Oireachtas Joint and Select Committees

Wednesday, 22 June 2022

Committee on Budgetary Oversight

Tax Expenditures Review: Discussion

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Members and all in attendance are asked to exercise personal responsibility in protecting themselves and others from the risk of contracting Covid-19. As numbers are quite high at the moment, we strongly advise members and others in attendance to practise good hand hygiene and to leave some distance between themselves and others attending. They should always maintain an appropriate level of social distance during and after the meeting.

Before we begin, I will explain some limitations to parliamentary privilege and the practice of the Houses as regards references witnesses may make to other persons in their evidence. The evidence by witnesses who are physically present or by those who give evidence from within the parliamentary precincts is protected pursuant to both the Constitution and statute by absolute privilege. Witnesses are reminded of the long-standing parliamentary practice to the effect that they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. Therefore, if their statements are potentially defamatory with regard to an identifiable person or entity, they will be directed to discontinue their remarks.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him, her or it identifiable. I remind members of the constitutional requirements that members must be physically present within the confines of the place in which Parliament has chosen to sit, namely, Leinster House, in order to participate in public meetings. I will not permit a member to participate where he or she is not adhering to this constitutional requirement.

Today, we will engage with the Department of Finance, the Office of the Revenue Commissioners and the Department of Enterprise, Trade and Employment to consider tax expenditures. After some debate and consideration, the committee has agreed to examine three specific tax expenditures almost as a kind of model for how we might look at them in general. Those expenditures are related to research and development, the knowledge development box and the film credit. The committee has written to a number of stakeholders inviting written submissions regarding the review of these tax expenditures and, next week, will hear evidence from some of these groups. Today, the committee will hear from evidence from the main officials and bodies with the remit of these three tax expenditures.

On behalf of the committee, I welcome Ms Deirdre Donaghy, head of business tax; Ms Aisling Greene, assistant principal officer, R&D tax credit and KDB tax credit; Ms Ian Kavanagh, assistant principal officer, film tax credit; Mr. Matthew McGann, principal officer; and Mr. Paul Cotter, principal officer, Department of Finance; Mr. Alan Carey, principal officer; and Ms Jacqueline O’Callaghan, principal officer, Office of the Revenue Commissioners; and Mr. Dermot Coates, principal officer; and Mr. Felix O’Kane, assistant principal officer, Department of Enterprise, Trade and Employment. I thank each of the witnesses for attending today and for providing information regarding the three tax expenditures in advance to the committee.

I call Ms Donaghy to make her opening statement.

On behalf of the Department of Finance and the Revenue Commissioners, I thank the committee for their invitation to come here today to discuss expenditure reviews of the research and development tax credit, the knowledge development box and the section 481 film tax credit. The Chair has gone through the names but I will mention that Mr. Matthew McGann and Mr. Paul Cotter are from our economics division and they have oversight of the tax expenditure guidelines and also provide the economic analysis elements of tax expenditure reviews.

My colleagues from Revenue will be speaking on the detail of the three tax credits in their statement, so I am going to focus on the expenditure review process. Subsequently, colleagues from the Department of Enterprise, Trade and Employment will provide an opening statement.

Tax expenditures represent a reduction in tax revenues which would otherwise accrue to the State, so it is appropriate that they should come under scrutiny to ensure they are fit for purpose. This scrutiny takes a number of forms, ranging from annual consideration as part of the budget process, to consideration in tax strategy group papers, to full econometric reviews. The work of the Committee on Budgetary Oversight has also contributed to the process of tax expenditure reviews, and I recall engaging with a number of the current members in this committee's formation under the 32nd Dáil in January 2019.

In 2014, the Department developed and published tax expenditure guidelines to set out a best practice approach to the review of tax expenditures. The guidelines indicate that tax expenditures should be used in limited circumstances of demonstrable market failure and where a tax-based incentive is more efficient than a direct expenditure intervention, and that expenditures should be reviewed regularly. A proportionate approach to the scope and frequency of ex postevaluations is recommended to be guided by the expenditure cost. For example, it is recommended that a level 1 expenditure, which would be one with an annual cost between €1 million and €10 million, should have a criteria-based review every five years. Level 2 expenditures with a cost between €10 million and €50 million, which would include the knowledge development box, should be reviewed every five years with an interim review after three years if annual costs exceed €25 million. Level 3 expenditures costing more than €50 million per annum, which would include the research and development and film tax credits, should be reviewed every three years. The briefing paper provided to committee members provides an overview of the expenditure review process and the questions to be considered in ex anteand ex postreviews, and also contains a link to the full tax expenditure guidelines document if further detail is required.

Stakeholder engagement is a key element of the review process for all formats of review. As the body with responsibility for the administration of the tax system, and therefore also having the most comprehensive taxpayer data, the Revenue Commissioners are essential contributors to the review process. The data, where available and suitably anonymised, can be used to analyse existing expenditures or to model potential new measures. However, of equal importance are Revenue’s operational insights into the tax system, which can inform the design of new measures to ensure they are operable in practice. In the case of existing reliefs, Revenue may also identify and bring to our attention issues of concern, or unintended consequences arising from legislation, which may require further review.

We also engage regularly with other relevant Departments - for example, with the Department of Enterprise, Trade and Employment and the Department of Further and Higher Education, Research, Innovation and Science in respect of the research and development tax credit and the knowledge development box, and with the Department of Tourism, Culture, Arts, Sport and Media in respect of the film tax credit. Tax expenditure reviews often also incorporate a public consultation in order to seek views of taxpayers, representative bodies and other interested persons. Department officials may meet with respondents to discuss their submissions, particularly where detailed technical matters are the subject of consultation.

More broadly, the Department is also committed to the regular publication of information on tax expenditures, for the purposes of transparency and to inform contributors who wish to engage with the policymaking process. For example, each year the Department prepares and publishes a series of papers for the tax strategy group, a group chaired by the Department of Finance with membership comprising senior officials and political advisers from a number of Civil Service Departments and offices. The papers contain analysis of a range of issues, often including reviews requested by Members of the Oireachtas during finance Bill debates. A significant volume of analysis is also published each year on budget day, containing analysis of the budget and expenditure measures and economic forecasts. This includes an annual tax expenditures report, containing an analysis of tax expenditure data, the outcomes of reviews completed since the previous report, and tables of tax expenditure costs across all tax heads.

I hope this overview and the briefing paper provided to committee members is of assistance in framing discussion at this meeting. I am happy to engage with any questions from members, following the remaining opening statements.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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I thank Ms Donaghy. I ask Mr. Alan Carey to give his opening statement.

Mr. Alan Carey:

Chairman and members of the committee, we welcome the opportunity to attend today to provide whatever assistance we can in relation to the topics covered in the committee's letter of invitation. I am joined by my colleague, Ms Jacqueline O’Callaghan, who is also a principal officer in the business, taxes, policy and legislation division of the Revenue Commissioners. I understand from the invitation letter that the committee wishes to discuss matters relating to the following tax expenditures: research and development tax credits, knowledge development box, KDB, and film relief. I am sure the committee will appreciate Revenue’s role in relation to the review and evaluation of tax policy measures. As the tax administration in the State, Revenue collects taxes and duties. Through this, Revenue has access to, and is able to provide, statistical information and analysis of tax returns and receipts as well as insights from our compliance activities. To assist the development and evaluation of tax policy, Revenue publishes information in relation to tax statistics, tax receipts and costings on a dedicated section of the Revenue website. While it is Revenue’s role to provide facts and advice to inform the policymaking process, it would not be appropriate for us to make any comment on policy matters.

I will give a brief overview of the three tax reliefs under consideration by the committee, including some high-level statistics in relation to them. We will be happy to address any questions the committee might have in relation to these topics. While we will provide whatever assistance we can, the committee will appreciate that Revenue is constrained by law, and specifically by section 851A of the Taxes Consolidation Act 1997, from discussing the tax affairs of any taxpayer on confidentiality grounds. This includes providing any information that might lead to the identification of any taxpayer.

The research and development tax credit allows a company to claim a 25% tax credit in respect of expenditure incurred on qualifying research and development activities. The credit is available in respect of expenses incurred in the carrying on of research and development, as well as on amounts spent on plant and machinery used and on buildings used to house research and development. The research and development credit is available for offset against a company’s corporation tax liability in both the current and preceding accounting periods. Where there is an excess research and development credit remaining, a company may claim the excess as a payable credit, with 33% of the payable credit available in the first year, and the balance payable over the next two years. There is a limit on the amount of the payable credit a company can claim, with the limit being determined by reference to the amount of corporation tax paid by the company in the previous ten years or by the amount of payroll taxes paid by the company.

The latest year for which claims and cost figures for the research and development tax credit are available is 2020, when the total cost of the credit was €658 million in respect of 1,616 claims. In that year, small and medium-sized enterprises accounted for approximately 88%, or 1,420, of the total research and development tax credit claims. Larger companies dealt with by Revenue’s large corporates division, LCD, accounted for 73% of the total value of research and development claims made in 2020. Companies which claimed these tax credits in 2020 paid €5.6 billion of net corporation tax receipts in that year - that is, net of the research and development credit.

Table 1 sets out the total cost of the research and development credit for each of the years from 2004 to 2020 and the total number of claimant companies in each year. Table 2 provides a breakdown of the cost and number of research and development tax credit claims between large companies dealt with by LCD and small and medium enterprises which are not dealt with by LCD. Table 3 provides an overview of the total value of expenditure, in respect of which the research and development credit is claimed, for each of the years from 2012 to 2020, broken down between small and medium enterprises and large enterprises. In 2020, of the €3.1 billion total value of expenditure on research and development, €2.6 billion was by foreign-owned multinational companies. Research and development credit expenditure by Irish-owned multinationals was €215 million and non-multinationals accounted for the remaining €293 million.

