation that we are now being taken to the European Court of Justice for not collecting this money? Mr. Hogan might not agree with that, but he can see the point.
Seán Fleming (Laois, Fianna Fail)
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Next year.
Seán Fleming (Laois, Fianna Fail)
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In what quarter of 2018 would Mr. Hogan see that this might be dealt with? He can venture a quarter as opposed to a month.
Seán Fleming (Laois, Fianna Fail)
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If Mr. Hogan cannot, he cannot.
Seán Fleming (Laois, Fianna Fail)
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For the benefit of-----
Seán Fleming (Laois, Fianna Fail)
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It does not mean the payment.
Seán Fleming (Laois, Fianna Fail)
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For public information, there have often been short debates in the Dáil and probably the people will get a better understanding of what is happening. Is the Department of Finance in charge of this process? Does the Revenue, the NTMA or the Attorney General have a role?
Seán Fleming (Laois, Fianna Fail)
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Does Revenue have a role in collecting the money?
Mr. Niall Cody:
Revenue's role in relation to the particular challenge of the amount is to finalise and agree the amount. The only place that the €13 billion appeared was in the press release. The Commission never calculated or finalised an actual figure. Our role is that we have to agree with the company, based on the DG Competition's approach, what the amount should be. That process - we were talking about it last night as well - is substantially completed. It involves effectively agreeing the tax liability, taking the DG Comp's approach, for each of the years. There is an 11-year computation covering the two companies. In the context of complex tax audits, the actual timescale involved in finalising that is hugely challenging. We have that work substantially completed, but it is not yet finalised. That is our role in the context of it.
Seán Fleming (Laois, Fianna Fail)
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Really the Department of Finance is taking the lead on this.
Seán Fleming (Laois, Fianna Fail)
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Will it require legislation at any stage?
Seán Fleming (Laois, Fianna Fail)
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Is the Department satisfied about that?
Seán Fleming (Laois, Fianna Fail)
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I know we are getting on to the specific issue of the corporation tax - the specific chapter - but this is such a big issue on corporation tax that we just have to get this out of the way beforehand. Just on this topic, I call Deputy Cullinane and then on the main business of the day, Deputy Farrell is the main speaker.
David Cullinane (Waterford, Sinn Fein)
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I just seek a point of clarification
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Is it on this topic?
David Cullinane (Waterford, Sinn Fein)
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On this topic, yes. I am assuming that we will be able to refer to Apple and ask questions on some aspects of this because it is entirely relevant to the application of the tax code. You have spent the last ten minutes putting questions in respect of the escrow account. All of this is in the public domain.
Seán Fleming (Laois, Fianna Fail)
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Apple has been mentioned.
David Cullinane (Waterford, Sinn Fein)
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I am putting the Chairman on notice that Apple will be part of my questioning.
Seán Fleming (Laois, Fianna Fail)
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I understand that. That is clear. I call Deputy MacSharry on this point only.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I have two brief questions. To what extent is Apple designing the approach the Department of Finance is taking?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I know it is a very complex issue, but if I have a potential tax bill, I do not ring Mr. Cody and say, "Listen, who's going to be managing these funds? Where's it going?" Whether €13 or €13 billion is owed, it would seem to me that we should have ownership of the process of where it goes.
I have another question; I do not want to delay others because it will take quite some time before I get in for my substantial contribution.
Seán Fleming (Laois, Fianna Fail)
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Only on the topic.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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It is only on this topic. What does the NTMA do? Why are we holding tender requests, manager interviews and so on for an expertise that I thought was down in Treasury Building on Grand Canal Street?
Seán Fleming (Laois, Fianna Fail)
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Can the NTMA do this? Is it satisfactory that a State agency manage the fund?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Is that in place? Do we not have that?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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What is it doing with our money then?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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It is managing that hopefully with the same enthusiasm that it might be looking after Apple's - what would be our - money.
Mr. John McCarthy:
The NTMA is most definitely not a fund manager or anything. The NTMA's role is to manage the sovereign debt, to reduce debt-serving costs to the Irish sovereign.
The Chairman is absolutely right. It has amassed a huge amount of liquid and semi-liquid assets, which are mostly sitting on deposit in the various banks. That is to help smooth amortisation humps, which the committee, I am sure, is aware of. There are huge redemptions in, I think, 2019 and 2020. That is pretty much sitting-----
Seán Fleming (Laois, Fianna Fail)
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Mr. McCarthy is saying the NTMA is not a fund manager.
Seán Fleming (Laois, Fianna Fail)
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If the €13 billion is lodged to an account for one year, two years or 21 years, the people who have lodged that fund want to be sure their money is still intact and has not whittled away through bad fund management. If they did, they would probably hold Ireland responsible for any shortfall, or they might.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Mr. McCarthy is saying the NTMA does not have the expertise to do it.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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That is neither here nor there.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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If I have a gardener, he can cut hedges as well as grass. I am not going to put out a tender for a hedge cutter, just because I have not seen him cut them before.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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The main question is what is the Department's calculation of the cost of these managers and infrastructure, and who is paying for it?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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On the basis that it is commercially sensitive and our job is the oversight of taxpayers' money, we are interested to know if there is no calculation of it; if the Department cannot share it, it is one thing. Why is there no calculation of it? There is a clear exposure to the State? How much to these people cost? How much does the infrastructure cost? That is a cost incurred by the State that may accrue to the taxpayer, depending on how this case goes in a number of years' time. It is a matter of huge frustration that whether it is a lack of belief or demarcation that we are not prepared to use existing infrastructure to manage these funds.
I thank the Chairman; I have taken up enough time.
Seán Fleming (Laois, Fianna Fail)
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I call Deputy Connolly for one minute to make one point and then I will call Deputy Farrell.
Catherine Connolly (Galway West, Independent)
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When the substantial infrastructure is in place and when it is decided between Revenue and Apple what will be paid, does the agreement envisage that one lump sum will be paid in?
Mr. John Hogan:
I think there is the possibility for it to be paid in in stages and some of that is dependent on the final calculations being made in terms of what Revenue assesses is in respect of each particular year and in respect of the particular company involved. Putting a very large sum of money into the escrow account or the escrow fund on the first day would pose challenges for any fund manager. One needs to be sure that this is put in a staged manner that allows for the fund managers to be able to invest them in a particular and proper way.
Catherine Connolly (Galway West, Independent)
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Obviously some agreement is written up, so what is the length of time of the stages?
Catherine Connolly (Galway West, Independent)
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I will leave it for now. It certainly seems to be made up as one goes along. I will come back later because Deputy Farrell is waiting.
Seán Fleming (Laois, Fianna Fail)
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That is what bespoke is.
Catherine Connolly (Galway West, Independent)
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That is not what the Commission requested. Anyway I will let-----
Seán Fleming (Laois, Fianna Fail)
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I call Deputy Farrell. I am sorry for that specific topic cutting in ahead of him, but we wanted to get it out of the way because it would probably have emerged during the course of the day anyway.
Alan Farrell (Dublin Fingal, Fine Gael)
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I will revert to the point, which I thank Deputy Connolly for making, on the expectation of a lump sum such as €13.1 billion, which was broadly speaking plucked out of the air. This company reported $256.8 billion in cash reserves, according to MarketWatch.com, which I just googled a second ago. Mr. Hogan says that it might be difficult or unexpected for the company to come up with the amount in one tranche and that this sort of investment would have knock-on effects for the managers. I am no expert but, regardless of whether the amount is €13 million, €130 million or €13 billion, if the company has it, we should have it because that is what the Commission wants.
Mr. John Hogan:
I did not say that it would be difficult for the company to come up with the money. Rather, we have to appreciate that, with large sums of money that are market moving in their own right, we must ensure that the custodian and the investment managers have available to them the mechanisms with which to manage that money.
Alan Farrell (Dublin Fingal, Fine Gael)
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I have five quick questions on Apple, and then I will move on to other issues. To Mr. Hogan's knowledge, are rules set out for this sort of scenario in terms of the investment protocols?
Alan Farrell (Dublin Fingal, Fine Gael)
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In these circumstances, the Commission has made a decision that requires the Department, Revenue and others taking €13.1 billion and holding it until such time as the legal side of the case has either been resolved or not resolved, as the case may be. Are there rules for that process?
Alan Farrell (Dublin Fingal, Fine Gael)
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Yes. We know that.
Alan Farrell (Dublin Fingal, Fine Gael)
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There are no agreed rules.
Alan Farrell (Dublin Fingal, Fine Gael)
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Has the Department been engaging with the Commission on the establishment of rules for this?
Alan Farrell (Dublin Fingal, Fine Gael)
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No, I am specifically referring to investment rules. We have €13.1 billion in cash. We are hardly going to leave it sitting in a current account.
Alan Farrell (Dublin Fingal, Fine Gael)
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It is not interested.
Alan Farrell (Dublin Fingal, Fine Gael)
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Mr. Hogan mentioned that the Department had been liaising with the Commission for the past 18 months or so since the decision was made, that the Department had been exchanging information with it and that the relationship was relatively good, yet the Commission has decided to refer the matter to the European Court of Justice, ECJ. Are politics involved in that?
Alan Farrell (Dublin Fingal, Fine Gael)
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Has the Department been getting reminder or "past due" letters?
Mr. John Hogan:
The way we have been dealing with this is that the central team involved in the Department and the Commission recovery team have been in contact on a fortnightly basis. We have been giving it an update on a consistent basis as to where we are, how we are engaging in terms of the-----
Alan Farrell (Dublin Fingal, Fine Gael)
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How would Mr. Hogan characterise the tone of those conversations?
Alan Farrell (Dublin Fingal, Fine Gael)
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As a result of the decision on this client of the Revenue Commissioners, which I am assuming is in the top 100 of its clients, has Revenue put in place audit structures to re-examine the matter? I do not doubt that Revenue was engaged by the Commission on ensuring that accurate corporation tax rates were paid, but has there been any internal or external overview to ensure that Mr. Cody, as chairman of the Revenue Commissioners, is happy that all tax codes in this jurisdiction have been complied with in respect of clients such as Apple?
Mr. Niall Cody:
Deputy Cullinane mentioned the idea of what we can talk about in terms of individual taxpayers. The Commission's decision in respect of state aid is in the public domain, elements of it have been published and other elements of it and the background have been redacted. We discussed the decision with this committee in February, which is in the public domain. I cannot speak about our interaction with any taxpayer other than that.
Alan Farrell (Dublin Fingal, Fine Gael)
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I accept that. Broadly speaking, though.
Alan Farrell (Dublin Fingal, Fine Gael)
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I accept Mr. Cody's point,-----
Alan Farrell (Dublin Fingal, Fine Gael)
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-----but it is hardly the basis-----
Alan Farrell (Dublin Fingal, Fine Gael)
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My question is more specific than that. As a result of the Commission's decision, has Revenue put in place any programme to re-examine the compliance of large companies and the payment of corporation tax?
Mr. Niall Cody:
We have a comprehensive programme addressing risk across all taxes. It would probably be useful to discuss how we are structured. Revenue has a dedicated division to deal with large cases across the country. That division is responsible for compliance management and customer service in respect of 698 groups - the large multinationals, the companies that figure in the Comptroller and Auditor General's report. The 698 groups comprise 6,500 companies. These are proactively managed by the large cases division. The division was established in 2003 in the Revenue restructuring process. How it manages large cases is regarded as best practice. As the Comptroller and Auditor General and our reports state, it is responsible for 80% of the corporate tax receipts paid by companies in Ireland. Dedicated teams are dealing with that. The challenge of ensuring compliance, the type of companies involved and the other complexities are part and parcel of the work that we do in managing risk.
Alan Farrell (Dublin Fingal, Fine Gael)
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Mr. Hogan mentioned that he feels it would not be appropriate for him to cite a cost associated with the work his Department has been undertaking for the past 18 months in the recoupment of the award - actually, I should say "the decision" - of the Commission. I accept that, but he can tell me how many personnel are assigned to this matter and whether they are working whole-time on it, approximately how many hours have been assigned to this per individual or in totality - days or weeks would be fine - and how many outside State agencies or private companies has the Department engaged in the process of the establishment of the escrow, the money managers, the custodians, etc.
