Mr. Joe Cullen:

I am a principal officer in the tax division of the Department of Finance. I head up the income tax policy section. I am joined this afternoon by my colleagues: Ms Deirdre Donaghy, principal officer, who leads one of the two corporation tax sections in the division; by Mr. Pat Leahy, principal officer, who heads up the capital taxes section of the division; and my colleague Mr. Keith Walsh, principal officer, who heads up the statistics and economics research branch of the Revenue Commissioners.

On behalf of the Department of Finance and the Revenue Commissioners I would like to thank the committee for its invitation to discuss the Department's report on tax expenditures, which was published as part of the documentation for budget 2019, as well as the paper prepared by the Parliamentary Budget Office, PBO, entitled: Tax Expenditures in Ireland: Key Issues for Consideration, which was published in September of last year.

In 2008 and 2009, I was part of the secretariat which supported the Commission on Taxation, which reported to Government in 2009. More specifically, I acted as secretary to the working group within the commission that examined the question of tax expenditures. With other colleagues in the commission secretariat, I was directly involved in providing research and drafting support to the group and the commission.

As to an approach that might assist towards having a fruitful discussion this afternoon, and with the permission of the Chairman, I will focus in my remarks on the main conclusions and findings of the PBO paper. Broadly speaking, we would support the perspective and views put forward by the PBO that tax expenditures represent a significant and non-trivial annual cost the Exchequer. We also hold the view that, in general, the direct spending route should be the first port of call where the State wishes to support a particular activity and that tax expenditures should be seen as equivalent to direct public spending. It follows from that then, that the processes related to accounting and accountability for tax expenditures might benefit from being more closely aligned with those on the direct spending side.

We also support, in principle, the view that there is scope for a more in-depth consideration of tax expenditures as part of the wider budget scrutiny process. This point speaks to key messages 2, 3, and 4 put forward by the PBO in its paper.

Taking those messages in turn, on key message 2, costing of tax expenditures, the Department has no difficulty with the proposition that consideration might be given to alternative methods of estimating the cost of tax expenditures. However, it should be noted that the OECD 2010 report, referenced by the PBO paper, notes in the context of its review of ten countries which did not include Ireland, that every country examined here has chosen the revenue foregone method, despite all its flaws.

The reason for this is almost certainly that the final revenue loss method is totally impractical. The European Commission document, Tax expenditures in direct taxation in EU Member States, observes that member states most often use the revenue foregone method in their regular tax expenditure reporting. Indeed, the PBO's own paper acknowledges the complexity of alternative approaches. Limitations in the data may also prove an inhibitory factor in taking a revised approach. This is not only because of trade-off considerations between seeking information from beneficiaries and the burden that may place on those beneficiaries, but also because there can be an absence of reliable base data upon which to base cost estimates.

The recent introduction of the key employee engagement programme, KEEP, a new incentive, is an example in this regard, where it was difficult to estimate the likely annual cost in advance. Notwithstanding these points, we would have no difficulty in further examining how tax expenditures are costed.

Similarly, on key message 3, the Department would not disagree with the view that there is room for further improvement in access, availability and transparency of data on tax expenditures. That said, it would be fair to acknowledge the significant progress that has been made in Ireland in this regard if we take as a starting point the work of the Commission on Taxation ten years ago, which sought to identify, codify and cost all the main tax expenditures in existence at the time.

Timing and placement of tax expenditure reports is key to ensuring transparency. The OECD report of 2010 recommends that such reports should be published in the budget documents, which has been our practice to date. The report also recommends that tax expenditures should be reported alongside outlay programmes with the same purpose. A domestic example in this regard is the recent agri-taxation progress update report, which was published with the 2018 tax expenditures report, as part of budget 2019. It specifically set out to map the direct and tax expenditure supports available to the agri-sector and presented both sets of data, from the period 2012 to 2016, alongside each other. As acknowledged by the PBO paper, however, and in my comments earlier, there is a need to strike a balance between data transparency and the administrative burden this may place on taxpayers.