The knowledge development box, KDB, was introduced in Finance Act 2015 and applies for accounting periods commencing between 1 January 2016 and 31 December 2022.

The KDB provides for relief from corporation tax on income arising from qualifying assets such as computer programmes and inventions protected by a qualifying patent or, in respect of smaller companies, other intellectual property that is similar to an invention which could be patented. A company qualifying for the KDB may claim a deduction equal to 50% of its qualifying profits. This means that the company’s qualifying profits may be taxed at an effective rate of 6.25%. A company has 24 months to submit a claim for the KDB. Table 4 provides a breakdown of the overall cost of the KDB for each of the years 2016 to 2020. Statistics for 2020 are provisional due to the 24-month timeline for making a claim.

Regarding the film tax credit, a tax relief relating to the film industry was first introduced by section 35 of the Finance Act 1987. Prior to 2015 the scheme operated by giving tax relief to individuals investing in the film industry. Since 2015 the scheme provides direct support to film producer companies in the form of a corporation tax credit. Producer companies that meet certain requirements may claim a credit at a rate of 32% in respect of the production costs of a qualifying film. The credit is available on the lower of: eligible expenditure, 80% of total qualifying film production costs or €70 million. The maximum value of relief that may be claimed is €22.4 million. A total of 186 producer companies have received €600 million in respect of film tax credits relating to the making of 592 films. Table 5 provides a breakdown of the value of claims and the number of projects for each of the years 2015 to 2021.

When the corporation tax credit scheme was first introduced, the Revenue Commissioners administered both the certification and the payment of the credit. Following amendments in Finance Act 2018, the producer company must apply to the Minister for Tourism, Culture, Arts, Gaeltacht, Sport and Media for a cultural certificate in advance of commencing the film. A cultural certificate is a confirmation that the film is a qualifying film for the purposes of the film tax credit. The credit was moved onto a self-assessment footing from March 2019 to bring applications under section 481 within the normal penalty and prosecution regime where an incorrect claim is made. Producer companies are required to calculate the value of credit due and make their claims through their corporation tax returns.

In summary, the role of the Revenue Commissioners in the review of tax expenditures is primarily to support the process through the provision of statistical information and insights gathered as part of our administration of taxes.

We will answer any questions from members of the committee on these issues, subject to the constraints I noted in my opening comments.

Dr. Dermot Coates:

I thank the committee for the invitation to participate in this meeting of the committee. I am chief economist in the Department of Enterprise, Trade and Employment and I am accompanied by my colleague, Mr. Felix O’Kane, professional accountant in our economic and tax policy unit.

With regard to the matters under consideration today, it is important to note that the Department of Enterprise, Trade and Employment is not involved in determining which tax expenditures will be selected for review in a given year. My understanding is that the Department of Finance generally follows guidelines as laid out in the guidelines for tax expenditure evaluation which were published in 2014. While the Department of Enterprise, Trade and Employment has an interest in the tax expenditures on which we are concentrating today, in addition to a number of other similar tax incentives, it does not have a role in deciding which expenditures should be reviewed or when those reviews should take place.

Officials from the tax policy unit in our Department tend to engage regularly with officials from the various taxation areas within the Department of Finance. Each year our Department prepares a pre-budget submission which proposes options for adjustments to aspects of the tax system, including tax expenditures, often in the form of proposals for amendments to existing legislation aimed at enhancing the taxation landscape for enterprises. This document is the Department’s primary means of communicating enterprise tax proposals to the Department and Minister for Finance. In the event that a tax expenditure review has been decided on by the Minister for Finance, officials may discuss aspects of the review, for example, timelines would frequently come up for discussion, but these discussions tend not to guide the focus of the review.

With regard to tax expenditures more generally, it is useful to point out that many such expenditures can also be considered as tax incentives. There is little doubt that from an enterprise perspective, tax incentives can bring about many positives. Indeed, the OECD states that the tax regime is a key policy instrument that may negatively or positively influence investment and the achievement of wider policy goals. While our Department is supportive of ongoing and timely reviews of tax incentives, it is important that the members of the committee appreciate that measurement of the revenue forgone relating to a specific incentive is unlikely to provide a complete picture of the impacts of that incentive. Benefits resulting from the changes in behaviour which incentives drive are extremely challenging to assess and cost-benefit analyses should be used where possible, but even these will have limitations. It is often the case, therefore, that evidence must be generated from a wider variety of sources than would ideally be the case.

Looking at the research and development tax credit, for example, establishing the counterfactual position around innovation investment in the absence of the incentive would be very challenging, so we must seek other evidence. In the case of this tax credit, it is instructive to see that similar innovation incentives are offered by 25 of our fellow EU member states. Recent contributions to the ongoing review of the research and development tax credit also reinforced the importance of the credit in incentivising activity in Ireland. For example, a KPMG survey found that 74% of respondents would markedly decrease activity in Ireland in the absence of the incentive. Similarly, the American Chamber of Commerce reported member feedback indicating that in the absence of the credit, there would be a significant reduction in the proportion of research and development activities taking place in Ireland. These contributions back up findings from the 2016 review of the credit by the Department of Finance which found that 60% of research and development activity conducted by firms since 2009 was additional research and development activity which would not have occurred in the absence of the tax credit.

The Department of Enterprise, Trade and Employment believes that to best support enterprise to achieve its potential, a mix of direct expenditures and tax incentives will work best. There are instances where each method of support is more appropriate. Some of the advantages of tax-based supports are that they tend to require a lower degree of administration, they are more generally accessible and they are more flexible than direct supports in that they allow the taxpayer to largely determine the nature of the expenditure within defined legislative parameters. These benefits lend themselves to innovative activities, in particular where the prescriptive nature of direct subsidies can inhibit progress in fast-moving sectors of the economy.

In conclusion, while the Department has no role in the selection of tax expenditures for review, it does feed into the review process on an ongoing basis via our interactions with Department of Finance officials and our engagement in the budgetary process. The Department is supportive of regular review of these expenditures and acknowledges the presence of the expenditure review guidelines and adherence to them as being an important advance which provides protection for the Exchequer and ultimately the taxpayer. Regular reviews present opportunities to examine the effectiveness of incentives and make changes if they are not achieving their desired policy objective.

We look forward to participating in the discussion.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I thank the witnesses for appearing before an coiste and for the three presentations. I will start with the research and development tax credit, the larger of the three being discussed. All members of the committee recognise the importance of developing innovation, high productivity and a high-wage economy, and the importance of research and development in that regard and in fostering research and innovation, particularly in indigenous companies.

It is clear from all the statistics we heard in the presentations and the statistics we have that there is an imbalance in the beneficiaries of the research and development tax credit, with the vast majority of expenditure under research and development going to foreign direct investment. The figures for 2020 show that 84% of the €3.1 billion in expenditure in respect of which the tax credit was claimed was by foreign-owned multinationals. Committee members will know that since 2018 and over the following years I have been calling for an increased rate of 30% to be made available to small and micro companies under the research and development tax credit. In fairness, the Minister took up this proposal in the Finance Act 2019, but it has not been implemented due to the communications his Department has received from the European Commission with regard to state aid.

Can the witnesses clarify the specific issues which resulted in this measure, the increase of the research and development tax credit rate from 25% to 30% for small and micro companies, not being progressed and being dropped? Can they expand on the different criteria that would have to apply to the two elements of the claim were it to be adopted? Can they outline whether state aid approval was given and what would need to be done to give it effect?

Ms Deirdre Donaghy:

As the Deputy said, in Finance Act 2019 we introduced some measures which were introduced following the budget that year. We did a review in that year specifically looking at aspects of small companies and how we could try to incentivise that. A number of measures were introduced. It was intended they would operate by having the existing research and development tax credit which is available to everybody and gives a rate of 25%. Micro- or small-enterprises would be able to top that up by an extra 5% in order to get an overall rate of 30%. As that element would be targeted it would have to get state aid approval because it would be a targeted aid. When we began discussions with the Commission on that we looked at the various ways in which it could be introduced under the various approvals processes that exist. Essentially in order to approve it we would have to make slight changes to the definitions, for example, the definition of what qualifies as research and development or to the reporting procedures that would apply and to how it is declared and reported as an aid. The difficulty created there was that, for example, if you were doing €100 worth of research and development in order to get a credit of €25, you would have one sets of rules applying to it, and to get the next €5 credit there would be slightly different rules. That would mean that some of the €100 might not qualify and then again something else that did not qualify for the main €25 credit could potentially have qualified for the €5. They did not match up. We were talking about small and micro companies and some of the biggest issues they consistently raise with claiming the credit in the first place is that there is an administrative burden to it and they have a difficulty in understanding and following the criteria and having the right documentation to prove it and meet the science tests. If we then brought in a system where one set of rules applies to the first 25% of the credit and slightly different rules for the next 5% that would have been overly complicated and we did not think it would be practical to do that.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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The principle of having an enhanced tax credit for small and micro businesses was not an issue for the Commission. It just needed to be targeted. That is a positive step.

Ms Deirdre Donaghy:

It was the fact that it was entangled with the existing credit that was the real problem.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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That takes me to the next point. Why do we not disentangle them? Why do we not have a separate research and development tax credit using the definitions the Commission is asking us to use in regard to having a targeted, state aid approved support package? We could have two separate applications and a micro business could apply to either, technically. Why do we not do that? You would then not have two different sets of criteria or reporting for the same type of research and development.