Alan Farrell (Dublin Fingal, Fine Gael)
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Mr. Hogan knows how many people he has under him-----
Alan Farrell (Dublin Fingal, Fine Gael)
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-----and how many weeks they have been working on this.
Alan Farrell (Dublin Fingal, Fine Gael)
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It is not that granular.
Mr. John Hogan:
I am sorry, but the Deputy mentioned the hours they were working. In broad order within the Department, we have a principal officer assigned to deal with this case and two assistant principals are working with him on it on a full-time basis.
We also have support from our colleagues in the Revenue Commissioners. I am not sure of the precise numbers, but perhaps the chairman, Mr. Cody, might clarify them. We also have support from our own legal division in the Department. Precisely how much of its time is spent on this case is a little difficult for me to quantify off the top of my head, but there has been very intensive engagement on it. There is engagement by the Attorney General's office and-----
Alan Farrell (Dublin Fingal, Fine Gael)
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To condense it , would I be right in estimating there is a minimum of ten people working on the case?
Alan Farrell (Dublin Fingal, Fine Gael)
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I stated earlier - Mr. Cody even said it - that the only place the €13.1 billion had been mentioned was in the press release. That said an awful lot to very many people involved in the sector.
Unfortunately, Mr. Cody did not really answer my question about overviewing or whether the Revenue Commissioners had specifically gone back and examined the audit structures or whether they had, specifically as a result of the decision, examined other companies in this category and determined whether they were comfortable standing over the rates of corporation tax paid by them.
Alan Farrell (Dublin Fingal, Fine Gael)
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I assure Mr. Cody I will allow him back in. I wanted to assess whether the Department or the Revenue Commissioners had actually spent time examining how the Commission had come up with the figure. Perhaps that is not a question for Mr. Hogan but for Mr. Cody. Has the State, or any of its organs, determined specifically how the €13.1 billion figure was calculated?
Mr. Niall Cody:
I will talk about the first issue. The basis of the state aid decision is set out in the decision, but it was also set out in a process that went on probably for two years, beginning with an initial opinion. There is a formal process in which the Commission sets out its interpretation of the state aid rules. It has come up with a decision. There would have been significant interaction and toing and froing between Ireland and the Commission. At the end of the process the Commission came up with its decision, part of which is that, in its opinion, there is state aid. That is the basis on which its decision is based. It has to do with worldwide profits as opposed to the profits attributable to the Irish branch. We have discussed that issue here numerous times and at other committees. The job with which we have been tasked is to calculate the liability that will arise if the Commission's decision is correct, having regard to the detail-----
Alan Farrell (Dublin Fingal, Fine Gael)
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Rather than the figure.
Mr. Niall Cody:
We have to calculate the figure based on the Commission's methodology and interpretation of the rules. In fairness to it, the reason it included the figure in the press release rather than the decision was that, broadly, it had taken the worldwide profits and multiplied the figure by 12.5%. That is the basic approach. What the Commission would not have carried out is a detailed examination of the component elements of each year. Regarding the idea of us looking back over the 11-year period or the period of ten years plus, we have to go through the information in granular detail for the given case. However, we would not have any legal basis on which to engage in a similar exercise for any other company.
Alan Farrell (Dublin Fingal, Fine Gael)
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Maybe I was not clear, but I was not suggesting that in the slightest. I was not suggesting Mr. Cody employ the Commission's methodology in the collection of Irish tax. That is a million miles away from what I said.
Alan Farrell (Dublin Fingal, Fine Gael)
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Mr. Hogan has said his engagement with the Commission is ongoing and that the rules of engagement for the entire process are somewhat fluid. Would that be a fair characterisation?
Mr. John Hogan:
I think there is a standard approach in that, in normal state aid cases, the interrelationship between the member state and the Commission services is at a particular level. In this case, given its complexity and bespoke nature, we have tried to bring the Commission along in its understanding of what we would be faced with when we would look to put the structure in place to capture this amount of money. Earlier in the year I was anxious to ensure there would be no misunderstanding. We would have tried to alleviate any misunderstanding on the Commission's part that this was a simple matter of opening an account and putting the money in it; that was just not what was going to happen and could not possibly happen. Therefore, we have been building our relationship with the Commission services team over time. In the past few weeks our team has been sitting down face-to-face with Commission staff to bring them through the structure and design as we currently see them. We will continue to do this over time.
Alan Farrell (Dublin Fingal, Fine Gael)
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Mr. Hogan has mentioned that the Commission was quite indifferent to certain elements of the process. It simply wants the transfer. Again, I am characterising the situation. Has Mr. Hogan discussed the proceeds in any way? For instance, if one puts €13 billion into a current account, one will receive considerable interest. If one puts it into an investment account, one will get a vast sum in return. Has Mr. Hogan discussed where the money will go? Has there been any discussion on who would bear the cost of managing the account? Would it be paid out of the investment proceeds? Has Mr. Hogan got into to that level of detail?
Alan Farrell (Dublin Fingal, Fine Gael)
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Has Apple, for instance, stated anything about where the proceeds of the investment might go? Has it laid a claim on it? Has Mr. Hogan had that discussion?
Mr. John Hogan:
I have to be careful because we are veering into the actual parameters of the escrow fund, as we are designing it. If the Deputy does not mind, I have to be quite careful about how I choose my words. Part of the complexity is that we want to look at how the fund would operate from end to end.
Alan Farrell (Dublin Fingal, Fine Gael)
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With regard to the proofs the Revenue Commissioners employ when applying the rules in the avoidance of double taxation between Ireland and any other country with which there is an arrangement, will Mr. Cody briefly go through the verification process? In layman's terms, is a tax clearance certificate issued by the
Mr. Niall Cody:
The basic system that applies under the tax code in Ireland is a self-assessment system. Companies complete corporation tax returns. Large companies also provide accounts and XBRL data for us. We take a risk-based approach. Ultimately, considering the types of entity with which we are involved, we know the companies and the countries in which the foreign tax is being paid and the rules that apply under double taxation agreements.
In an audit process we can look for proof, and we can also look under exchange with other countries for confirmation of amounts. Given the type of entities involved and the type of claim involved, first, the dividend income is declared. It comes from a particular country. The rules that apply in that country are very clear. The double tax agreements are very clear. The legislation is very clear. It would be one of the low-risk checks, and a very simply check to carry out, to confirm the rules were applied appropriately and the tax computations involved.
On the type of challenges we have in managing large multinational enterprises, the idea that any of them would make a false declaration, which is the context of the question, would not be the case because of all sorts of accounting rules and sets of accounts. Certainly, it is very easy for us to confirm the amounts, and we would do that as part of our ongoing risk approach on all cases.
Alan Farrell (Dublin Fingal, Fine Gael)
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The analysis the Comptroller and Auditor General provided gave a helpful breakdown of the top 100 taxpayers and their effective rates of corporation tax and all the rest of it. Approximately 80% them are paying over 10%. Mr. Cody mentioned rather helpfully in his statement that "In summary, if the effective tax rate of each of the 13 companies is calculated before taking account of double tax relief and the R&D tax credit, each would have an effective tax rate in excess of 12%". In terms of whether those who should be paying tax are paying tax, this, in itself, is satisfactory. The R&D tax credit, introduced in 2013, is a policy matter and therefore does not come under the remit of this committee. However, it is interesting that if one removes it, there is a 12 percentage point differential which is substantial - sorry, I should say, when one includes double taxation. One cannot qualify it precisely, or perhaps one can - if Mr. Cody can intercede, he should feel free to do so. If one removes the R&D tax credit element, what percentage of tax would the 13 companies have paid? Can Mr. Cody do that?
Mr. Niall Cody:
I can certainly talk in general terms around the R&D credit. Fifteen hundred and thirty-six companies claimed the R&D credit in 2015. They claimed a total of €708 million. Each year, the amount of the R&D credit has gone up. The policy decisions around R&D has been to broaden the scope of the credit and a number of years ago, a refundable element was brought into the R&D credit. As I said in my opening remarks, the R&D credit was subject to an examination by the Comptroller and Auditor General in the 2015 accounts and we had a discussion about it here, back in June, on the level of audit that we carry out on the R&D credit.
The significant issue around R&D credit is ultimately a policy issue. Ireland is keen to deepen the involvement higher up the development chain of companies in Ireland and the R&D credit is seen as a support of that process. The Department of Finance did a review on that and published it last year. The most significant proportion of the R&D credit is claimed by large multinational companies because they are spending the biggest proportion of the money on the R&D credits, and that just makes sense.
In the report we published in April 2017, we gave some significant breakdown of the R&D element, by sector and by multinational, compared to small companies. On the 13 cases, we could certainly show the number of them that were in receipt of the R&D credit. Some of them were in receipt of both the double tax and the R&D credit, depending on where they were. I refer to the impact, if you took out the R&D credit. Mr. Seamus Coffey gets mentioned a lot when we discuss corporation tax receipts. One of the things he did was he did a commentary on the chapter and he highlighted the fact that the R&D credit is actually related to expenditure, and it is not like the companies can get a kind of free credit. They have to spend this money on R&D.
Seán Fleming (Laois, Fianna Fail)
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Is that spent in Ireland?
Mr. Niall Cody:
Yes, it is spent in Ireland. Revenue has come under significant criticism from elements of the sector. What they have accused us of is an overaggressive approach to the audit of the R&D tax credit. A number or practitioners have commented on that, including making representations to the OECD about an overly aggressive approach to R&D credit. That was what we were discussing.
Alan Farrell (Dublin Fingal, Fine Gael)
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Given Revenue's audits have yielded €500 million, that is to be expected.
Mr. Niall Cody:
The R&D credit is probably the element on the audits we do. It has improved significantly. In record keeping in relation to R&D, there are onerous requirements to substantiate that it is original R&D.
There are essentially two elements to the claims: one is an accounting process; and the other is what we call the science test, even though R&D is not just science. We do the accounting test ourselves. If there is a challenge, because, obviously, we are not experts in whatever bioengineering or pharmaceutical, we engage experts to satisfy us in the context of an audit that the research and development meets the legislation standards that are set out.
Alan Farrell (Dublin Fingal, Fine Gael)
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Are the definitions in the legislation tight enough or are there definitions?
Mr. Niall Cody:
The legislation is based on EU and OECD standards. What we have tried to do is improve our guidance as we come across new insights.
I was asked a few years ago here could we not pre-approve every R&D claim because that would provide great certainty. The mantra in tax is certainty. It is really important. When we teased it out, we came to the conclusion that if we did that we would stop all research and development taking place because you would have to have the experts in at the start and there are not even that many experts there.
I suppose some of the research and development is very clearly cutting edge - totally new. Others are enhancements and development of the system. It is a really important piece of the Irish investment situation and the Irish tax code. It is set out in legislation and we have to deal with it.
Seán Fleming (Laois, Fianna Fail)
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We have to move on. Deputy Farrell is well over the time.
Alan Farrell (Dublin Fingal, Fine Gael)
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Can I ask one final question?
Seán Fleming (Laois, Fianna Fail)
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A final one.
Alan Farrell (Dublin Fingal, Fine Gael)
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It relates to how the residency rules are policed. What level of engagement would the Revenue have on that aspect of the tax code here for large multinationals? Does Revenue have a division that looks after it? I appreciate it is quite a broad question.
Mr. Niall Cody:
The company residence rules are essentially set out in legislation. There have been fairly significant changes over the last number of years.
They are a matter of fact. With the change that took place in 2014, all Irish-incorporated companies are essentially now Irish resident unless they are resident in another double taxation agreement country. Since pre-1999, there was essentially a set of rules. Changes took place in 1999 and significant changes happened in 2013 and then in 2014. That is all set in legislation and is a matter of fact. Companies registered in Ireland register with the Companies Registration Office and over the past number of years, we have engaged in a process around balancing the companies registered with the Companies Registration Office and registered for corporation tax. There are some reasons relating to shelf companies, for example, they are not trading. There are forms to be filled out and we look after that process.
David Cullinane (Waterford, Sinn Fein)
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I welcome all of the witnesses. I refer to Mr. Cody's opening statement. He rightly reminded us of section 851A of the Taxes Consolidation Act 1997, which precludes him from discussing the tax affairs of any taxpayer. Why is that law in place? What is the logic behind that law?