Revenue publishes costs and numbers of tax expenditures as part of its official statistics and open data releases, meaning that the methodologies used are validated against a set of statistical criteria reviewed with the Central Statistics Office and that they are made available in open and accessible formats. Significant efforts have been made by Revenue to provide greater detail on the distribution of certain tax expenditures. For example, it publishes detailed reports on the help-to-buy incentive and the recently discontinued home renovation incentive, giving information on geographical spread, the numbers of individuals availing of different quantums of relief and so on. It also publishes an annual farming profile which analyses the relief availed of by the agri-sector under a number of different tax heads - value added tax, capital acquisitions tax, stamp duty, etc.

On key message 4, systematic review and evaluation, the Department would again have no difficulty in supporting the principle of a systematic approach to the routine review of tax expenditures. Such an approach is set out in the Department’s tax expenditure guidelines, developed and published in 2014. It would be prudent to acknowledge, however, that there can be resource or practical constraints which can limit the amount of review work that may be carried out in any one year. In addition, the desirability of ex-ante review can be overtaken by timing limitations in the context of the budget and finance Bill annual cycle.

Four tax expenditures reports have been published as part of the annual budget process in 2015, 2016, 2017 and 2018. The publication of these annual reports allows us to meet our obligations under Article 14(2) of EU Council Directive 2011/85/EU on requirements for budgetary frameworks of the member states, which states: "Member States shall publish detailed information on the impact of tax expenditures on revenues." Each report has followed the consistent pattern of outlining the fiscal impact of a range of tax expenditures and publishing the results of certain tax expenditure reviews that have been completed since the previous budget. In the 2018 report, we included reviews of the employment and investment incentive, EII, agri-tax and help-to-buy, as well as film relief and start-up relief for businesses. All five were comprehensive reviews.

On the question of periodic re-authorisation, it should be noted that all tax expenditures that commenced post-2014 have been subject to sunset clauses.

Finally, on key message 1, defining the benchmark system, the Department acknowledges the desirability of defining such a system. Both the Department and Revenue recognise that they publish different classifications of tax expenditure measures.

This is not due, however, to differences of opinion arising out of a formal deliberative process. Instead, the approach taken by Revenue is to publish all available information on tax expenditures - broadly defined - and this should be viewed alongside a newer and more formal classification approach adopted by the Department. Development of an agreed approach to classification of tax expenditures is a task that could be built into the work programmes of both organisations in the medium term.

In the international literature, the challenges associated with identifying a benchmark system are acknowledged. While there is significant diversity in working definitions of tax expenditures across countries, a common element is the concept of a departure from a tax system benchmark. The 2010 OECD report profiled and compared the tax expenditure policies of ten OECD countries and concluded: “Some countries have very elaborately specified benchmarks, while others have only implicit definitions of tax expenditures from which their benchmark systems are inferred."

Overall, in the past ten years, significant progress has been made in raising the profile of the issue and the cost of tax expenditures. As noted in the 2017 tax strategy group paper, significant advances have been made in the analysis of tax expenditures and the development of an analytical process for such evaluation, whether they are ex ante or ex post evaluations, which has built on the work of the 2009 Commission on Taxation. There is a comprehensive evaluation structure in place for such reviews, namely, the Department’s 2014 tax expenditure guideline, and the Department seeks to carry out reviews of existing tax expenditures and ex anteevaluations of proposed new tax incentives. I have already mentioned, as examples, the comprehensive reviews of EII and agri-tax carried out last year. Furthermore, two time-limited incentives, namely, the home renovation incentive and the start your own business incentive were reviewed and discontinued last year, both having achieved their original policy objectives.

This is not to say that there is not further work to be done. I hope this presentation will lead towards a conclusion that there is no issue of principle holding back progress. The direction of travel is clear. The only issue is one of prioritisation of the work alongside other important tasks.