Ms Deirdre Donaghy:

That is ideally the road we would go down. The worst situation is to have somebody stuck between the two, or half in one and half in the other. When we ran into the problems with the Commission that is what we then started to look at. If this is not a viable avenue, what are the alternatives because there is still a policy imperative to try to support the micro and small companies? To be honest, the main difficulty and why it has not progressed is that Covid-19 intervened. There was then a significant diversion of resources by both ourselves and Revenue to Covid-19 measures. We are hopefully coming out of that now and can come back to this. We are doing the review again this year and while there are other policy objectives we have to address this year as well, we are coming back to the idea of looking at what can we possibly do. We have one potential difficulty in the avenue suggested by the Deputy which was to separate it out. We then need to look at what happens with the main tax credit. If you separate it out and just have it for the uplift it becomes a 5% credit. That is probably too much of an administrative burden for just 5%. Ideally you would look to do that for the whole amount.

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

Ms Deirdre Donaghy:

You possibly then need to look at saying that they cannot claim the existing 25% credit and by a back-door approach we make that a targeted credit because we have taken other people out of it. At the moment the research and development credit is available to anybody who is-----

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I understand Ms Donaghy's point. By excluding businesses you make the main tax credit a targeted credit and therefore it needs state aid approval as well. Why would you have to go down that road? Why can you not have in legislation that if you claim the micro, enhanced, targeted credit that you automatically rule yourself out of the main credit? Therefore it is not targeted because it is eligible to all business but you self-withdraw from that. Why can we not do that?

Ms Deirdre Donaghy:

To be honest I do not know that we cannot do that. It is an option to look at. Over the past two years we have not had the opportunity to look into it.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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The good news is, it is not dead in the water as a policy. It is just a case of time, resources and being able to look at another track.

Ms Deirdre Donaghy:

Yes, we hit insurmountable problems with the particular approach we took. From a policy point of view it is not dead in the water.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Is there any likelihood of something appearing in the finance Bill this year in regard to it? The heavy lifting is done to a certain degree.

Ms Deirdre Donaghy:

That is definitely a question for the Minister.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Okay, and Ms Donaghy will probably put the paper in front of the Minister.

Ms Deirdre Donaghy:

It will not be me who answers it.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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That brings me neatly on to the second issue which we have been raising for many years as well, that is, the problems faced by indigenous small and medium enterprises, SMEs, which is the over-burdensome procedure in regard to the credit. Many SMEs do not have access to the large accountancy firms. It is acknowledged that the process in Britain and in the North is much simpler and less risky for SMEs. The Department commissioned the OECD in 2019 to do a report on SMEs and entrepreneurship policy in Ireland. Part of that stated:

The cost of preparing, filing and defending a claim is too high. The criteria for making claims, recording and justifying claims and so on as laid down by Revenue are onerous for SMEs – the rules appear to have been designed with large established R&D intensive (e.g. pharmaceutical) companies in mind, where development processes are very detailed and structured. In contrast, the rules are not a good fit with, for example, new, agile software development companies, where processes are fluid and fast and documentation is less necessary.

Helpfully, it went on to make three proposals, namely, to simplify the approval procedure for research and development tax credits to facilitate the participation of SMEs in this initiative; to introduce a pre-approval procedure of research and development tax credits to help reduce uncertainty for SMEs - in Norway, for example, there is list of things that are likely to get approval; and to maintain the research and development tax credits while trying to increase their update by smaller enterprise by design change and awareness raising.

That was commissioned in 2019 from the OECD. What actions has the Department taken to achieve these objectives, specifically in regard to the simplification of the application process?

Ms Deirdre Donaghy:

I might take them in reverse order, if that is okay. On simplifying the approval, pre-approval and design changes, the thing to consider with that is that if you do things like pre-approval and design changes, they will help to a certain extent. If something is pre-approved you always have to retain the ability to come back afterwards and audit to verify that what was pre-approved was done. When it comes to trying to raise awareness or to assist, in particular smaller firms to claim credits, both ourselves and the Revenue Commissioners work on that to try to engage. There are industry representative bodies which represent all research and development active firms. It is not just the big four but specifically research and development bodies. They will have annual conferences at which ourselves and Revenue give presentations and give the context in order to try to build the awareness of it and where to find further information about it.

In regard to the administration of it, my colleague, Ms O'Callaghan, from Revenue might have more information on it. Revenue has done a lot of work in trying to give templates for how to make the claim and so on to help matters.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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That is helpful.

The key finding from UCD and what we hear from SMEs all the time is that this was designed for FDI, that is, it was to design an R&D tax credit for SMEs in terms of the application process and the reporting process. We all recognise the importance of FDI and the R&D tax credit, which need to be maintained, but we have two different and completely unequal systems for SMEs which really want to get involved in research and development and help with wage growth in that sector, and so on.

It is done in other areas. I hear all of the time from people who are working with companies. They say they are working with SMEs and with FDI in the South and they are working with SMEs and with FDI in the North, but it is like night and day. There is a simple application process in the North, although I do not know the detail of it. Bringing awareness of the existing rules would be very helpful in making it easier for them to comply but it cannot happen if the rules are designed initially with FDI and big pharma in mind. I would like to hear if there is thinking within the Department or within Revenue so that, as we are looking at the rates for SMEs, we would look at a simplified approval procedure for the R&D tax credit for SMEs as well.

Ms Deirdre Donaghy:

There is definitely an openness to looking at anything we can do to make things easier or more straightforward. It is not designed specifically with FDI or pharma in mind. Clearly, those are large claimants and they would probably have the most experience with it. In terms of how it was designed originally, things like what is qualifying R&D refer back to wider international definitions, and there is a Frascati definition of what is research and development. Things like that have an origin and there is a reason why they are there.

Revenue can probably give more information on this. We get feedback from the consultations with small businesses that those who engage with this have a reasonable amount of positive things to say about it. There is definitely a fear of it that seems to put people off engaging, and while we will do what we can to try to address that, it is clearly there. There is no policy objection to trying to simplify it but there are some basic underlying criteria that we have to satisfy. We have to be able to show that it is R&D and that it is pursuing scientific or technological uncertainty. We have to have a reasonably fair way of saying how we determine how much of the cost is to do with that. It is rare enough that there will be a company that is doing nothing but R&D because every person involved might be doing part R&D and part something else. There has to be some kind of fair system of doing it. Working within all of that, if we can find a way that is robust, there is no policy objection to trying to simplify and it is just a matter of trying to find a way that works.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I appreciate that. Another question on this area that we have been putting forward is in regard to the timeframe in which the credits can be drawn down. Ms Donaghy mentioned 33 months whereas we would argue that should be available in one instalment in 12 months. Again, there is a cost to this but it is a cashflow cost because these are being paid out anyway. As we are supporting businesses which are doing R&D, the idea is to have the credit drawn down in one year as opposed to over three years. Can Ms Donaghy explain to me the rationale as to why Revenue or the Department has not moved in that direction? Is there something I am not seeing here in terms of why we would not allow for the payable credits to be drawn down in 12 months as opposed to 33 months?

Ms Deirdre Donaghy:

If it is for the full amount of the credit for all claimants, it is really a matter of cost. As the Deputy said, it is only a cashflow cost but, nonetheless, it is a cost. At the moment, the way it works is that when someone claims it in the first year, they work out how much their R&D credit can be, they work out what their corporation tax is that year, they do an offset and they see how much is left, and they can claim a repayment, and it carries forward. Again, in that year, they have to first offset against corporation tax and then claim a bit. All of the time, it is trying to link it to make sure it is something that has substance in the State. The real objective of the R&D tax credit is that it has that activity happening in the State in real, substantive businesses that generate all kind of spinouts around it.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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The activity happened in year one because the credit was realised in year one. The only thing is that it is not being fully realised or cannot be drawn down for up to three years, which, for a company that is emerging or growing, is a big issue in terms of cashflow. Obviously, it is not able to draw it down because it would not have the corporation tax liability, so we are not talking about massive profitable companies.

Ms Deirdre Donaghy:

It was part of the move because, originally, the R&D tax credit would have been purely a credit that was not payable so it could only ever be offset against the company's corporation tax. When it became payable, it was a way of staggering the cost, so cost is a significant consideration in that.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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It is only €25 million, which is small in the context of the amount of corporation tax we are receiving, and it is not a cost and is only a cashflow issue.

Ms Deirdre Donaghy:

Is the Deputy referring to all claimants in regard to the €25 million?

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I think the cost we got was €25 million but I can come back on that.

One other area I want to touch on is the knowledge development box. The surprising figure is that only 17 companies are availing of this. Can Ms Donaghy give us any indication in regard to FDI versus SME or indigenous companies? There is a crucial question I would ask in regard to the knowledge development box. What is Ms Donaghy's understanding of how the knowledge development box and the R&D tax credit could be affected by the US tax changes, particularly the global intangible low-taxed income, GILTI, credit and also the pillar 1 OECD agreement? Where do those lie? Some of those carve-outs have not been agreed at the minute. Can Ms Donaghy give us any insight into the importance of that in terms of the final agreement?

Ms Deirdre Donaghy:

In terms of the claimants, we have very limited information because my colleagues in Revenue will tell me they cannot give it to me either. When the numbers come down so low, they are prevented from going into details that would identify. The numbers are low but not unexpectedly low on the knowledge development box because it is quite a restricted relief.