Mr. Niall Cody:
Taxpayer confidentiality has been part and parcel of the Irish tax code since the foundation of the State. Section 851A was inserted into the Taxes Consolidation Act a number of years ago to confirm that process. Ultimately, it is a policy issue. It is a decision. Whether we end up with a complete open process that makes everybody's tax records available is ultimately a decision I do not make. I implement the law. It is a criminal offence to breach section 851A.
David Cullinane (Waterford, Sinn Fein)
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I have seen enough episodes of "Yes Minister" to understand that there is a difference between people who oversee policy and people who have responsibility for the operation of policy. I clearly understand that it is Mr. Cody's role to implement whatever policy is in place so, obviously, I understand that. My point is that there are other countries where there is proper scrutiny and even publication of the taxes paid by individuals, including high net worth individuals and companies. We operate a different system. We are the Committee of Public Accounts and it is our job to scrutinise how money is spent, which can be done very easily, and how money is raised, which is more problematic because we cannot discuss whether or not individual companies or individuals themselves have actually paid the taxes they should have paid or even scrutinise that. We must take Mr. Cody's word for it. We cannot scrutinise it. I am only making this point by way of an observation because a number of these big companies are going to appear before the Committee of Public Accounts. We have invited them and, hopefully, they will come before us voluntarily. Some have already acknowledged that they will-----
Seán Fleming (Laois, Fianna Fail)
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For the record, I can confirm that we have invited Google, Apple, J. P Morgan, Citibank, GlaxoSmithKline and Pfizer to assist the committee in its understanding of corporation tax administration from their perspective. J.P. Morgan has been in touch with the secretariat about arrangements for an engagement and Citibank and Apple have made initial contact with the committee.
David Cullinane (Waterford, Sinn Fein)
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I understand that Mr. Cody is limited in what he can say. He should feel free to completely disagree with me in terms of my analysis. What I see when I see systems in place that preclude us from talking about taxes that people can pay is a system of secrecy. I do not like a system that is built around secrecy. I would much prefer it if we had full transparency where we could examine all of these issues, particularly as messengers of the people. As a Committee of Public Accounts, we have a clear duty to examine systems, processes and procedures in respect of how money is raised and spent. I do not believe we are fully in a position to do that because of the limitations of that Act. I clearly understand that it is not for Mr. Cody to even comment on that. I am just making that statement by way of an observation. If Mr. Cody wishes to respond, he can.
Mr. Niall Cody:
It is not so much that I am responding to the Deputy but I think what is important is that the Irish tax code is set out in legislation. The Office of the Revenue Commissioners is established under law to administer the tax system and tax administration. I have a responsibility as chairman of the board of the Revenue Commissioners and as Accounting Officer for the Office of the Revenue Commissioners to appear in front of the Committee of Public Accounts and other committees. We publish an detailed annual report. We have governance frameworks in place for which we are accountable. We publish our annual report every April with detailed analysis of our activity. Over a long number of years, we increasingly publish granular data comparing annual receipts from corporation tax, for example, with CSO and economic activity. We are also subject to examination by the Comptroller and Auditor General, who has permanent access to all of our systems, files and records in respect of every taxpayer in the State.
David Cullinane (Waterford, Sinn Fein)
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Sorry Mr. Cody-----
David Cullinane (Waterford, Sinn Fein)
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And I am simply-----
David Cullinane (Waterford, Sinn Fein)
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With respect because I am aware of all of that; I am aware of the macro work that Revenue does and what information the Comptroller and Auditor General is privy to or not. I am talking about the Committee of Public Accounts, which Mr. Cody well knows, so my statement was not about what Mr. Cody knows or what Mr. McCarthy knows or has access to. It involves what we have access to. I am fully aware of Revenue's function, responsibilities and powers. Mr. Cody could spend half an hour telling me all of that. I am aware of it. I was simply making a point that the Act cited by me makes it problematic for me to truly scrutinise whether or not companies are paying their taxes or not. That is my point.
Seán Fleming (Laois, Fianna Fail)
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It is legislation.
David Cullinane (Waterford, Sinn Fein)
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There actually are and-----
David Cullinane (Waterford, Sinn Fein)
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I have that. Money that is raised is public money.
David Cullinane (Waterford, Sinn Fein)
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In my view, we have a duty to examine whether or not public money is in the first instance going into the public coffers. We then examine how it is spent. That is my point. In his opening statement, Mr. Cody said that Revenue's approach to tackling offshore evasion is recognised by the OECD as best practice and has been adopted by other tax authorities. Does Mr. Cody believe that Ireland is a tax haven?
David Cullinane (Waterford, Sinn Fein)
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Sorry, was it the Committee on Finance, Public Expenditure and Reform, and Taoiseach?
David Cullinane (Waterford, Sinn Fein)
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Mr. Cody referred to the OECD as the benchmark because it says we operate to best practice.
Mr. Niall Cody:
The Deputy is quoting is our approach to tackling tax evasion using offshore structures. We are a benchmark of best practice.
What we did in respect of tackling tax evasion using offshore structures, starting in 2003 with the offshore assets group, the fact that we raised in excess of €1 billion from tackling tax evasion using offshore structures, the changes we made regarding the opportunity to use voluntary disclosure in the context of people with offshore matters and the settlement opportunity that was finalised on 4 May, when we raised a further €84 million from the use of offshore structures to facilitate tax evasion, is part of a process. We had a good discussion on this last night. I discussed it at the Committee of Public Accounts in respect of HSB Swiss. It is a core part of some of the inquires and investigations the Comptroller and Auditor General has done, going back to the original work of the Committee of Public Accounts in 1999 on bogus non-resident accounts. The process we use has been adopted by many tax administrations following the work which we have done.
David Cullinane (Waterford, Sinn Fein)
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Does Mr. Cody believe that there are any tax havens? Are there any countries operate as tax havens? I am not asking him to name them; I am asking whether Mr. Cody accepts there are tax havens operating in some parts of the world.
Mr. Niall Cody:
There are issues around definitions of tax havens. The OECD has a process around tax havens. At present, in the context of the EU, work is being undertaken on what is called the blacklists process and that is part of a policy deliberative process and is not a matter for the Office of the Revenue Commissioners.
David Cullinane (Waterford, Sinn Fein)
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It is when Mr. Cody cites the OECD.
David Cullinane (Waterford, Sinn Fein)
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There is no need for Mr. Cody to be so defensive, because all I am doing is putting questions to him.
David Cullinane (Waterford, Sinn Fein)
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Okay. All I am doing is putting questions to him. I am reading a statement that Mr. Cody made where he said that Revenue's approach to tackling offshore evasion is recognised by the OECD and that, then, is the benchmark. I am reading from two reports by the OECD, one from 2000 where it identified seven jurisdictions which it says were tax havens, namely, Andorra, the Principality of Liechtenstein, Liberia, the Principality of Monaco, the Republic of the Marshall Islands and the Republic of Vanuatu. In May 2009, the same OECD stated there were no tax havens and that no jurisdiction is currently listed as a tax haven by the committee on fiscal affairs. The OECD itself is saying - it seems to be a flat earth view of the world - that there are no tax havens operating in the world. When Mr. Cody, then, as head of the Revenue Commissioners cites the OECD as the benchmark upon which we should judge whether Ireland is facilitating tax avoidance, tax evasion or is a tax haven, it is not something that holds up when one looks at the OECD's own reports. That is the point I am making.
David Cullinane (Waterford, Sinn Fein)
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I have the direct quote here.
Mr. Niall Cody:
I am sorry, what I was talking about was the use of offshore accounts and offshore financial instruments by Irish tax residents to avoid Irish tax. It has nothing to do with a debate around whether a country is a tax haven. What we were dealing with was in the context originally of bogus non-resident accounts, followed by the use of bank accounts by Irish residents and citizens to hide money that was subject to Irish tax and that is what I was talking about last night with the Deputy's colleague, Deputy Pearse Doherty. We had a really good exchange on tackling that. Deputy Cullinane is now conflating what I said last night with a debate, which is a really political debate, on whether the tax code of a country is to be considered as part of a tax haven.
David Cullinane (Waterford, Sinn Fein)
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No.
David Cullinane (Waterford, Sinn Fein)
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With respect, I am not.
David Cullinane (Waterford, Sinn Fein)
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Sorry, with respect, no I am not. What I have put to Mr. Cody is exactly what he said. If he would sit back and listen for a moment to what I am saying, it is that Mr. Cody said that the Revenue Commissioners approach to tackling offshore evasion is recognised by the OECD as best practice. Is that correct?
David Cullinane (Waterford, Sinn Fein)
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Mr. Cody was offering up the OECD and its standards as the standard by which we should judge whether the Revenue Commissioners' approach is best practice. I am saying that this is the same organisation which, in the same breath, is telling us that there are no tax havens at all. That is the point I am making. I will move away from that because, with respect, Mr. Cody completely misunderstood the context of where I was coming from. I have made that point and will move on.
On the research and development credit, Mr. Cody has accepted that the credit has sharply increased over the space of five years. Does he have those figures? Can he tell us what the figures were over a five-year period?
David Cullinane (Waterford, Sinn Fein)
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No, that is okay. Is it also the case that the number of companies in receipt of the credit has decreased?
David Cullinane (Waterford, Sinn Fein)
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Is it the case that ten companies claimed €416 million of those tax credits? Is that correct?
David Cullinane (Waterford, Sinn Fein)
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Does Mr. Cody mean million?
David Cullinane (Waterford, Sinn Fein)
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If you could, because my understanding is that ten companies claimed two thirds of the overall amount, which is €416 million.
David Cullinane (Waterford, Sinn Fein)
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And I am asking the question here. I seek clarification as to whether the figure is correct. I am assuming it is correct, which then means that many smaller companies that we are trying to encourage to develop and grow may not be getting a fair crack of the whip. If it is the case that we have a tax credit in place that is simply going to the top companies and is not filtering down to smaller companies, is that cause for concern? The setting of the policy is not a matter for Mr. Cody, perhaps the Department can respond. Has it any concerns? I will put this question to the Department officials. Has Mr. Hogan any concerns about the application of this particular tax credit?
Mr. John Hogan:
As the Chairman has just articulated, there has been an increased cost to the Exchequer resulting from the tax credit over recent years. The Department has conducted a series of evaluations of the research and development tax credit, most notably in 2016 and for 2017, which was published as part of the pack that members have been given. The outcome of that quite detailed review, which is available on our website, is that the research and development tax credit was seen as being responsible for 60% of the additionality of the research and development happening in the country. That compares favourably with other similar types of interventions. It is a general measure that is available to companies, large and small, which incur the type of research and development expenditure that qualifies under the incentive. The Department continues to review this regularly in line with our tax expenditure guidelines.
David Cullinane (Waterford, Sinn Fein)
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Is there any concern that companies are inflating the research and development being undertaken? Is that something that would concern the Department? Does it form part of the Department's examination of the tax credit?
Mr. Rónán Hession:
We do not have a particular concern about inflated claims. Some clarification was provided recently to explain some of the disparity between Central Statistics Office, CSO, figures around research and what we are seeing in the research and development tax credit. There was a degree of double counting and we have corrected the record of the House to clarify that.
As the Chairman outlined, there is a risk based audit approach adopted in Revenue to make sure claims are legitimate, valid and comply with requirements.
David Cullinane (Waterford, Sinn Fein)
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May I turn to Apple briefly?
Mr. Niall Cody:
As I said, we carry out a risk based programme in respect of the research and development credit. In 2016 we carried out a series of interventions and restricted the credit by a figure of just under €13 million for the year. Last June we had a good discussion about our audit programme in the context of research and development. We carry out risk based audits in respect of the research and development credit because it is valuable, about which there is no question. In the context of the changes made over the period and small enterprises, the key is that there has to be expenditure on research and development. That is the first point. What we have been doing is trying to ensure that if a small enterprise is carrying out research and development, the appropriate documentation is submitted. In February we issued guidance specifically to assist small and medium enterprises engaged in research and development. We engaged with Enterprise Ireland on the record keeping needed in that regard to ensure that if companies were carrying out qualifying research and development, they were receiving the credit to which they were entitled.