In terms of the future changes, R&D and the knowledge development box are both potentially being affected, particularly by pillar 2, which is the minimum effective tax rate. The changes to GILTI are obviously tied in with that as well. Under pillar 2, a country has to calculate a minimum effective rate of 15% based on the global anti-base erosion, or GloBE, base. The question is that if someone has a tax credit, is that something that reduces their effective rate or is it not? All of the countries involved recognise the value of R&D and recognise it is something they want to be supported. Provided it meets the definition of what they called a qualifying refundable tax credit, it is not treated as reducing someone’s effective tax rate. The idea is that if someone has something that is not a qualified credit, the credit is treated as basically reducing the tax they have paid, which reduces their effective rate, which makes it more likely they have to pay a top-up, whereas if they have a qualifying tax credit, it is treated instead as income. It effectively comes in almost above the line, in a way. Instead of saying that someone has €100 in income and they paid €12 in tax and got €5 in tax credit, it means they only paid €7 in tax. That would be the non-qualifying version. The qualifying version would be that they had their €100 in income, they paid their €12 in tax and, with the €5 offset of the tax credit, the way it is treated is that they still paid €12 in tax but they had €105 in income. Therefore, it increases their income and, effectively, they will have to pay the 15% on that, but it preserves the majority of the value of it.

There is a definition in those rules of what a qualifying refundable tax credit is. Our R&D tax credit is very close to that. It is possible there may need to be some small changes to it but that is something we are looking at this year in the context of the review.

For the knowledge development box, it is a different element of pillar 2 that might affect that. Outside of the GloBE rules, there is a separate element called the subject to tax rule. This is where a jurisdiction has any element of its tax system that provides an effective tax rate of less than 9%. Because the knowledge development box effectively allows a tax rate of 6.25%, because what it does is halve the income and it then taxes that-----

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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It halves it, yes.

Ms Deirdre Donaghy:

Yes, and then it taxes you, so effectively it gives you 6.25%. That is potentially in scope of the subject to tax rule. The way that one works is there is not any turnover threshold that applies to that. With the main part of pillar 2, you are only in scope if there is global turnover above €750 million. With the subject to tax rule there is no cap, so anyone is potentially within the scope. The way it works is it is designed primarily to help developing countries.

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

Ms Deirdre Donaghy:

The idea is if you have an element of that nature in your tax system, developing countries can request you include provisions in your tax treaties that effectively allow them to put additional withholding taxes on. At the moment, as the KDB currently stands and if it were to continue, because that rate gives an effective rate of 6.25%, it is potentially in scope of the subject to tax rule. Again, that is something that needs to be considered this year.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I thank the officials. I appreciate the responses.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I have loads of questions but we are going to get a second round, are we not?

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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I am not sticking very carefully to the time.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Okay. I have a couple of general questions but mostly I want to ask about the film tax credit. In the case of the research and development credit, what market failure is being addressed? It is supposed to address a market failure and it seems to me there is not a market failure, especially for those that are the biggest beneficiaries of it. They are companies that have enormous wealth and resources and whether we gave them a tax credit or not they would be innovating. Are we giving a tax credit that is supposed to be responding to market failure in an area where there simply is not a market failure?

Ms Deirdre Donaghy:

It goes as well to Deputy Doherty's points on it. There are two separate parts of who is engaging. If you have the smaller companies there is certainly more of a financial pressure on them to try to do research and development because with research and development, in order to meet the definitions that are there, you have to be trying to resolve an uncertainty, so there is no guarantee anything beneficial for your business will come out of it. It is a much higher risk than investing your business's money in something you know for sure will deliver a return, albeit possibly a smaller return than if your research and development works out for you.

When it comes to the larger companies, what the Deputy needs to consider is whether there be a market failure in Ireland without the credit. What we consistently hear from all the companies that engage with us is some of the biggest competition they face in trying to locate research and development projects here is from other arms of the same firm in other jurisdictions because there will always be a lot of competition to get the research and development located in any jurisdiction. The reason people want it to be there is it brings a lot more with it. If you locate your research and development here it is more likely you will have manufacturing processes associated with it, for example, or that you will build other functions around it because whatever the outcome of it is, you need to manage it, develop it and protect in the long run. The very strong reports we get back when we do consultations on this is that in the absence of the research and development tax credit there would be a significant market failure in Ireland of research and development.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Okay, but it is primarily going to those big multinational companies. The bulk of the value of this thing is going to big, very wealthy, very profitable multinational corporations and the threat is if we do not give them this tax break they will do that research and development elsewhere. The contrast I always draw is if we put €700 million into our public universities for research and development or into Science Foundation Ireland, SFI, what might we get in the form of more targeted research and development that was actually beneficial to society as against beneficial to already spectacularly wealthy corporations.

Ms Deirdre Donaghy:

It is a question we ask. As part of the review process, we will ask stakeholders to tell us - to essentially defend why we need to have this credit. When it comes to putting money into the universities, the straightforward thing is if we have €600 million, for example, which is the cost of the credit, then we can spend €600 million as a State to get €600 million worth of work done or we can do €600 million of a tax credit which incentivises €2.4 billion in work to be done because we provide €1 in €4 of that. We do as much as we can to ensure the research and development credit builds those links with the third level institutions and has the spillover effects. It is one of the things we are trying to examine and get more information on in this year's review. From an economics point of view, you can take the numbers and the tax forgone and how much research is done, which are the things that are quantifiable and easy to review. It is much more difficult to try to determine those kind of spillovers but we are asking and if nothing else we will have reported our outcomes.

There are many things happening with the universities in terms of college courses being developed specifically around the types of research and development that are happening here, both in pharma and software, and internships that are sponsored from one to the other. Basically, in order to have the quality of a college course or of a third level course that is bang up to date and really delivering value it helps hugely if you have a real-life industry that is at the cutting edge of research in your jurisdiction and nearby and with a link to that university.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Okay. One of the things the PBO, in looking at all this, is saying, and I am in agreement, is we are not having a proper evaluation on a regular enough basis of these things and hearing from stakeholders as to the arguments and pros and cons of this. I do not think we are. Ms Donaghy can put that case and I am sure people will put that case but then I think of the fact that educational counselling and psychology are not funded for people to do doctorates, yet we have a chronic shortage of psychologists to do assessments for children. I want to hear that discussion on evaluating if this is the best expenditure of public money in the area of encouraging research, advancing research, and so on. We are not getting that level of scrutiny, oversight and hearing from the different stakeholders so we can make a proper evaluation. We should find ways to have that discussion with all those stakeholders in a more structured way.

We have discussed the film tax credit many times. According to the EU, state aid to film must meet two tests, namely, the industry development test and the culture test. The industry development test is worth reading out. It states there will be:

... [an] aim to generate the critical mass of activity that is required to create the dynamic for the development and consolidation of the industry through the creation of soundly based production undertakings and the development of a permanent pool of human skills and experience.

Then there is "... the primary cultural aim of ensuring that the national and regional cultures and creative potential are expressed in the audiovisual media of film and television". How are we evaluating that? I believe we are not doing so at all, to be honest. Margrethe Vestager, as the Commissioner with responsibility for state aid, wrote to the Minister for Foreign Affairs, Deputy Coveney, in 2019 to express concerns about whether we were meeting the cultural test. There are very serious question marks. It is interesting that on foot of that that this year an Irish film won a load of awards at the Irish Film and Television Awards. I do not think that was a coincidence.

I am sure it was deserved, but it was very interesting because it was the first time it had happened for yonks . In my view, that was because it was being called out on it.

How are we evaluating this? I would be interested to know if anyone has ever been refused section 481 support on the grounds of not meeting the culture test. Has anybody ever been refused on the grounds of not meeting the industry development test? One of the biggest recipients of section 481 support is producing “Vikings: Valhalla”, which is being shot in Wicklow at the moment. It was reported in the newspapers recently that: "A note attached to the accounts states that the majority of workers employed are contract workers." This raises serious questions about the industry development test. If the majority of people working on a production for one of the biggest - if not the biggest - recipients of section 481 tax relief year in, year out, are contractors rather than individuals who have an employment relationship with the recipient, that is a big problem. In the context of any reasonable understanding of the EU rules around this test, that clearly does not meet the industry development test. It is not creating a permanent pool of skills, and it involves using a load of contractors who have no employment relationship whatsoever with the recipient of the relief. That relief is given specifically on the grounds of creating quality employment and training, and creating a permanent pool of skills. How are we checking this? It appears to me that we are not. We are listening to the producers who get the relief and they are saying that it is brilliant. Of course they are saying it is brilliant because they are getting the relief and benefiting from it.

Previously, this criticism was coming from people who were employed on construction crews, stage crews, etc. I do not know if our witnesses have had a chance to read the Equity submission. Equity raises some very interesting questions and expresses concerns about section 481. Equity, the film workers who have expressed deep concerns and I all want to see money going in to create an industry. However, Equity has asked some serious questions. It states that the risks regarding the way in which it is done at the moment relate to: excluding new and emerging independent producers and having a large amount of industry power concentrated within a small group of players; the potential abuse of the tax credit through a range of practices, including internal pricing and artificially depressed income strategies; and the flaunting of national and international copyright legislation. This latter concern relates to the question of residuals and royalties. Nearly all of the major recipients of section 481 relief in this country tell people who want to work in film productions that in order to get jobs, they have to sign up to buy-out contracts where they sign away all of their royalties and residuals. Their counterparts in Britain are not asked to do that. This is absolutely outrageous. Residuals are one of the major ways whereby artists and performers who are in very precarious situations might get a little bit of money back over the years from a film that continues to be shown again and again. The recipients of section 481 in this country are insisting that most performers and artists must sign away their rights to the particular production in question.

This also raises a very interesting question as to whom those rights are being assigned? Who then gets the royalties over the years? Is it the DAC that disappears after 12 months following the end of the production? This is the mushroom-like nature of the DAC. Where employees have grievances and go to the WRC and raise issues relating to their employment on a production or in respect of instances where they may have been wrongfully dismissed or badly treated, the film production company, which receives the money on the basis of developing the industry, quality employment and training, goes before the WRC and the Labour Court again and again and states that not only is the relevant person not its employee but also that the structure of section 481 means he or she could never be an employee of the company. The employer is the DAC and the DAC is gone. As a result, nobody is accountable for how a person is treated on a particular film production. I do not even know the answer to the question as to what happens to the royalties and residuals because they are not going to the performers. Where are they going? I presume they are going to the production company, which has always existed and which is the recipient of section 481 relief. This is the company that has managed to disown responsibility for everybody who has worked on the film production and got all of them to sign away their rights to further royalties. When are we going to start looking seriously at these things?

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Do I have any takers as to who would like to-----

Ms Deirdre Donaghy:

I have a list that I could start with. I may have probably missed some of the questions along the way. In that context, I ask the Deputy to feel free to ask me again if I do not answer any of the questions.

I could not say if anyone has been refused a culture certificate because that is dealt with the by the Department of Tourism, Culture, Arts, Gaeltacht, Sport and Media. The application goes to the Department, which then carries out the assessment. I know that officials from the Department have appeared before various committees to discuss this matter previously. The Department will be able to give the committee any data specifically around that.

When it comes to the issue of quality employment, it is one which we have discussed with the committee on many occasions over the years and we have been paying attention to the issues. We do not just listen to Screen Producers Ireland. In fact, it complains that we do not listen to its members enough. We have met with employee representative groups also and deal a great deal with Screen Ireland, which is the official body. There have been many changes over the past three or four years in order to try to ensure that we are substantiating that in the screen development aspect of it.

I know that the committee has received a submission from Screen Ireland that gives some of the detail around that but, essentially, back in 2019, the skills development aspect of it was much less well developed. It went around a system that for every X amount of credit you claimed, you had to have Y amount of interns or trainees. Queries were raised - and they were fair ones - as to how we ensure that someone will not be an intern or a trainee forever, that there is proper development and that people can make actually make progress through the industry. From 2019 onward, Screen Ireland has been progressively developing an entirely new process for that and is now focusing on skills development. It is not just interns or trainees; Screen Ireland is looking at skills development at every level. It is not just about getting a trainee in; it is also about getting a mid-level unit manager and training him or her up to be a head of unit. This is happening at all levels to show that the company involved is actually developing somebody’s career as it goes along.

When we split the credit in 2019, one of the benefits of that was that the application has to go in for the culture test before the application with the financial details goes through to Revenue, which can be further along in the process. One has to engage upfront on one skills’ development plan with Screen Ireland and with the Department of Tourism, Culture, Arts, Gaeltacht, Sport and Media. That is staggered because the bigger the production, the more you have to engage and the more detail you have to provide. In the case of a larger production, there is a compliance stage at the end of the production to ensure that this is signed off and that the company has met the criteria. The Department has sent through details to say that since April 2019, over 140 skills development plans have been submitted to Screen Ireland for approval and more than 1,500 skills participants have been tracked through those productions.

On a regional basis, because we also have a focus on trying to move those talent pools out of Dublin and Wicklow and around the country in a more broad way, we have the regional spend uplift.

If you are applying for the regional uplift, there have to be additional skills development participants for that to show that you are developing the talents in those areas. Since April 2019, Screen Ireland has had over 45 regional skills development plans, over 500 participants have been tracked and it is continuing to move forward. It has engagement now on higher and further education and training. There are new Springboard and traineeship programmes at institutions like the Technological University of the Shannon, the Atlantic Technological University and Limerick and Clare Education and Training Board and Screen Ireland is establishing five new talent academies across Ireland, in Wicklow, Limerick and Dublin and two in Galway. It is moving so far forward in that respect that it is the first to link this type of structured skills training to the film tax credit and other jurisdictions are now coming in to learn from Screen Ireland about what it is doing. The latest innovation being introduced towards the end of this year is a new digital skills tracking system, so there should be more transparency and accountability about what is there. I know Screen Ireland has sent-----

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I have read it. I am probably out of time.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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We do not have a long list of speakers so the Deputy can keep going. I would not have expected the witnesses to have read the submissions. We have not made those available to them.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Fair enough.

Ms Deirdre Donaghy:

We have not received the Equity submissions so if they are happy to-----

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I am pre-empting a bit.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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A little bit.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Apologies.

Ms Deirdre Donaghy:

If the committee wants to send the submission to us, we will read it and, if we are aware of issues, we will do our best to address them.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I will do so because the submissions raise some pretty serious questions. They have been put in the public domain. The royalties and residuals are shocking and outrageous. They have publicly made the case strongly that the contracts and conditions of employment for people working on film productions here are significantly worse than in Britain, for example. That is very serious. We will hear from them and the detail will be seen in the report but they have made public statements to that effect.

That echoes the views of a group Ms Donaghy has heard from before, namely, the Irish Film Workers Association, whose leading figures have never worked n the film industry after they made these things public. Some of the people who work on those film productions have just said to me straight, "I'll never be working with those people again." It is as black and white as that. You get blacklisted if you say certain things in the film industry. I still do not see where the protections are, nor do I see how a situation in which people can be blacklisted is compliant with a state aid and EU requirement, and a legal requirement in terms of the relief here, that something called quality employment and training be in place, along with a permanent pool of skills.

The database is something workers have been screaming for. It used to exist many years ago. Who will draw up the database? I suggest we find out and I think the answer will be interesting.

Ms Deirdre Donaghy:

The tracking system is Screen Ireland in collaboration with the key stakeholders, namely, Screen Guilds of Ireland, Screen Directors Guild of Ireland, the screenwriters guild, Screen Composers Guild Ireland and Animation Ireland.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Yes, the Screen Guilds of Ireland, the contractors. That is who will draw up the list. That is a problem because the allegation made is that the contractors hire and fire who they want.

Ms Deirdre Donaghy:

I might have that wrong. Screen Ireland will introduce the technical systems, including a new digital tracking system, and the organisations I listed will launch the new competency framework for all of the roles. I can get that clarified for the Deputy if he wants. It is an initiative under Screen Ireland so-----

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Sure. I have read it but the questions are how you get on that database and also concern the tracking of trainees. They have been designating people as trainees on films for yonks. That does not tell me anything has changed. They can put a document in stating they have a certain number of trainees. The big question is whether any of those trainees are working on the next production. Do they have any obligation to those trainees? Do those trainees have a qualification? The answer is "No". There is no pathway to qualification. We are still way behind on that. It is like we are ticking a box that someone is a trainee and, by the way, we have run a course that the trainee may have participated in. Does that actually give people a qualification and will they have any greater security in the industry than they had previously? The answer, in my opinion and from what I hear, is "No". There is still absolutely nothing to prevent someone being designated a trainee on this production and on the next production it is a different bunch of trainees.

Ms Deirdre Donaghy:

What should be facilitated in this is that someone cannot be designated as a trainee on one production and continue to be a trainee on every production thereafter. The purpose of this is to show the development of the skills and address the suggestion that fully qualified people are still being designated as trainees. There has to be a pathway. It has to show a person's skills are being developed.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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That would first require a qualification standard and a pathway, which I am pretty sure do not exist. At which point does someone become a props master or a set painter?

Ms Deirdre Donaghy:

My understanding is that is what Screen Ireland is developing through these traineeship programmes and the links with different universities and talent academies. I cannot give the full detail of it-----

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I understand.

Ms Deirdre Donaghy:

-----but it seems it is on the road to doing that and developing it. Regarding another long-standing concern around employment rights and so on, we have brought in the undertakings to make sure there are commitments to compliance with all the various workplace relations issues. There are ongoing discussions with the various guilds and representative bodies in the sector. A new crew agreement has been reached. They are still working on-----

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Except the ones who were blacklisted.

Ms Deirdre Donaghy:

I cannot talk about industrial relations issues because it is not my speciality. These are being addressed and the proper forum for that is through forums such as the Workplace Relations Commission and the bodies that can do that. I know cases have been taken and my understanding of taking a case to the Workplace Relations Commission is that it needs to be taken, in general, within six months, or up to 12 months in certain circumstances. There is a requirement for the designated activity company, DAC, to stay in existence for at least 12 months after the end of the production so-----

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Can I make an obvious point? There is a problem with that. The big film producers might be a year or 18 months between big productions. When people are laid off at the end of a film production and the same production company makes a new film with a new DAC, the old DAC has expired. If someone does not get employed 18 months later, it is too late to take a case. The DAC under which that person was employed no longer exists and there is no recourse.

Ms Deirdre Donaghy:

The WRC or the relevant body needs to rule on whether that person has a continuity of employment. Are the individuals trying to say they were laid off, worked for other producers on other projects in the meantime and still have a pre-emptive right to the next series with the first employer?

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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These are precisely the issues that need to be discussed. People acquire through the operation of law a contract of indefinite duration when they work a certain amount of time over a certain period for a particular employer. The difficulty in this situation occurs when those cases are taken and the employees go in.

Every time, without exception, as we can see from the transcripts of proceedings, the recipient of the section 481 relief states something like, "I have never been that person's employer and I could never be that person's employer because the DAC is the employer." What the recipients are, in effect, saying is, "I set up the DAC and I only set it up as an accounting tool, but somehow I am managing to separate myself, the recipient of section 481, from this DAC thing, which is only an accounting tool, but legally it is allowing me to absolve myself of any responsibility for the people who worked on the film production." That is continuing to happen, even after all the compliance certificates and all the rest of it, because of the DAC structure.

Ms Deirdre Donaghy:

This is an issue that really needs to go to something like an employment tribunal to get a view on it. There is nothing a film tax credit can do to make the film industry a 52-weeks-a-year industry.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Nobody is suggesting that.