David Cullinane (Waterford, Sinn Fein)
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What I might do is come back to the Apple issue in the second round. I have one final question for Mr. Cody. He said last night that Revenue would investigate thoroughly and seek to recover the tax avoided, together with interest and avoidance surcharges. Has anybody in the State been subject to a criminal sanction for not paying tax in the past five years?
David Cullinane (Waterford, Sinn Fein)
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Does Mr. Cody have data he could provide for the committee or is it sensitive information? Obviously, we are not looking for the names of the individuals involved, but in terms of the numbers-----
Mr. Niall Cody:
In 2016 the number of convictions for serious evasion was 18. There is a pipeline of cases. Another 16 have been referred to the Director of Public Prosecutions. As the Deputy is aware, an investigation leading to a criminal prosecution takes a significant period and cases are at various levels or stages. Custodial sentences were imposed in 16 of the 18 cases in which there were convictions for serious evasion. Some were fully suspended, while others were partially suspended. Actual prison terms were imposed in four cases, ranging from three months to one year. Up to September this year, we had had 19 convictions for serious tax and duty evasion.
David Cullinane (Waterford, Sinn Fein)
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Will Mr. Cody forward a note to the committee on that matter? I will come back to the Apple case later.
Catherine Murphy (Kildare North, Social Democrats)
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I welcome the witnesses. I will try to keep my questions brief and ask the witnesses to be succinct in their replies because we have limited time.
On the escrow account and the staged payments into it, I understand the amount involved has yet to be finalised, but at what point will the entire amount agreed to end up in the account? About how many staged payments are we talking?
Seán Fleming (Laois, Fianna Fail)
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Will Mr. Hogan answer that question?
Catherine Murphy (Kildare North, Social Democrats)
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Are we talking about years or will it be done by next year?
Seán Fleming (Laois, Fianna Fail)
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It is a question of years. We are into the third calendar year.
Mr. John Hogan:
As I mentioned, what we are doing is putting the framework in place to capture the money. There are certain timelines, but I do not know what they are off the top of my head. I have also mentioned that publicly available from the company is an indication that it will comply and be committing a certain sum to the escrow account.
Seán Fleming (Laois, Fianna Fail)
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Is Mr. Hogan saying we might find out more by looking at the company's audited financial statements than we will find out here in the Oireachtas?
Seán Fleming (Laois, Fianna Fail)
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Mr. Hogan has offered up that it is included in Apple's financial statement. He has said Apple has made a commitment in its financial statement to pay the money in 2018. That is actually the most definite statement that has been made by anybody to date. We have never had a definite statement from anyone at Government level or in the Oireachtas. Apple's statement, while it refers to next year, is at least definite.
Seán Fleming (Laois, Fianna Fail)
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Yes and Mr. Hogan is being helpful.
Seán Fleming (Laois, Fianna Fail)
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I accept that Mr. Hogan is doing the best he can. We also appreciate that he probably was not expecting a debate on Apple this morning, but we felt it was an obvious issue to raise.
Catherine Murphy (Kildare North, Social Democrats)
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I wish to raise a number of small issues to understand how things work. Reference was made to the fact that a number of corporations had received rebates. Where is that shown and how does it happen in practice?
Mr. Niall Cody:
Like income tax, corporation tax is paid based on preliminary tax paid during the year. The corporation tax return is filed in the following year and the computations are finalised. Sometimes there is an inherent refund required because there has been an overpayment. We have gross and net tax receipts which are all published in the accounts.
Catherine Murphy (Kildare North, Social Democrats)
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On carrying losses, it has recently been reported in the media that one of the banks will not be liable for tax for 20 years. Is there no statute of limitations in such circumstances similar to the limitations on refunds from Revenue? What is the regime in that regard?
Mr. Niall Cody:
Ultimately, corporation tax losses can be carried forward to be set against income from the same trade in future years. They are carried forward year on year. I have set out that somewhere in the region of €200 billion in losses were carried forward into 2016. There are various restrictions that apply, depending on factors such as if trade changes. It is not completely open ended, but if a business is in the same trade, losses can be carried forward into the following year until they are used up. It reflects the fact that companies are taxable in the year in which they make a profit and-----
Catherine Murphy (Kildare North, Social Democrats)
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Is there no limit on the number of years?
Catherine Murphy (Kildare North, Social Democrats)
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Therefore, it is unlimited. Large amounts of public money were invested to save the banks. In that context, is there no special arrangement in place in terms of tax liabilities in a situation where the entity would be sold?
Mr. Niall Cody:
The Deputy is aware that the Finance Bill completed all Stages in the Dáil last week and will be brought before Seanad Éireann next week.
There has been fairly considerable debate regarding the use of losses in the financial sector. It is a policy issue. There was a restriction in place affecting the National Asset Management Agency, NAMA, banks a number of years ago. That was changed and the levy was introduced on banks to reflect the fact that this process had taken place. However, that is ultimately a policy matter. We implement the tax code having regard to the rules set out in law. Losses - including losses carried forward - are a standard feature of the tax code in practically all developed countries.
Catherine Murphy (Kildare North, Social Democrats)
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Essentially, people will feel like eejits. They bailed out a particular sector. That made it saleable and it does not have tax liabilities forevermore because of the crash. However, the people are required to be tax-compliant. This is just a comment. People feel that there is an inherent unfairness there. However, as the witness said, it is part of what was discussed in the context of the Finance Bill 2017. We may have to come back to that policy issue.
Given that approximately 80% of corporation tax receipts come from foreign-owned multinational companies, can Mr. Cody elaborate on how residency is established? That was obviously one of the issues relating to the Apple tax situation, which concerned an entity that was here in the sense that it was registered here. How does the Revenue Commissioners define residency?
Mr. Niall Cody:
Since the changes in 2014, the rules have been that all companies incorporated in Ireland are resident here unless they are resident, for tax purposes, in another country with which we have a double-tax agreement from 1 January 2015. That has been part of the process of change that took place in our whole international tax process. A foreign-incorporated company is tax-resident here if it is managed and controlled here. The rules are set out in legislation. There have been changes over the years that reflected policy changes and they are set out in the corporation tax code.
Catherine Murphy (Kildare North, Social Democrats)
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Do the Revenue Commissioners look at brass-plate companies with no employees or do they largely just rely on a paper exercise? How is that actually handled?
Mr. Niall Cody:
For a company to be registered here, it has to register with the Companies Registration Office, CRO. Most companies that register here immediately register for corporation tax. They are trading here and they have converted from being sole traders into limited companies or whatever. In 2016, an additional 16,390 companies were registered on the corporation tax system. The last few years have seen numbers in the region of 16,000, 15,000, or 13,000. Meanwhile, 20,951 companies registered with the CRO in 2016. We examine companies which are registered with the CRO but which have not registered with the Revenue Commissioners to see if they should do so. That starts with a declaration form. All sorts of shelf companies that do not trade here at all are set up. They are set up because somebody thinks that they might trade. The foreign companies that have set up in Ireland are primarily not brass-plate operations. They provide substantial employment. I looked at the figures for last year. The Revenue Commissioners examines employments, as opposed to employees. A person could have a number of employments. He or she may be dealt with by different companies in a group. There are 490,000 employments linked to the multinational sector.
Seán Fleming (Laois, Fianna Fail)
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Can Mr. Cody explain this? Everyone thought the figure was 200,000. Mr. Cody says that employments are different from employees. He must help the public understand the doubling of this figure. I will not take this out of the Deputy Catherine Murphy's time. I have never heard that figure before.
Seán Fleming (Laois, Fianna Fail)
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Is Mr. Cody saying that most of the people in the multinational sector have two employments and two employers?
Seán Fleming (Laois, Fianna Fail)
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Is this caused by people coming and going during the year?
Mr. Niall Cody:
That is part of it. Across all companies, there were 1,785,898 employments. In the context of foreign-owned multinationals, the figure was 443,776. We published this information in April. It is in the material that we sent as part of the committee's briefing. Irish-owned multinationals accounted for 68,763 employments and non-multinationals for 1,273,359. The foreign-owned multinationals' employment income equated to €15.8 billion in wages paid by multinationals to their employees and, in that particular year, they accounted for €6.4 billion in PAYE and PRSI payments.
Seán Fleming (Laois, Fianna Fail)
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I ask Mr. Cody to send the information to the committee. I know it is a published document.
Mr. Niall Cody:
It is in the data that we sent for the committee's briefing. We will publish this information, updated for 2016, in April. There are some really interesting figures. The multinational sector in Ireland is a significant employer and a significant driver of economic activity. It is not composed of brass-plate operations.
Catherine Murphy (Kildare North, Social Democrats)
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Obviously, business people will say that they need certainty, and I understand that. However, as a country, we need certainty as well. This is probably more a question for the Department of Finance.
On the previous occasion on which Mr. McCarthy was before the committee, I asked how his Department communicated the surge in corporate tax in 2015 and he stated that there was a difficulty in communicating it because it had not been not expected. How can there be certainty in the Department of Finance? That surge could go as quickly as it came. At this point, is there a means of estimating what the yield would be if every company that is liable for a corporation tax rate of 12.5% was to pay the 12.5%, which is a generous amount?
Mr. John McCarthy:
In response to the Deputy's first point, she is absolutely right in that she and I did have a discussion. However, it was about the 26% GDP growth rate in 2015, rather than tax. There are absolutely huge communication challenges around that, and it has caused us some reputational damage. There is no doubt about that. Ireland's GDP is perhaps the most volatile of any country in the world. During the crisis, we fell much more than anybody else, and we have rebounded much faster than anybody else. Even the components of GDP are incredibly volatile, that is, investment, exports and so forth. There are lots of these issues.
The second part of the Deputy's question may be more for colleagues in the Revenue Commissioners. We know the total corporate profitability in the economy. One of the reasons for the surge in corporation tax in 2015, when it went up by €2.3 billion, was a surge in corporate profitability. However, corporate profitability does not immediately translate into tax liability because of capital allowances, losses carried forward, the €200 billion which, I think, is still outstanding because of trade charges, and so forth.
This means that the walk from profits to taxes is not simple. When we try to project GDP we base tax yield on corporate profitability. We run projections in line with that basis. We also interact with our colleagues in the large cases division, some of whom are sitting in the Gallery, because there will be issues specific to individual firms. We will never be told what the firm is. Under the legal arrangements Mr. Cody has talked about, we are not allowed to know. We will, however, be told that there may be repayments pending or a big payment to be made. We take such judgments into account.
Catherine Murphy (Kildare North, Social Democrats)
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Does that volatility not tell us something about how we compare to other countries?
Catherine Murphy (Kildare North, Social Democrats)
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Yes.
Mr. John McCarthy:
It is a function of how globalised our economy is. To give the Deputy an example, exports are 120% of our GDP. No other country is as open as Ireland. We are the coalface in terms of the fragmentation of global value chains. For instance, if a firm in the pharmaceutical sector has a product which is going off-patent, it has a big impact on our GDP. Firm-specific developments have a big impact on our GDP. Some 50 firms account for 30% of our GDP. That makes it very volatile and very difficult to forecast.
Catherine Murphy (Kildare North, Social Democrats)
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Some of what we do ourselves in terms of capital allowances, however, may well influence behaviour. I note page 293 of the Comptroller and Auditor General's Report which says "The cost of capital allowances increased from €2.4 billion in 2014 to €5.8 billion in 2015, an increase of almost 150%". That paragraph, 20.18, shows that the amount of tax liability that can be written off is impacted by the policy positions which have been taken. Was that reviewed in the context of the surge in GDP?
Mr. John McCarthy:
The Deputy is absolutely right. There was a huge surge in capital allowances on the intangible assets side in 2015, of the order of €26 billion. As has been mentioned before, capital allowances are a normal part of international tax codes. They are part and parcel of our system as well and it is perfectly legitimate that investment and depreciation can be offset from tax liability.
Catherine Murphy (Kildare North, Social Democrats)
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Okay. Do we know what the yield would be if 12.5% was the effective tax rate for the companies which are here now? What would it be if every company paid 12.5%? I know there are companies with losses, but 12.5% is a generous tax rate. Has that potential yield been calculated?
Mr. John McCarthy:
It has not. Total corporate profitability was something of the order of €150 billion on a national accounts basis. One could work out what 12.5% of that figure would be if there were no offsets such as capital allowances, trade charges or losses carried forward. That would not apply in any country however. It is too simplistic an approach because firms are entitled to apply these trade charges and so forth.