Ms Deirdre Donaghy:

The system has to work within how the industry itself works. In the case of producers who are making series, the days of annual series are almost gone now. Every six months or nine months, a new series comes along. The question then is whether a case will be taken that will come within the timelines and have a decision made. The impression I have is that this is not a simple issue of timelines and there are many complicating factors such as employees working with other productions in the meantime and still trying to say they had a continuous contract of employment. I am not in any way qualified to give the Deputy an opinion on those issues. They need to go to the right bodies in the State, with the people who are the experts on these matters.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I am running out of time. The Government needs to make a decision on this issue and stop batting it back to the WRC. The latter does not know what to do with it. Somebody needs to clarify the situation. The relief is given out with a purpose, which is to support the industry, create a permanent pool of skilled employees and create employment. The Government, using public money, is trying to meet a particular objective. Whatever about precisely how the WRC may interpret it, nobody looking at the situation can say the test is being met because the people who are getting the money are saying they have no employees. I do not see how that is an industry or how it can be described as such.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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I have some questions. If members wish, there will be a second round of questions. First, I would like to do some housekeeping on behalf of the committee relating to the consideration that was given to this matter during the Thirty-second Dáil and the report thereon that was written. The tax strategy group in the Department of Finance subsequently made a report that, from my reading, was very much an answer to the work of both the Parliamentary Budget Office, PBO, and the predecessor to this committee. The immediacy of that report to the work done in the Oireachtas meant the language used included a lot of "we will consider" and "we will do work on this". Will the officials from the Department of Finance give a general update on the work that has been done in this regard since then?

In the original report by the PBO in 2019, one of the requests was that there be a shared list between Revenue and the Department of Finance and some kind of clarity around why some things are considered tax expenditures and others are not. Some concern expressed was on the issue of sunset clauses, which I may have time to comment on presently. Will the witnesses also comment on data and measurements that are calculated ex ante? There needs to be clarity for everyone around the measurement of whether a tax expenditure is working well. I do not know whether they have that information.

Ms Deirdre Donaghy:

I have some of it. In terms of the list, the main confusion comes up because we publish a document every year at budget time listing tax expenditures. That list is based on the definition of a tax expenditure as per the tax expenditure guidelines. Separately, and for longer than we have had the tax expenditure guidelines, Revenue has been publishing its own list under the title "Tax Expenditures" that is not based on the same definition and includes some things we would not consider to be tax expenditures because we consider them part of the benchmark tax system. It is undeniably problematic that there are two lists that both have titles referencing tax expenditures but that include different things.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Is that an intractable issue?

Ms Deirdre Donaghy:

It is not an intractable issue. The solution probably is just to give one of the lists a different name. The issue is that the two lists give different information. If we try to resolve them, we will end up with less information. There is a real purpose to Revenue publishing everything it has because it is publishing a lot of information on parts of the tax system we do not consider to be officially tax expenditure, but it is still valuable information to have.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Will Ms Donaghy elaborate a little on that? I am aware that sometimes we call things tax reliefs. Why is there a difference in the definitions? Is it because some expenditure does not qualify as requiring the types of reviews a tax expenditure would?

Ms Deirdre Donaghy:

We are talking about things we would regard as being so intrinsic to the normal tax system that they are not something we would call out as being an expenditure.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Are they operating in a way that does not align with how tax expenditures operate?

Ms Deirdre Donaghy:

Not necessarily. All tax expenditures operate in different way depending on what they are and some of them are very easy to quantify. For example, research and development is a very clear cash benefit and it is really easy to pick that out and say, "This is the cost of your research and development tax credit." Some are more like offsets or are otherwise harder to quantify. We are talking about something that is so fundamental to the system, it is considered part of the benchmark and we do not call it an expenditure.

Mr. Matt McGann:

As Ms Donaghy said, the issue is around the question of what is in the benchmark. A tax expenditure is a departure from the benchmark, if we think of the latter as the baseline system. Colleagues from Revenue will correct me if I am wrong but I understand they do not take a view on what is a benchmark system. The Revenue report just lists all the costings without saying whether they are a departure from the benchmark.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Will Mr. McGann give an example of a benchmark expenditure as opposed to a tax expenditure?

Mr. Matt McGann:

There is not a hard and fast definition. Different people can have legitimate points of difference on it. Ms Donaghy mentioned some benchmark expenditures earlier. The PAYE tax credit is one. We do not expect it ever to be removed; we just consider it part of the benchmark system. Ms Donaghy might give some other examples.

Ms Deirdre Donaghy:

Group reliefs between companies, which Deputy Boyd Barrett often talks about, are an example.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Inter-group transactions.

Ms Deirdre Donaghy:

Yes. They are fundamentally part of how accounts work. They are very difficult to quantify in some ways because they are just so standard in every system.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Are they expenditures the Department would not ever expect to have a sunset clause?

Ms Deirdre Donaghy:

They are absolutely part of the structure. It is like the difference between a phone and a jacket.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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We have been briefed by the PBO on this and we have done our own work but there is a level of ambiguity there between the respective definitions used by the Department of Finance and Revenue. Is that ambiguity serving both organisations well?

Ms Deirdre Donaghy:

Not really given that we are here trying to work it out.

Mr. Matt McGann:

It leads to confusion, which is not helpful. The way I would describe it is that the lists are trying to do different things. The problem, as Ms Donaghy said, is that because the names are similar, it looks like they are trying to do the same thing. Revenue is just showing the list of all the different costings, which is giving as much information out as possible, whereas our list is focusing on, for want of a better phrase, what might be described as policy measures-----

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Yes, they are policy initiatives.

Mr. Matt McGann:

Exactly. The lists are trying to do different things. We would probably prefer not to change the name of our list. I can talk about that with my Revenue colleagues.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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I want to hear from the witnesses from Revenue on this issue but, first, I want to clarify something further with Ms Donaghy or Mr. McGann.

The eking out, or the creating, of a list that is just policy initiatives would imply that those initiatives change. The information we got from the Department, however, suggests that at least some of these policies have been in place since 1999. They have not changed and they have no sunset clauses. Are we really still categorising them as policy initiatives, if they have not been reviewed, they have not been changed and they have no sunset clauses?

Ms Deirdre Donaghy:

They are still considered expenditures because they are departures from the norm that are relevant to a small number of people, which is part of the definition of a tax expenditure. If we took something, for example, like the blind person's tax credit, it is an extremely targeted measure aimed at helping a particular cohort of people. It is therefore clearly an expenditure. It is considered every year as part of the annual budget process. All personal tax credits are considered in that context. It is unlikely that we will see a cost-benefit analysis of the blind person's tax credit, though, because it is hard to see anyone proposing the removal of something of this nature.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Okay. That differentiation seems rather arbitrary.

Ms Deirdre Donaghy:

Which differentiation?

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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The differentiation between what is a permanent or intrinsic part of the tax system and what is not. I certainly would not suggest that we take away the blind person's tax credit, but an argument could be made that there is a better way of achieving that support. I will bring in Revenue at this point..

Ms Jacqueline O'Callaghan:

Revenue publishes a broad list of what we call tax expenditures, but we do not define that relative to a benchmark. Instead, the approach taken by Revenue is to publish all available information on tax expenditures, broadly defined as those moneys gathered as part of the role of the administration of taxes. To go into that aspect further, we source data from the returns of income tax, corporation tax, capital acquisitions tax, stamp duty, value-added tax, VAT, and other available sources. Those data show the estimated cost in respect of revenue forgone, as well as the numbers of people who availed of the tax credits and main reliefs and deductions allowable. Several reliefs that may apply to individuals and companies are also included. The costs shown in respect of those reliefs cover income tax and corporation tax. On www.revenue.ie, it can be seen that we publish a statistics link. The cost of tax expenditures can be found there. Additionally, there is a method statement concerning how those figures are arrived at. Therefore, this is about the data we have available and it is the information therein that is published.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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The key phrase there is that the Revenue would define tax expenditures as anything where taxes are forgone.

Ms Jacqueline O'Callaghan:

Not necessarily.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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I am not asking Ms O’Callaghan to say that. For a layperson, though, this seems to be the situation. The Revenue is taking a broader view in this regard.

Ms Jacqueline O'Callaghan:

We are publishing the information available to us.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Okay.

Ms Jacqueline O'Callaghan:

That is what is then available. It informs policy for the Department, because the information is available to the Department as well.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Okay. Having had that conversation, we will return to the issue of sunset clauses. If we are talking about policy initiatives, then, and I did some quick calculations regarding the latest list we received, it looks to me like 75% of tax expenditures, big or small, do not have sunset clauses. If these are policy initiatives, that is a surprising figure.

Ms Deirdre Donaghy:

It will be seen that there are sunset clauses in the more recent ones. The lessons learned in this regard came from the early 2000s, in the context of the property incentives. They were good and rational policy incentives to begin with and if they had ended five years before they did, we would all have been a lot better off. Therefore, the lesson learned from that experience, and that came out of that period, was that if we were to bring in something new, that it should have a sunset clause. That would ensure that a review was triggered to make us look at the measure. It would also ensure that we were not in a position where such measures could just passively keep going. If a policy decision were made to continue the measure, that would require a legislative amendment. It will be seen that there are sunset clauses in the measures that have come in since then, from about 2012 to 2015 onwards. Almost everything that has come in since then has a sunset clause.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Can a sunset clause be retrospectively applied to an existing tax expenditure?