Catherine Murphy (Kildare North, Social Democrats)
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Yes, but our tax rate of 12.5% is very generous. It is very generous headline rate, but it is not the effective rate. I can understand offsetting in cases where there are losses. However, if a large company can employ people to work on being "efficient" - is that the word used? - in respect of calculating its taxes or minimising the amount it pays, then the generosity is not really in the headline rate but in the other associated elements which result in the effective rate being lower than it should be. Some companies are paying less than 1%.
Mr. John McCarthy:
Rather than referring to one company I will respond to the more general point. I am straying into my colleague's territory but I will give the economic rationale. We have a relatively low headline rate, but we apply it to a very broad base. Many institutions such as the IMF would say that is the correct approach because it does not distort incentives and so forth. As the Chairman mentioned earlier we have published analyses of eight or ten different ways of measuring the effective rate. Depending on how it is done our effective rate is about 9% or 10%. If one looks at page 295 of the Comptroller and Auditor General's report, one will see many countries which have very high headline rates. These countries are quite happy to talk about the headline rates but, because of various exemptions and so on, their effective rates are much lower. We are much more transparent. There are far fewer loopholes. We have a low rate but the base is very broad. That is the correct approach from an economic perspective.
Catherine Connolly (Galway West, Independent)
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Mr. McCarthy is very welcome ar ais arís. We are going from Panama to paradise and in between we have the red apple. I appreciate the work Revenue and the Department of Finance does. I am certainly not one to quote President Trump but he certainly has a view on Ireland. There is a narrative out there that we are not paying our fair share of taxes. Would Mr. McCarthy accept that there is a narrative that Ireland is a place where less tax is paid than in other countries?
Catherine Connolly (Galway West, Independent)
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Just over the past couple of months? We have had a number of tax amnesties and we had the DIRT inquiry going way back.
Catherine Connolly (Galway West, Independent)
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Tax Justice Network Ireland, which is made up of a very broad range of organisations, is has having a session next week. That information has just been passed onto all of us. Will any officials from Revenue or the Department of Finance go along to hear the concerns being raised by these organisations?
Catherine Connolly (Galway West, Independent)
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So there will be somebody there next week at the launch of the Tax Justice Network's report.
Catherine Connolly (Galway West, Independent)
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That is okay. I do not know much about this, but the group obviously has serious concerns. It is launching a report called Tax Games - The Race to the Bottom. The launch will be hosted by the Tax Justice Network Ireland. I am not asking for an answer. I am making the point that there are obviously very serious concerns in respect of tax avoidance, tax evasion or both. Does Mr. Cody accept that there are serious concerns?
Catherine Connolly (Galway West, Independent)
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Absolutely. I appreciate what Revenue is doing but the issues have not really come to the fore because of proactive work - although I am sure Mr. Cody will contradict me on that - but because of the work of concerned journalists.
The information has come from various other outside sources in regard to the Paradise and Panama Papers, etc. Is that right? Then the Revenue Commissioners are left trying to react. Does Mr. Cody accept that?
Mr. Niall Cody:
I think it depends on what we are talking about. If we look at tax evasion using offshore accounts and financial accounts, we have been proactive in that. As I outlined last night, we sought 40 High Court orders from the early 2000s up to 2015 to compel financial institutions to provide us with information on accounts held and before-----
Catherine Connolly (Galway West, Independent)
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Mr. Cody has given that as an example of best practice, for which I am appreciative. Was the Paradise Papers a surprise? With all of Revenue's experience and best practice in terms of offshore accounts, were the papers expected?
Mr. Niall Cody:
The idea that we were expecting leaks of information from any institution, it is not that we expect or do not expect but we are very interested when it happens. I was appointed to this job on 1 February 2015 and two weeks later there was the first of these leaks - HSB Swiss - and there were significant documents provided. In March of that year I came into the Committee of Public Accounts at the time to report on our activity in HSB Swiss. It was very interesting in that any of the entities that had an Irish involvement, a significant number we had already dealt with. We had already prosecuted four of the people who have used the HSB Swiss structure for serious tax evasion. We then had the Lux Leaks, the second of the big process in which the International Consortium of Investigative Journalists, ICIJ, was involved. Then we had the Panama Papers. Each of those sets of leaks we have analysed and we have looked to see if there are cases with an Irish interest. For example, in the context of the Panama Papers we know that there are a number of jurisdictions that paid for the underlying data to whoever got the information from Mossack Fonseca. We were not offered the information which, I think, is probably significant and probably underlines the fact that there is not significant Irish tax evasion. I have to stress the term "tax evasion" because we can only collect tax in accordance with the Irish legislation.
We now have the Paradise Papers. There are 71 entities with an Irish connection. There are 603 addresses and 802 individuals that the ICIJ say are Irish. The information that has been provided publicly is essentially a kind of spreadsheet setting out names and addresses. The underlying data, and the financial data, has not been made publicly available. We have written to The Irish Timesand we have written to the ICIJ asking them, and this is set out. I thought because of the Paradise Papers that it was appropriate that we should send the committee the opening statement that I made last night.
Catherine Connolly (Galway West, Independent)
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I have read it, yes.
Catherine Connolly (Galway West, Independent)
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Is Revenue in the active process of following up on that?
Catherine Connolly (Galway West, Independent)
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Yes.
Mr. Niall Cody:
One of the things that is very interesting is that four sets of information, essentially, has come out of various financial institutions or advisers. I am certain that this is going to be a trend that will continue to the extent that there is information that comes to light. I think some of the things that are interesting is that we are seeing, in some of the documents that are written about in the press, information that would never be provided. Advisers and their agents do not share with ourselves some of their thinking. There is a colour in it. We welcome that type of information. If a person wants to approach us with information that he or she has then we are always open. We would get those type of information released.
Deputy Catherine Connolly:I would like to engage longer with Mr. Cody because this matter is very interesting. As my time is limited I will ask specific questions on research and development, R&D, which is one of the key reasons tax liability might be reduced. Is that right?
Catherine Connolly (Galway West, Independent)
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When Revenue was before us in June a number of factors arose. R&D has been a very good policy decision, Revenue has no say over it and it leads to a reduction in tax liability. The important role of Revenue is to monitor that the process is being used appropriately. When Revenue was before us in June there were serious issues raised. Revenue had outsourced to experts and there were questions about tax compliance certificates. Have those issues been resolved?
Catherine Connolly (Galway West, Independent)
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Let me rephrase my query. It has not been checked that the certificates were tax compliant. It was an issue raised with the experts that Revenue had used. Tell me "Yes" or "No" that the matter has been sorted out.
Catherine Connolly (Galway West, Independent)
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Yes, that is right.
Catherine Connolly (Galway West, Independent)
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Mr. Cody might clarify the following for me. At that point Revenue talked about mandating the use of section 766 of the Taxes Consolidation Act as it would lead to more visibility about the yield generated by research and development. Has that happened? Where has the process reached?
Catherine Connolly (Galway West, Independent)
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Please clarify what it means.
Mr. Niall Cody:
The challenge we had was to say what element of the recovery was actually a restriction on the R&D element of the credit. If we go in to do an audit on a company that has an R&D credit we do not necessarily restrict ourselves to a problem with the R&D credit. One could find that there was a problem with expenses for employees. In the collection or audit yield, it was not necessarily clear that the full recovery in an R&D audit was a restriction on the R&D credit. The Comptroller in his study of it recommended that we would capture exactly what was the restriction of the credit. What we have done is we have mandated our officers, when they have the recovery, to raise the assessment and collect it using a specific section of the Act. That is then recorded in our IT systems and then we will be able to say exactly the restriction was that. The only thing that I cannot say 100% off the top of my head, because I did not come with that piece of paper in my head, is the idea of whether our IT system enhancement has taken place. Certainly, the policy decision has been taken.
Catherine Connolly (Galway West, Independent)
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In regard to the cost of the R&D, first we have a substantial amount of companies. Mr. McCarthy gave an update. Was it found that eight or ten companies out of the top 100 did not pay any tax?
Catherine Connolly (Galway West, Independent)
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Eight companies out of the top 100 companies in Ireland do not pay any tax.
Catherine Connolly (Galway West, Independent)
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That is all we are talking about.
Catherine Connolly (Galway West, Independent)
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I understand. Or roll-over losses or something.
Catherine Connolly (Galway West, Independent)
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Double tax.
Catherine Connolly (Galway West, Independent)
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There are three or four major reasons why they would not but the fact is that eight of the top 100 companies did not pay any tax.
Catherine Connolly (Galway West, Independent)
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I have heard Mr. Cody give that answer.
Catherine Connolly (Galway West, Independent)
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The cost is higher but the number of companies claiming the research is lower. Is that right?
Catherine Connolly (Galway West, Independent)
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I have heard Mr. Cody say that it is marginal.
Catherine Connolly (Galway West, Independent)
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Yes. I wish to discuss our reliance on a small section of multinationals.
The Department identified the risk with that. Following this analysis, what has the Department and Revenue done about it?
Mr. John McCarthy:
We had identified it as a risk for some time. Up to 6% of total tax revenue comes from ten firms, meaning there is a concentration risk. One cannot tell the company we no longer want it in Ireland. That is not part of our industrial policy. Accordingly, to militate against that risk, we must ensure the public finances are in a better shape to be able to absorb any shock if one of these firms was to move or reduce its tax payments substantially. This is why it is important from a policy perspective that we achieve a structural balance next year and rebuild our fiscal buffers, including, as the Minister did, establishing the rainy day fund.
Under the fiscal rules and the so-called "expenditure benchmark", growth in public expenditure is anchored on the trend growth rate of the economy. It is averaged over ten years rather than on one particular year. That, in turn, reduces the probability that a Government might spend so-called "windfall gains".
Seán Fleming (Laois, Fianna Fail)
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A division has been called in the Chamber. I propose we suspend the sitting. It is our intention to finish today's proceedings by 1 p.m. I think this division concerns the appointment of the new Minister.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Yes, it is about our former colleague, Deputy Madigan. She went straight into the Cabinet. Can all committee members expect that?
Seán Fleming (Laois, Fianna Fail)
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The Deputy is on the right committee.
Seán Fleming (Laois, Fianna Fail)
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We are resuming our discussion of corporation tax receipts, Chapter 20 of the Comptroller and Auditor General's annual report. Deputy Connolly was in possession.
Catherine Connolly (Galway West, Independent)
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I understand Mr. Hogan wants to come in but I have one more question. Of the 100 top companies, eight do not pay any tax, ten pay 1% and so on. Have those companies been subjected to intervention, audit or check by the Revenue Commissioners?
Catherine Connolly (Galway West, Independent)
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I am not asking Mr. Cody to go into the detail but have-----
Catherine Connolly (Galway West, Independent)
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Revenue has looked at all of those 100.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I welcome the witnesses and thank them for all the work they do in Revenue and the Department. I am glad to have the opportunity to make a few points. I apologise if I am sometimes abrupt but that is the nature of the beast in here. The delivery can be a bit adversarial but it is not personal.
I often think that when it comes to dealing with matters relating to Revenue and taxation we should have a glossary of terms defined in the Peter and Jane Ladybird version because the complexion or perception of 'company X paid no tax' is often wrong and naturally any of us paying pay as you earn, PAYE, can be very frustrated to think that such profitable companies are theoretically paying no tax. Double taxation means nothing to the person in the street. Am I right in saying double taxation means not that no tax was paid but that it was paid in the country where the profits were domiciled but the company was not eligible to pay it here for that reason? Is that a fair assessment?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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That is good. I often see these determined as 'the cost of double taxation to the State was €X millions'. When we use that language we must make it clearer for the taxpayer because in real terms it is not a cost to the State. It is not money we are paying out. For people's peace of mind it is important for them to understand that these people invested €X millions in research and development or whatever and as a result they availed of a measure we introduced in policy to encourage such investment. That is lost and the catchy headline of 'X Paid no Tax' will always win out unless our definitions are clearer.