Ms Deirdre Donaghy:

It could be done. Care would have to be taken about how it was phrased but there is no particular reason why not.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Has the Department of Finance given consideration to undertaking such an audit? I am sure it would not be appropriate for everything, but certainly 75% is a high rate of measures not having sunset clauses, if it has already been accepted that they are a good idea.

Mr. Matt McGann:

I will pick up on several points. What the Chair is saying about the sunset clauses goes back to her previous statement that there might be better ways of delivering initiatives. It is important to state that just because measures do not have a sunset clause does not mean that we do not consider whether there might be a better way of delivering the desired outcomes. Just because something has been on the books for a while does not mean it is never looked at again, even if a formal cost-benefit analysis is not undertaken etc. The only issue regarding extending the use of sunset clauses is that we must be realistic and honest in this regard. There is a resource constraint concerning the number of tax expenditure elements we can examine annually. To be honest, it is about-----

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Four or five maybe?

Mr. Matt McGann:

Yes. We are a small administration. When a sunset clause requires a legislative roll-over, we are forced to look at it. A lesson we learned from the original tax expenditure review guidelines is that we can end up crowding out other work because we must examine the measures with sunset clauses. Therefore, this is just a trade-off and there is no perfect answer.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Mr. McGann has made a good argument to put sunset clauses in older tax expenditures, because he is saying that the newer ones are now crowding out the work in this regard. We can see from the relevant table that some of these have been there since 1999, some 23 years. They have never been reviewed or at least there are no records of there having been a review. They do not have a sunset clause, and this is a good argument to put one in them, if it forces the Department to review them.

Mr. Matt McGann:

We would have to be selective or to think carefully about -----

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Which ones.

Mr. Matt McGann:

-----what we want to do, prioritise and consider what this is going to mean for prioritisation. For instance, as mentioned by Ms Donaghy, there might be better ways to deliver the blind person's tax credit but it is probably not a measure that is going to be removed.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Yes.

Mr. Matt McGann:

It is also important to point out that while things can be on the books for a long time, we do not want to stop designating them as tax expenditures just because they have been on the books for a long time. In the context of the 2009 Commission on Taxation report, for example, it was important to go back, to explore all those measures, to recognise they had been on the books a long time, to ask if they were serving their purpose anymore and to determine whether many of them needed to be rowed back on or removed.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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We are trying to get some oversight, I guess. Sticking on this issue-----

Ms Deirdre Donaghy:

The list largely looks at what measures got a formal econometric review. Many other things happen instead of a formal econometric review. The PAYE tax credit, for example, does not have a sunset clause and it does not get formally reviewed. It is a measure, however, that is highly unlikely to ever be taken away. What happens is that it is considered annually in respect of whether it should be increased or decreased. It is-----

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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No, I get that. We discussed this aspect at the Committee of Public Accounts recently, when I asked a similar question. A certain percentage of measures have never been reviewed. I got a similar answer on that occasion, in respect of certain packages being reviewed during the budget process. On the flip side of that, however, some of the briefing we have been given is that a proper review of these measures can take more than 12 months. If we are dealing with tax expenditures or tax reliefs that never get a full review, and are rolled over every year because someone is taking a passing glance at them, but not a full, in-depth review, I am not sure that is the kind of oversight that would satisfy the Parliamentary Budget Office, PBO, this committee, the OECD or any of those kinds of groups. I am aware that there are different levels of review, depending on the type of tax expenditure. How many of the 165 are over €25 million?

Ms Deirdre Donaghy:

I would have to go back and check a list for the Chair, I am afraid.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Would anybody like to take a guess?

Mr. Matt McGann:

I do not have the information to hand, but we should be able to work it out.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Here is the metric I am interested in. I could not find that information anywhere, or at least I was not able to collate it in the way I wanted to. How many of these 165 tax expenditure elements are over €25 million? That is the limit that triggers the three-year review. If only four of these measures are being reviewed annually, then I suspect that the Department is woefully understaffed in this regard to undertake this kind of work. I also suspect that the ratio of what is being reviewed is not 1:1. It is very low. In respect of the €25 million limit, I would appreciate knowing how many of these 165 tax expenditure measures meet that stipulation and are meant to be reviewed every three years. That would be very useful.

I will stick to an overall view of how we do this. This might be more an issue for those who deal with trade and employment. Some of the measures we are speaking about today have very specific employment requirements. This is not always the case with tax expenditure. Is there a different quantitative requirement for reviews of these? Who gets involved in this? Does it all happen in the Department of Finance? Are other Departments involved where aspects of the expenditure are more complex than simply handing over money to be tax compliant? This may be the case where there are employment clauses. I ask this very specifically because we will soon deal with gaming development tax expenditure. I am very keen on this. I would like to see it treated in the same way as film tax expenditure is treated, with goals to support the industry in terms of staff and training. Is there a difference between how we look at these types of tax expenditures as opposed to standard tax expenditure that does not have an employment cause?

Mr. Felix O'Kane:

I am not really sure there is any that has a specific employment clause. Is there one the Chair can think of offhand?

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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The one for the film industry requires training. This is similar to a planning permission that requires local employment. It has a clause that we might not see in other tax expenditures. Is there a more comprehensive review of how it is working? Unlike direct expenditure, there is no performance budgeting for tax expenditure. The committee spends a lot of time speaking about equality budgeting, gender budgeting, well-being budgeting, poverty proofing and child poverty proofing. There are all these metrics we are trying to push Departments to put in place. It does not really happen. Perhaps the newer ones are better at saying what the measurements are. It is not yet happening at the level of tax expenditure, which, in real terms, is spending. Where there are particular clauses, are we doing something different?

Mr. Felix O'Kane:

Section 481 certification for the film industry comes from the Department with responsibility for culture. There is not really a role for the Department of Enterprise, Trade and Employment to follow up on it. We are not really involved in any way. Nothing really springs to mind. Perhaps in general one thing we mentioned in the opening statement is that it is very difficult to try to assess the benefits of any tax expenditure or incentive. In trying to quantify these things, we have to look for other sources of information. It is not something that is there as part of the overall process that I am aware of.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Is the Department of Finance aware of the issue in terms of the difficulty of performance testing?

Mr. Matt McGann:

Absolutely. The Chair mentioned equality budgeting. Last year with the budget we published an initial scoping paper on equality budgeting within the tax base.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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That is very welcome.

Mr. Matt McGann:

We also published a document with an analysis of green budgeting and tax. The Department of Public Expenditure and Reform had already published something on expenditure. We are in the early stages of looking at green budgeting, as are other countries. It lends itself more to expenditure than to tax. We have set out the issues with green budgeting before taxes apply. It is a green tagging system for various tax measures based on existing measures. This could be used on a per year budgetary basis to assess, as a first step, the monetary value of the greenness of the budget. The only people I have seen who are ahead of us on this are the French. They have more developed criteria. They assess the environmental effect on six criteria rather than just the monetary value. They have a four-point scale of how green a particular measure is. With regard to the tax base, even though our system is relatively rudimentary, it is one of the most advanced. The European Commission is asking us to present to other countries on what we do.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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That is encouraging. I suspect with the Citizens' Assembly on Biodiversity, one of the suggestions will be to broaden away from monetary evaluation. I do not think it will end at green budgeting. Tax expenditures often benefit people who pay sufficient tax to take advantage of them. I suspect equality budgeting will also be quite challenging.

I want to continue to discuss how exactly we are going about reviewing tax expenditures. Perhaps it is an issue for Revenue. I am not sure who it is for. If tax expenditures relate to EU programmes or have a relationship with EU goals or EU funding, is there increased complexity? Is this something that comes up? Is there any tax expenditure that has an EU aspect? Does the greenhouse gas emissions allowance have something to do with the emissions trading system, ETS? That would have an EU component in it.

Ms Deirdre Donaghy:

I will have to get my colleagues to provide the Chair with information on this. It is not something I am aware of.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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I am interested in information on this. Where measures interact with EU requirements on auditing sometimes that auditing can be less and sometimes more than our own. I am interested to know whether we are coming up to the level required. In this case, we have not reviewed it.

Ms Deirdre Donaghy:

What is the question exactly? What does the Chair want to find out?

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Where there is an EU component to a tax expenditure, are there particular requirements for audit?

Ms Deirdre Donaghy:

By an EU component does the Chair mean getting a grant?

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Either funding or a policy initiative from the EU.

Ms Deirdre Donaghy:

When funding comes from the EU-----

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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It is direct expenditure.

Ms Deirdre Donaghy:

Yes. In addition, the research and development credit, for example, interacts with measures. There are a lot of grants available. I cannot remember their names but they are also available at EU level.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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I would have expected that the EU would require relatively stringent reporting on how the component it provides interacts with others. If it does not, I would be interested to know.

Ms Deirdre Donaghy:

The Chair wants to know whether the reporting is similar.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Yes, or if it is something that comes up for Revenue or other Departments.

Ms Deirdre Donaghy:

If something is grant funded, a tax credit cannot be claimed on the amount that is grant funded because it has not been suffered as a cost to the person. With regard to the accounting criteria for it, I am not sure whether we have information at the level of the company. Ms O'Callaghan might have information on this.

Ms Jacqueline O'Callaghan:

What Ms Donaghy is referring to is the Horizon 2020 grant. It is deducted directly from qualifying expenditure. It is not taken into account in the credit costs, if that makes any sense.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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It does make sense. I thank Ms. O'Callaghan.

I want to go back to the film relief. I was perusing the numbers. This is a minor detail in the greater scheme of things but I noticed a noteworthy change was made between 2019 and 2020. The expenditure went from €1.3 million to €2.2 million but the number of people or groups in receipt of the tax expenditures went from 41 to 47. The increase in the number of groups receiving it was 14% but the increase in expenditure was 66%. What is happening there?