In his review of the code issued by the Department, Seamus Coffey proposes several changes. One is to change to a territorial regime, as opposed to a worldwide one. That means nothing to me, apart from reading a bit about it and it means nothing to the ordinary taxpayer. Will the witnesses explain to us what the difference is between the two and what the benefits would be for Ireland if it opted for that system?
Mr. John Hogan:
The Deputy mentioned Seamus Coffey's report and that is why I wanted to respond to Deputy Connolly because her previous exchange with my colleague, Mr. McCarthy, was about the sustainability of the corporate tax regime. We were conscious last year that we wanted to study sustainability in respect of corporation tax receipts and to have a look overall at our tax codes. He was engaged to undertake a fairly fundamental overview of our corporation tax regime considering several issues, including how we are implementing the base erosion and profit shifting, BEPS, arrangements and the sustainability of tax receipts.
His conclusion was that the new baseline in terms of our corporation tax receipts is sustainable until 2020. That is an important point to make. Mr. Hession will comment on the worldwide versus the territorial regime.
Mr. Rónán Hession:
Following on from the point on the double taxation treaty, Ireland and a number of other jurisdictions, including the US, operate tax systems on a worldwide basis. In other words, we tax overseas profits but give credit for the tax paid overseas. In effect, taxes are paid on profits in Ireland. The same result could be achieved using a territorial system, whereby we would tax profits in Ireland but would not seek to tax overseas profits as they would be taxed in another jurisdiction. The latter type of system requires the introduction of a particular type of anti-avoidance rule, which is known as the controlled foreign company, CFC, rule. This ensures that companies do not artificially stuff their profits in the jurisdiction that has a lower tax rate than their home country. Under a European directive, this rule has to come into effect in Ireland on 1 January 2019. Seamus Coffey's view is that given that one of the reasons we have not made this move up to now is because we do not have the CFC rule but we are now required to introduce it, it is timely-----
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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What is a CFC rule?
Mr. Rónán Hession:
It is the controlled foreign company rule, which is the rule which prevents companies artificially moving profits to a lower tax jurisdiction. As I said, we are now required to introduce this rule. Policy makers should periodically explore - every generation if one likes - whether we have the right design for our system. Mr. Coffey has suggested that when introducing this rule, we should also look at the question of whether orienting our system differently to a territorial system would be a worthwhile change. It may not make that much difference in terms of the overall amount of tax paid here but as so many countries now have a territorial system - the US is now moving to this system - this may become the default design norm in tax systems and, therefore, it may make things easier for us in terms of moving internationally in the years ahead. This is an assessment we have to do in the Department next year. We are currently engaged in a consultation process, launched by the Minister on budget day, which runs until the end of January. These types of rules can be very complex and can depend on company structure. Broadly speaking, that is the explanation.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Basically, it a different system to achieve the same outcome.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Is there a cost implication to changing to that system?
Mr. Rónán Hession:
That is one of the issues we will have to examine. It depends on how one does it. The directive sets a minimum standard in terms of what we have to do and there are different design features within that requirement, for example, there is option A or option B. There are lots of other features internationally in controlled foreign company rules that we could import if they made sense for Ireland. We will have to do that analysis next year ahead of the legislation being brought forward.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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So there could be a costs in terms of resources that will need to be applied in this regard.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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The term "professionally sceptical" is a good term. Another term used is "transfer pricing". I note that the report also mentions changes to Ireland's domestic transfer pricing legislation. Can whomever is best placed to define "transfer pricing" do so?
Mr. Rónán Hession:
As I am probably closer to a layman than an expert, I will try to do so using simple language and the Revenue officials can add to my commentary if there is anything I have missed. Broadly speaking, this is about transactions within a group or in other words, the manner in which related companies transact between themselves. Under OECD rules this should happen on an arm's-length basis. In other words, if the Deputy and I are companies in the same group we should transact as if we are on the open market such that we cannot artificially set prices in a way that distorts the tax result. That is the purpose of the transfer pricing rules. The OECD sets these rules internationally. Arising out of the base erosion and profit shifting, BEPS, project there are new guidelines in place as to how this should be done. Ireland has committed to importing these rules into its domestic law. Mr. Seamus Coffey considered this issue in the context of his review. While this was not an issue that necessarily caught the headlines when the review was published, Mr. Coffey makes very important recommendations on it, including the need to meet the new OECD standards and on the scope of our transfer pricing rules. There are some areas where the transfer pricing regime in Ireland does not currently apply, for example, in respect of passive-investment income. It also does not apply to SMEs or to transactions before 2010, which is when transfer pricing was introduced in Ireland for the first time. Seamus Coffey makes the point that not only do we need to modernise our transfer pricing regime, we need to broaden it and that given the complexities, we should consult on the issue. This will form part of the process that runs until the end of January. He also states, however, that we should not unduly delay in introducing those changes and that by the end of 2020, we should have made these changes.
Perhaps one of the Revenue officials might like to add to what I have said.
Mr. Niall Cody:
The only point I would make is that the concept of the arm's-length principle asserts that inter-group transfer prices should be equivalent to those that would be charged between independent persons dealing at arm's length in otherwise similar circumstances. Transfer pricing is an essential part of how transactions between groups are priced and the key is that these transactions are at arm's length. That is the process. Mr. Hession set out very well the overall context of the Coffey review and the policy changes required.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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In the case of a company based in America that produces a product and sells it to its subsidiary in Ireland for X amount, which the subsidiary then sells on the open market for X plus 300% and therefore, all of the profits are with us, is our system robust enough on transfer pricing to protect against this?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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As things stand, could I as a pharmaceutical company produce a drug in, say, America, and sell it to my subsidiary in Ireland to put into boxes and then sell it from Ireland at X plus 300%? As things stand, is that legally possible?
Mr. Rónán Hession:
The price at which the product is sold on, in terms of the market price, depends on market conditions at a retail level. In principle, in the case of a pharmaceutical company selling to a related company in Ireland or to a company to which it is not related, the tax results should not change. This is broadly speaking what the arm's length principle means. Companies should not be able to manipulate the price.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I refer to a scenario in which they are related. What is the position if the company in question is giving a sweet deal to a subsidiary in Ireland in the full knowledge that the market price is 300% more but it does that to get the benefit of the 12.5% headline rate, rather than the 39% headline rate in the US?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I appreciate that the US tax code may or may not allow this. In the event that the US tax code did allow this, does our tax code facilitate it?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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The Chairman understands the point I am making. Notionally or in practice, could very limited value be added to a product here, perhaps through packaging, in order to domicile the profits here?
Mr. Niall Cody:
The process around how transfer pricing is controlled comes into play.
It is a multinational exercise. There is a whole range of transfer pricing auditing. The Coffey report suggested strengthening the resources in Revenue to deal with transfer pricing and strengthen the competent authority. One of the features of international tax is that there are inter-tax authority disputes around the proper attribution of profits, and there is a whole process around competent authorities engaging with each other. We deal with other tax administrations on the issue of the proper attribution of profits. This is a feature across the world. We look at transfer pricing auditing of companies based here to ensure that profits attributed to Ireland are not understated. Other tax administrations are looking at the Irish issue. There is engagement on correlative relief, mutual agreement procedures which deal with disputes around the challenges. One of the recommendations is that we should bolster our resources in this area. The transfer pricing Organisation for Economic Co-operation and Development, OECD, standard was introduced into legislation in 2010.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Is what I am describing possible in practice? Are we looking to improve it?
Mr. Niall Cody:
It is not a feature of the Irish tax system. We get challenges. There are disputes going on, and I have spoken about it at other committees. The success rate of our competent authority in disputes with other countries is very high. Ireland features very prominently in the multinational tax system - we are a significant player in foreign direct investment - and so there are disputes. The adjustments are reasonable, however, and it is not a big proportion of the profits attributed to Ireland. Ultimately, the company sets the transfer pricing arrangements. The arrangements are subject to review by Revenue and the other side. Some countries are very proactive in challenging. These take a number of years to wash through the system.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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How am I doing for time?
Seán Fleming (Laois, Fianna Fail)
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The Deputy is on time.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I need a bit of injury time. In terms of intellectual property, what was the tax yield from the knowledge development box in 2015 and 2016?
Mr. Niall Cody:
The first opportunity that returns from the knowledge development box could be claimed was the end of September this year. There were a very small number of claims involving very small amounts of money. When we are asked parliamentary questions, we do not give details if the number of entities is fewer than ten, as per section 851A of the Taxes Consolidation Act 1997. I imagine that there will be a parliamentary question soon, and we will say that because of the numbers involved we cannot answer it. It is fewer than ten.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Are there any companies who have moved their domicile off-shore from Ireland to a more favourable tax regime in another country? If that data is available, how many such companies are there?
Mr. Niall Cody:
That kind of data is not available. There have been changes in the residence rules, which now refer to Irish companies incorporated in Ireland. If an entity closes down or goes into liquidation and moves its operation that would be different, but inversions - I hesitate to use that term - are not a feature in Ireland. It is a challenge that the United States has faced over the past number of years.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Does Revenue have sufficient staff and resources to allow it to achieve the optimum level of collection, recovery and audit that the witness believes necessary?
Mr. Niall Cody:
We had a good discussion about this last night. Revenue, like every public sector organisation, has gone through a fairly significant period of change. In 2007, it had 6,600 full-time equivalent staff. In 2014, the number was down to 5,700. That is a significant reduction through the period.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Was there a decrease in the proportion of recovery or collections?
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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I am sure that actuaries would be able to provide relative data.
Mr. Niall Cody:
The issue of the recovery proportionate to tax receipts stayed at a fairly standard level across the period. In the budgets of 2015, 2016, 2017 and 2018 we made a business case to the Department of Public Expenditure and Reform, but because there is a budget and Finance Bill process, it is done through the Minister for Finance. In each of those budget Estimate processes, the Minister for Finance supported our case. There has been a net increase over those four years of €326 million, which is really significant. In the last budget, the Minister for Finance supported the case, which was important. Some 35% of Revenue staff have over 35 years service. We are going through a period of huge change. We recruited over 540 people last year and 410 the year before. This year, we will recruit over 500 people. It is a huge challenge.
Marc MacSharry (Sligo-Leitrim, Fianna Fail)
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Is the witness happy that when Revenue makes its business case year on year, its requests have been met?
David Cullinane (Waterford, Sinn Fein)
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I want to return to some of the issues raised earlier, especially the issues of Apple and capital allowances. Mr. Hogan fielded questions earlier about the establishment of the escrow account. He said that the infrastructure is not in place for that account to be set up. Can he remind us what infrastructure needs to be put in place?
Mr. John Hogan:
The infrastructure necessary for the operation of the escrow account is the appointment of escrow custodians and agents, which is a duel role. Investment managers also need to be appointed. Both of the procurement processes for the provision of those services are well under way at this stage.
David Cullinane (Waterford, Sinn Fein)
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Custodians and investment managers must be appointed. Why does it take so long for that to happen?
David Cullinane (Waterford, Sinn Fein)
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Is that now in train? Have they kicked in yet?
David Cullinane (Waterford, Sinn Fein)
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What date does the witness expect the account to be up and running?
David Cullinane (Waterford, Sinn Fein)
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I am not asking for the Monday or Tuesday it will happen. Can the witness give us the month it will happen?
David Cullinane (Waterford, Sinn Fein)
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Given that this is an issue where, potentially, we might find ourselves in hot water for a delay in establishing this account, it would be in the State's interest for the Department to be somewhat prescriptive.
David Cullinane (Waterford, Sinn Fein)
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The witness also said, when fielding questions in respect of the amounts that will eventually have to be transferred into the account, that it is possible this could be done in phases-----
David Cullinane (Waterford, Sinn Fein)
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-----and the reason is that the people who manage the investments and the custodians would need to have the wherewithal to be able to do that. The State, whether it is through the Revenue Commissioners or the Department, deals with tens of billions of euro every year, so it is not credible to put forward a defence that the money simply cannot be transferred at one time. I am putting this question as an observation. Some people might ask whether this is a stalling tactic. I cannot see how it is credible for the Department of Finance to say that the money simply cannot be transferred in one go, so I believe there are possibly other reasons for that. Can the witness explain why it would be difficult for the money to be transferred in one go, given that tens of billions of euro go through the hands of the State every year?
Mr. John Hogan:
In the case we have here if, for example, a large sum of money was to be allocated to the escrow account and the escrow agent or investment manager then was expected to invest that immediately, the difficulty is that because it is such a large sum of money it is a market moving event. Whatever the large number is, whether it is €8 billion, €10 billion or whatever, we want to ensure that the investment managers are looking for the best possible return for the investment that we expect them to make on our behalf. It is not that there are other issues at play with this, as the Deputy might suggest, but the reality of what we are dealing with here. We are taking advice from the NTMA on the procurement process. It is much more familiar with how we engage these investment managers. The advice is that we must have this done on a phased basis.
David Cullinane (Waterford, Sinn Fein)
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The witness understands that we must ask questions. If there is, as there appears to be, a delay in establishing this account we must probe and try to establish why that is the case. This question is for Mr. Hogan before I turn to Mr. Cody. How much money must be transferred into this account?
David Cullinane (Waterford, Sinn Fein)
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Is one of the reasons that the account is not set up that the Department does not yet know how much it must put into it?
David Cullinane (Waterford, Sinn Fein)
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It is not very complex when they have to figure out how much tax I must pay-----
David Cullinane (Waterford, Sinn Fein)
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-----or how much citizens have to pay. It is always very complex when we have to find out how much high net worth individuals have to pay in taxes. Mr. Hogan does not know yet how much money must be put into this account. The Revenue Commissioners have not calculated it yet. Is that one of the reasons the account has not been established?
David Cullinane (Waterford, Sinn Fein)
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I will put that to Mr. Cody. When did the Revenue Commissioners become aware that they would have to make a calculation of how much money would have to be put into the escrow account? I ask Mr. Cody to be precise about when because I do not wish to have to interrupt him or for him to have to interrupt me.
Mr. Niall Cody:
The decision of the Commission was on 30 August. There is a four month period, in the normal course, for state aid to be lodged and collected. Our requirement was to calculate. We knew that and we started that process in September 2016. That process is part of the ongoing engagement. That is our responsibility - taking the Commission's decision and then engaging with the company to finalise agreement. It is not just that we assess each year, we must also engage with the Commission.
David Cullinane (Waterford, Sinn Fein)
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I understand that.
David Cullinane (Waterford, Sinn Fein)
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As we sit here today, Mr. Cody still cannot give us a figure. He said that in September 2016 the Revenue Commissioners would have been aware that they would have to come up with this figure. I understand it is complex and that the Revenue Commissioners must engage with outside stakeholders and people in the State, but the figure is still not established. Can he give me a date for that, because I cannot get a date for when the account will be established? Given that it is a work in progress, and notwithstanding that I am not convinced that it should take as long as it is taking, when will Mr. Cody determine how much money will have to be put into the account? Is it weeks or months?
David Cullinane (Waterford, Sinn Fein)
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Can Mr. Cody define a short number of months?
David Cullinane (Waterford, Sinn Fein)
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Why does he prefer not to? Mr. Cody is here to answer questions.
David Cullinane (Waterford, Sinn Fein)
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Is that not the problem?
Mr. Niall Cody:
No. I believe the issue at present, and I hope the Deputy will excuse me if I do not have exactly the right number of years since this was not on the agenda for today, is that eight of the relevant years are finalised and there is a small proportion to be finalised. Our work with that is ongoing. I can find out that detail. If I had known I was going to be asked about the case I would have been able to give the Deputy as much information as I can with regard to the process.
David Cullinane (Waterford, Sinn Fein)
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I wish to be fair. I am not asking Mr. Cody to hang his coat on a particular time period because I imagine-----
Seán Fleming (Laois, Fianna Fail)
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Deputy, you are well over five minutes. Mr. Cody, can you send that on to the committee? You did not bring it with you today.
David Cullinane (Waterford, Sinn Fein)
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That is progress. Hopefully, that will be the case. Once that is done I expect that Mr. Hogan will have done his work and, hopefully, the account will be set up and the money can be transferred instantly, or as much of it as possible. Would that be a workable timeframe?
David Cullinane (Waterford, Sinn Fein)
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The word "rational" is not the word I would use to underpin this issue up to now. However, if that is how it transpires, it will be progress.
David Cullinane (Waterford, Sinn Fein)
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Yes, and the witness will refer back to the committee with dates for that. That would be part of the process as I expect there would be indicative timeframes for that. Mr. Hogan can refer back to us. I accept that he said he was not absolutely definitive-----
David Cullinane (Waterford, Sinn Fein)
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-----but he must have a notion of when he wants to do it.
David Cullinane (Waterford, Sinn Fein)
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Let us work on the assumption that the account will be set up in the first quarter of next year, Mr. Cody will have the figures in order and the money can then start to be transferred. The Commission is watching this so it would be good work if we were in that territory.
I wish to refer to the capital allowances. Can Mr. Cody say how much of this relates to intangible assets?
David Cullinane (Waterford, Sinn Fein)
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There was an increase of €26.7 billion. Is that correct?
David Cullinane (Waterford, Sinn Fein)
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The Department of Public Expenditure and Reform says it is a general rule of thumb that there are ten jobs created for every €1 million in capital investment. If that is the case, my calculation is that approximately 267,000 new jobs would have been created in 2015. That clearly was not the case, so what is happening?
David Cullinane (Waterford, Sinn Fein)
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How much of the €26.7 billion is intangible goods?
David Cullinane (Waterford, Sinn Fein)
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It is all intangible.
Mr. John McCarthy:
If I may add a comment, the term "capital allowances" is essentially an accounting term. The equivalent economic term is "depreciation". Therefore, depreciation is what we are talking about here, whereas the Department of Public Expenditure and Reform's numbers are about actual investment, rather than the depreciation of a capital asset.
David Cullinane (Waterford, Sinn Fein)
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That is fine.
Catherine Murphy (Kildare North, Social Democrats)
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To pick up on that point, why did the cost of capital allowances increase by almost 150% between 2014 and 2015 given that the number of claims only increased by 8%? That question is directed at the representatives from the Revenue Commissioners.
Mr. Niall Cody:
On the issue around changes in intellectual property, in multinational entities intellectual property was held offshore and has been brought to Ireland. Income relating to the exploitation of that intellectual property is taxable in Ireland but capital allowances are allowable against that income. That is part of the tax code.
Catherine Murphy (Kildare North, Social Democrats)
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Am I correct in stating that assets that were offshore were onshored and depreciation was then allowed on them?
Mr. John McCarthy:
If I may add a comment, if one looks at the Coffey report, that is exactly it. Mr. Coffey states that the increased profits associated with onshoring of intellectual property assets to Ireland are likely attributable to Irish resident companies. However, a claim for capital allowances for intangible assets would likely reduce substantially or eliminate the taxable income associated with the use of these IP assets. This is essentially Mr. Coffey saying what the Chairman just said. The companies brought the intellectual property onshore and it could offset that against tax using its capital allowances.
Seán Fleming (Laois, Fianna Fail)
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At what rate can it be offset?
Catherine Murphy (Kildare North, Social Democrats)
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Are we mad?
Seán Fleming (Laois, Fianna Fail)
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The rate is 100%.
Seán Fleming (Laois, Fianna Fail)
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One could write off the full balance for taxation purposes in the year the intellectual property was onshored.
Catherine Murphy (Kildare North, Social Democrats)
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Is depreciation progressive or regressive?
Mr. Rónán Hession:
Effectively, capital allowances are conceptually equivalent to depreciation. If one has an asset which reduces in value, that is a cost which one offsets against one's profits. It is exactly the same, for example, if one buys a car for €10,000. If one made a profit of €1,000 in that year, one could write it down by €1,000 because one's car is only worth €9,000 after a year. The €1,000 is offset against one's profit. It is an equivalent scenario here where a company buys an intellectual property asset which depreciates and it is written down in the accounts over time. That depreciation in the form of capital allowances is offset against the income for that asset.
One of the changes in the Finance Bill, which came from Seamus Coffey's recommendations, is that one does not have a scenario where capital allowances are written off against income in full and then one has a period where one has a big change in one's corporation tax receipts later on because there are no more capital allowances to use up. From a sustainability point of view, it is preferable to smooth this over time. What Mr. Coffey recommended is that the extent to which these capital allowances can be used against income should be limited and an 80% cap introduced.
Catherine Murphy (Kildare North, Social Democrats)
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With the onshoring of intellectual property, what if a company takes advantage of the capital allowances immediately after the intellectual property is onshored and a year later decides to move elsewhere? The tax code does not capture this over time and it can be very short term. Is the way in which it is structured more risky?
Mr. Rónán Hession:
There are provisions for a balancing charge if the entity was to move offshore within five years. We discussed earlier the base erosion and profit shifting project. What has been happening over many years is that intellectual property has been held offshore in jurisdictions with low corporation tax and, in some cases, no corporation tax. One then has royalty flows going out to the jurisdictions where the intellectual property is held. The OECD has introduced new transfer pricing rules whereby, if there is no substance in those jurisdictions, that sort of tax arrangement does not really work. What multinationals have to do now is look where they have substantive activities, employment and decision makers and co-locate the intellectual property with that substance. For some of those that have substantive operations in Ireland, it makes sense to move their intellectual property here. Once it comes onshore, like any other type of asset, it will be subject to depreciation and that is based on what is in the accounts. They follow within the accounts. What we have done in the Finance Bill, which has completed Second Stage in the Seanad, is that there is a cap on the extent to which companies can use these allowances. This measure will raise about €150 million a year.
Catherine Murphy (Kildare North, Social Democrats)
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Why did the cost of the research and development tax credit increase from €553 million in 2014 to €708 million in 2015 given that the number of claims decreased by 2%?
Catherine Murphy (Kildare North, Social Democrats)
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How does the Revenue monitor this tax credit? Is a claim received? Is it something that the Revenue predicts or entirely something that it discovers after the event? How does it work?
Mr. Niall Cody:
We probably had a much longer discussion about the research and development credit on 1 June. The claims are made in the context of the corporation tax return and then we carry out audits and interventions, having regard to the risks in companies. We treat it like we treat other credits and reliefs. We carry out a programme of research and development audits to address the risks. As I said earlier, we carried out 270 interventions in 2016, resulting in a clawback of €13 million in credits. Sometimes there are definitional issues.
Part of the reason for the increase is also that because of expansion in the policy regarding tax-payable credits, the scheme has been broadened to make it more effective. My colleagues from the Department of Finance spoke earlier about the research published in 2017 which evaluated the policy. A facility is in place to carry forward research and development credits. The refundable credits are paid over a period so an increase is built into the system until things are washed out. Ultimately, however, the credit is a direct result of the expenditure. There is a Government target to increase research and development because when it takes place in Ireland, it is really positive. It means we are employing people with education and we are bringing in people. That is what it is about.
Catherine Murphy (Kildare North, Social Democrats)
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While I understand that we are trying to achieve a higher value in terms of types of employment and so forth, I am trying to figure out why the value of the tax credit increased. Mr. Cody is essentially saying it was the value rather than the number of claims that increased.
Catherine Murphy (Kildare North, Social Democrats)
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In that case, the Revenue Commissioners had a smaller number of companies to audit. If something stands out, do the Revenue Commissioners specifically pick these out and audit them? How does this work?
Mr. Niall Cody:
I mentioned to Deputy Alan Farrell that there were words we tried to avoid. We do not deliberately go after anybody. We apply a risk-based evaluation to see what are the appropriate cases in which to make interventions. When one is dealing with something such as the research and development credit, some of the errors made in terms of the restrictions are purely that. A lot of the recoveries from our compliance activity stem from innocent errors. The tax code is complicated. We have only one of the tax Acts with us, but one could throw-----
Catherine Murphy (Kildare North, Social Democrats)
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I suspect that those who are getting the benefit of very large amounts of credit will have people employed directly to work on such initiatives.
Catherine Murphy (Kildare North, Social Democrats)
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The number of claims decreased.
Mr. Niall Cody:
I know, but we are talking about a small percentage. If I was looking at the research and development credit on its own, I would broadly say the numbers claiming it had stayed the same in the four-year period and that the amount claimed had increased. We have an audit programme commensurate to the risk. What happened in the earlier years was we had a higher rate of recovery, but as the years go by and our guidance develops, the problems reduce. Some of the earlier problems very much stemmed from accounting errors.
Catherine Murphy (Kildare North, Social Democrats)
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The only reason I am looking at this issue is the years involved. For example, in 2014 in many cases people could not get money to even keep the show on the road. There was then a big increase in the amount being invested in research and development. That is the reason it stands out. I do not dispute that research and development is-----
Mr. Niall Cody:
A big part of a multinational's operations in Ireland involves research and development. Increasingly, IDA Ireland and the Government want to attract significant expenditure in research and development and that leads to claims. They were probably not the ones who were struggling to get bank finance.
Catherine Murphy (Kildare North, Social Democrats)
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I will ask one final question on a slightly different topic. Are the non-residency rules for individuals looked at routinely? Those who avail of the measure have to be in the country for a certain number of days. I think there are requirements to be met such as there cannot be a kitchen in the house. There was an infamous case some years ago in that regard. Is it something Mr. Cody would discuss with the Government in terms of weaknesses that need to be addressed?
Catherine Murphy (Kildare North, Social Democrats)
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Yes.
Catherine Murphy (Kildare North, Social Democrats)
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That is not the group about which I am talking.
Catherine Murphy (Kildare North, Social Democrats)
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How does Revenue carry out that monitoring?
Mr. Niall Cody:
I would prefer not to talk about how we carry out our programmes. The Deputy mentioned familiar cases which came to attention because we ended up in tax appeals. They did not end up being challenged in the courts because someone decided they wanted to tell us about things. We have a programme to look at compliance with residency rules for high wealth individuals. The rules are set out and have changed a bit over time, but ultimately the number of days is 183. We pay attention to compliance. The Deputy talked about the entities carrying out research and development and the fact that they would have advisers and people working on the issue, but I can assure her that high wealth individuals, whether resident or non-resident, are very well advised.
Seán Fleming (Laois, Fianna Fail)
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To sum up I will ask a few questions, the first of which is for the Department of Finance. How will the sum of €13 billion or €15 billion impact on the State's balance sheet and how will it affect us under EU fiscal rules and in terms of national income and GDP?
Seán Fleming (Laois, Fianna Fail)
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Given that it is bespoke and we have never encountered it before, how come the Department has a ruling on the matter already?
Seán Fleming (Laois, Fianna Fail)
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The State's name is on the account with that of somebody else.
Seán Fleming (Laois, Fianna Fail)
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I presume that there is a EUROSTAT rule. Somebody must have envisaged such a scenario, namely, that money in an escrow account would not come onto a state's balance sheet. Mr. McCarthy was very clear in his answer.
Seán Fleming (Laois, Fianna Fail)
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Mr. McCarthy should send it to us. It will not impact on GDP. We will not be told our that GDP has gone up by €13 billion out of nowhere.
Seán Fleming (Laois, Fianna Fail)
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On double taxation agreements, there are lots of credits. People may have paid tax at a higher rate in other countries and that will reduce their liability here, or vice versa. Does Mr. Cody have figures to indicate the net flow into or out of Revenue in that regard? Obviously, there is loss of revenue in some cases, while in others we are probably receiving revenue under a double taxation agreement, but that is not something we have discussed. Will Mr. Cody give us some information, even just a headline, if he has something on it? In terms of the net flow in both directions, did we win or lose? What is the net position as a result of double taxation agreements? Everybody is laughing at this simple question.
Seán Fleming (Laois, Fianna Fail)
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Is there a net cost to Ireland?
Seán Fleming (Laois, Fianna Fail)
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Is Mr. Cody saying the cost of the research and development tax credit was somewhere near €700 million?
Seán Fleming (Laois, Fianna Fail)
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Therefore, those two items alone cost €1.5 billion.
Seán Fleming (Laois, Fianna Fail)
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What was the tax debit or, if one likes, the other half? There was a loss of income to Ireland as a result of that agreement. Were there gains for Ireland as a result of the double taxation agreements?
Seán Fleming (Laois, Fianna Fail)
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Okay. From a layman's point of view, Mr. Cody has just said the tax credit cost Ireland €900 million, or just short of €1 billion.
Seán Fleming (Laois, Fianna Fail)
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If that was the loss to Ireland as a result of the agreements, which countries were the beneficiaries of the €900 million? Does Mr. Cody understand my question? It is a simple one. If we lost, who gained?
Mr. Niall Cody:
This goes back to what Deputy Marc MacSharry was talking about. We call it a cost because it is claimed in the return. It goes back to what Mr. Hession was talking about, namely, the difference between a territorial system and a worldwide system.
This tax has been paid in the other country.
Seán Fleming (Laois, Fianna Fail)
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I understand that.
Seán Fleming (Laois, Fianna Fail)
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Has there ever been a stage at which a double taxation agreement resulted in a net flow into Ireland? I can understand what Mr. Cody is saying about now.
Seán Fleming (Laois, Fianna Fail)
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From the point of view of a person watching this, Mr. Cody has just said that this double taxation arrangement has resulted in €900 million less tax being paid in Ireland because it was paid in other countries. Has there ever been a reverse in that situation where Ireland was up €900 million? Is it because our tax rate is lower than other countries'?
Mr. Niall Cody:
I am sure that there are circumstances where, depending on whether the other country has a territorial or worldwide system, the other country would be given credits for the tax paid in Ireland if the Irish rate was higher than the rate in that country, but those would be based on the tax costs and the report in that other country. It should have been paid here. We would not necessarily be looking at-----
Seán Fleming (Laois, Fianna Fail)
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We would have been a beneficiary.
Seán Fleming (Laois, Fianna Fail)
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The US has a higher rate.
Seán Fleming (Laois, Fianna Fail)
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Has Mr. Cody any idea of the geography? He is saying that, where some countries have a lower rate than our 12.5%, the cost might generally be borne by them in these arrangements. I am saying this on behalf of the people watching us. They see a cost to the Exchequer of €900 million. Mr. Cody will say that it is difficult to know where it went, given that different countries and companies are involved, so it might be too simple a question.
Seán Fleming (Laois, Fianna Fail)
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Mr. Cody might send us a note.
Seán Fleming (Laois, Fianna Fail)
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With what Revenue can.
Seán Fleming (Laois, Fianna Fail)
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Fine. We have discussed multinationals all day without mentioning any specific one. How many are traditional Irish multinationals? I am referring to large Irish companies that also operate abroad. Has this conversation been dealing with foreign multinationals as opposed to domestic, home-grown, large multinationals that operate worldwide? We know that some Irish companies have a large footprint globally.
Mr. Niall Cody:
I referred to our further work on analysing the corporate tax base. The report that we will publish in April will give a breakdown. These figures could change a bit over time because the report is still a work in progress but, of the multinationals in our corporate tax base in 2015, some 6,700 were foreign owned and 304 were Irish owned.
Seán Fleming (Laois, Fianna Fail)
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Of the top 100 companies that the witnesses have been referring to and whose identity we do not know, how many are foreign multinationals versus large Irish companies?
Seán Fleming (Laois, Fianna Fail)
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Some of the Irish multinationals, for example, Kerry Group, Glanbia and so on, are big by international standards. They are multinationals.
Seán Fleming (Laois, Fianna Fail)
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They do not feature in our top-----
Seán Fleming (Laois, Fianna Fail)
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I am only mentioning them for the purpose of having an example. Very few-----
Seán Fleming (Laois, Fianna Fail)
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Mr. Cody can understand this simple question. When we discuss multinationals, we always seem to think of foreign direct investment, FDI. Irish is now a net investor abroad.
Seán Fleming (Laois, Fianna Fail)
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Some day, we should have an equivalent discussion about Irish companies. As Mr. Cody mentioned, most of the companies in the top 100 are foreign direct investors into Ireland. We have a chapter on corporation tax. I do not see the other half of the chapter, which should deal with the large Irish multinationals that are presumably resident in Ireland. At least, I hope they are resident here. I get the feeling that we are only dealing with the foreign-----
Seán Fleming (Laois, Fianna Fail)
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Without mentioning names, Mr. Cody might be able to tell us how many of those would be traditional Irish companies. I am sure that he has this information at the top of the list back in the office. It should not be a problem. It helps to balance the debate. Everyone believes that we are just referring to foreign multinationals.
Seán Fleming (Laois, Fianna Fail)
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Do not. I know.
Seán Fleming (Laois, Fianna Fail)
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I am delighted to hear that. These are large Irish businesses operating internationally and some have billions of euro in their bank accounts according to their published accounts.
Seán Fleming (Laois, Fianna Fail)
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I hope that they are included in everything we have been discussing, but Mr. Cody will understand that the public watching probably did not consider that half of the equation.
Seán Fleming (Laois, Fianna Fail)
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I will ask Mr. Cody to give us whatever information is safe to give us without identifying-----
Seán Fleming (Laois, Fianna Fail)
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Mr. Cody would not do it. I am just saying it so that he does not have to. Will Mr. Cody provide a breakdown of the report, An Analysis of 2015 Corporation Tax Returns and 2016 Payments? Revenue seems to have a great man in the form of Mr. Paul Tancred. Page 18 shows a diagram. Mr. Cody might have some information on this, although my question does not specifically relate to today's discussion on corporation tax. Everybody in Ireland comes from somewhere and has an interest in his or her own county. One of the diagrams shows employment by foreign-owned multinationals only. A second diagram shows employment by other companies, which presumably are not foreign companies. A third shows the employment share of foreign companies as a share of the employment provided by all companies.
Revenue must have some information about all employment, not just through companies. I am not talking about corporation tax. Is Mr. Cody able to provide an additional diagram showing the employment provided by foreign-owned companies relative to the total number of employees or however Revenue gathers its information in a county? These diagrams exclude the self-employed and public sector employees. Given that they provide good information otherwise, I suspect that the diagram I have requested might be useful. Maybe the CSO or some other body has that information. Will Revenue examine its statistics and determine whether this would be possible? This is not part of the corporation tax debate, only a means of providing information. These diagrams are interesting, but some Members of the Oireachtas would love to have it expanded upon. If Revenue is able to, well and good. If it cannot be done, then it cannot be done. I am coming at it from a different angle.
Seán Fleming (Laois, Fianna Fail)
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We are having a national debate on regional development, so it would be interesting to find out on a regional basis what percentage of total employment in a county is provided by foreign-owned multinationals or other companies. It would be a useful statistic.
Mr. Niall Cody:
The April 2017 report was a development. Mr. Tancred did great work under Dr. Walsh's leadership. We are anxious to provide as much information as we can, given that we probably have the greatest set of data holdings of any organisation.
Like the Chairman, I find presentation in maps really interesting. I think there is great richness in it. The research and statistics we produce must be for the purposes of tax administration. When we can provide extra colour and information in conjunction with the CSO, we will do so. It is really important. The next version will have more of that. We will continue to try to do that.
Seán Fleming (Laois, Fianna Fail)
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I prefaced everything I said with regard to employment of people paying PAYE and PRSI, not population-----
Mr. Niall Cody:
Absolutely, in a way, what we are trying to do here is facilitate organisations, be they the ESRI or the CSO, or academics who can take our information and map it. Some interesting work has been produced. People have mapped some of our information with CSO statistics. Anything we can do, we will.
Seán Fleming (Laois, Fianna Fail)
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I want to wrap up the meeting. We are not disposing of the chapter today because we are meeting with some multinationals. We will do so in due course. The witnesses' evidence has been very good, useful and helpful. We remarked that the amount of information they will have to send on to us after today is much less than after many other meetings when other groups have come before us. The witnesses seemed to have most of their information available when we asked them questions. With other people, we have a list of 20 questions that are unanswered on a day so it is nice to get most of our questions answered today. I say that by way of contrast.
On behalf of the committee, I thank our witnesses from the Revenue Commissioners, the Department of Finance and the Comptroller and Auditor General for coming before us today. We will adjourn the meeting until 9 a.m. on Thursday, 7 December 2017, when we will meet with representatives from the Department of Employment Affairs and Social Protection with regard to the 2016 report of the Comptroller and Auditor General as it relates to regulatory of social welfare payments, the management of social welfare overpayments and Departmental reviews of social welfare schemes as well as some matters relating to the social welfare appeals process. In that context, we will also look at, but not sign off on, the Social Insurance Fund 2016 and the social protection Vote.