Ms Deirdre Donaghy:

Perhaps Mr. Carey can explain how it is claimed. The way in which it is claimed can run over a number of years.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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I know there would be variations in the numbers. This was the only one I could find that had such a marked change.

Mr. Alan Carey:

There are a number of factors. Two thirds of the claims are for €500,000 or less. The most on one production could be up to €22.4 million. We can see how one big production can really skew the numbers. We spoke about the information published by Revenue. It is accurate but it probably needs a bit of context.

When a producer company is claiming the credit, it is a little bit complicated. If, say, they get a certificate in 2022, they have to go back and amend their corporation tax return for a previous year. I might use an example to clarify this. To a 31 December year-end, if a company wants to claim relief on a certificate in 2022, the previous tax return, for 2021, can be amended depending on the stage of the year. This is assuming that the specified return date for the corporation tax return has passed, which for December year end would be September 2022.

If it has not passed, however, and if the company wants to make the claim in June, it would go back to the 2020 return. The information the Revenue statistics branch produces and publishes shows the returns that were amended. If a film were certified in 2022, for example, some of that could be shown for a 2021 return being amended and some of it for 2020. Those numbers need to be contextualised. On the beneficiaries list we publish every quarter, it is shown by reference to the year in which the state aid was granted and the money received.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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That is confusing.

Mr. Alan Carey:

It is confusing, but it is a function of showing the information that is published from the CT1 returns because that is what that is looking at and because a company would have to have amended 2020 or 2021, in my example. That is what that is going to show-----

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Is that detail on those numbers set out anywhere?

Mr. Alan Carey:

I do not believe it is. We would always contextualise it if there were a parliamentary question, a press query or a media query-----

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Are the flat, or unchanged, numbers available anywhere?

Mr. Alan Carey:

That is something we would have to prepare on foot of a query-----

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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It is parliamentary question territory.

Mr. Alan Carey:

Yes, but we compile and publish the beneficiaries list every quarter. A tracking exercise is carried out to make that information readily available and accurate. I am not suggesting the other information is not accurate, but it is a different take on it.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Mr. Carey might refresh my memory. Is that the list where some of the recipients have, beside the name of the producer company, figures between €10 million and €30 million? It is slightly alarming that we are giving this company somewhere between €10 million and €30 million.

Mr. Alan Carey:

To be clear, we do know the exact number but-----

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I am glad to hear that.

Mr. Alan Carey:

-----that is the way we are required to publish it in line with the EU transparency rules. Those bands are provided and that is the information we are required to produce, so that is why we do it in that manner. We have the detailed data-----

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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But we cannot see them.

Mr. Alan Carey:

Not specifically. We do not publish a list like that. We publish under the transparency rules that require the data to be in that format.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I find that problematic, although I do not know whether Revenue is bound by certain rules here. This DAC thing drives me around the twist. How is anybody supposed to know? We will get on to the Equity issue next week, and our guests will have read the submission. One phrase that strikes me - people do not use phrases for nothing - refers to depressed income strategies and internal pricing. I know exactly what that means and I think our guests all know what it is alluding to. That kind of stuff needs to be scrutinised and, as policymakers and legislators, we need to know whether these mechanisms that have been set up to stimulate the industry are being abused. We need to know the detail. I am curious about the DAC in all this business. Do we ever see the DAC's accounts? Can I see them? All the accounting is done within the DAC even though it is the producer company that gets the relief. It does not give us transparency, does it?

Ms Deirdre Donaghy:

I think the Deputy is referring to the Equity letter. As I said, we have not seen it, but from the sounds of it, it may be Revenue is the proper avenue if there is concern that fraud is involved.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I think it is referred to as being a risk.

Ms Deirdre Donaghy:

If there were any indication that something was being done that was not in line with the requirements or with normal accounting rules, there are avenues by which that can be addressed, namely, the normal audit procedures. A DAC is a company. It must be established and have a normal company returns office. A certain degree of information can usually be availed of by the Companies Registration Office, although I am not sure of the level of detail. Revenue gets the returns under confidentiality, so they are not publicly available, but the returns go through Revenue's risk-profiling systems as well. If there were to be any suggestion of something being done that was fraudulent or incorrect, there are avenues by which that should be reported and it can be investigated.

Photo of Patricia RyanPatricia Ryan (Kildare South, Sinn Fein)
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I thank our guests. I had to step out to another meeting that lasted much longer than anticipated. If I double up on questions, therefore, I apologise for that in advance. My first question relates to the film tax credit and the percentage of films made in Ireland that claim the credit. What percentage of applicants are successful and what are the common reasons for refusal? How does it work if the film is made in a number of different countries?

Ms Deirdre Donaghy:

Unfortunately, I can probably only answer some of that. By definition, we know about the ones that do get approved. Officials in the Department of Tourism, Culture, Arts, Gaeltacht, Sport and Media are the people who would be able to give information about whether any companies that apply for the cultural certification do not get it, given that is a hurdle they have to jump over to get there.

I do not have information on collaborations, but Screen Ireland might. We can certainly inquire.

Photo of Patricia RyanPatricia Ryan (Kildare South, Sinn Fein)
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I would appreciate that. Deputy Doherty asked about research and design credits, so I will not go there. Does the Department believe there is potential to include metrics for tax expenditure to better analyse outcomes of tax expenditure?

Ms Deirdre Donaghy:

There are always options for new metrics. The metrics we use are set out in the tax expenditure guidelines, and my colleagues in the economics division are looking at reviewing them to see whether they need to be updated now that we have experience of operating them for a number of years. If the Deputy has suggestions for new metrics, I am sure they would welcome them.

Photo of Patricia RyanPatricia Ryan (Kildare South, Sinn Fein)
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The committee's 2019 report recommended the Department of Finance review its existing guidelines regarding the evaluation of tax expenditure. Can our guests provide an update in this regard?

Mr. Matt McGann:

We noted that in the 2019 report, and it was something we had been discussing internally. It was a fair conclusion, given the guidelines were published in 2014, so it was work we were going to undertake. Members probably hear this a lot, but Covid intervened in early 2020, so it was pushed down our list.

Is there an end date for it?

Mr. Matt McGann:

We have not started the work yet, to be honest, so it is something that will be in our work programme for next year.

Photo of Patricia RyanPatricia Ryan (Kildare South, Sinn Fein)
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Given the fact that it has not been started, how long does Mr McGann anticipate it will take to complete?

Mr. Matt McGann:

We can do it certainly within the year.

Photo of Patricia RyanPatricia Ryan (Kildare South, Sinn Fein)
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Okay, thank you.

Finally, how does the Department of Finance decide which measures to review and are they done on a schedule to ensure each one is reviewed regularly or are there some that need more regular review than others?

Ms Deirdre Donaghy:

A lot of factors go into deciding it. If there is a sunset clause, it prompts a review and the Department tends to look at those that have a larger cost, for example, the research and development and film would be higher cost ones that are reviewed more regularly. The tax and expenditure guidelines give the suggested review and the best practice timelines based on size. Then there are other things that prompt reviews as well. During budget or finance Bill debates, the Minister may often commit that something be examined, for example a tax strategy group paper might be produced on it. Political debate can prompt something to be reviewed. We have discussed that there are many more expenditures than the Department has capacity to review so it is always a case of trying to identify those that give the best value. We have to do a cost benefit analysis of doing a cost benefit analysis really. It is always a case that there is more work to be done than the Department has capacity to do and those are the criteria that bring the ones that get reviewed up to the top of the list.

Photo of Patricia RyanPatricia Ryan (Kildare South, Sinn Fein)
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I thank Ms Donaghy and the Chair. I apologise for the late entrance.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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That is no problem. It was as much our issue as it was yours.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I have a couple of quick points and they will genuinely be quick. I know this has been explained but it does concern me that the inter-group transactions are up to €35 billion as a cost on the revenue table this year. That is up from €16 billion the year before and €12 billion the year before that, which is an enormous jump. I am a great fan of the Revenue's table, by the way, I want to say that.

Ms Deirdre Donaghy:

Is Deputy Boyd Barrett referring to the stamp duty one?

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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The stamp duty inter-group transactions. On the face of it, in the table produced by Revenue, it is a cost to the people of €35 billion, having jumped from €16 billion the previous year. It is absolutely enormous.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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I will allow the witness to answer but I want to draw Deputy Boyd Barrett's attention to the fact that a vote has been called.

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Okay. One last thing, the stakeholder issue is a theme that comes across in terms of the reviews and I ask the committee to consider that we significantly up the ante on that. We had an arts committee that recommended a stakeholder forum around section 481 a few years ago. Certain participants said they were not participating and then, even though a Minister and a committee was in favour of it, the committee was gone because one or two stakeholders decided they did not want to participate. I seriously recommend that this is just not allowed. If people say they are not participating, they are the ones who should be penalised. How on earth can somebody get public money and then refuse point blank to participate in a stakeholder forum that the elected representatives and the Minister say is going to happen, and they are let away with that? It is beyond belief to me. I ask the committee to consider that point because we need more stakeholder engagement and a proper structured process. Frankly, if stakeholders and beneficiaries of these reliefs are not playing ball, they should be told to take a hike.

Ms Deirdre Donaghy:

Stamp duty is a very archaic tax on documents but essentially it is when an asset transfers and inter-group is where it moves from one arm of a company to another arm of a company. The reason there is a relief is that there is no real economic change in the owner. It is still owned within the same group and provided you meet the criteria, stamp duty is not charged. It would not be viewed as a loss of revenue to the State because if there was a stamp duty charge on it, moves just would not happen. It exists for things like reconstructions, amalgamations, moving things around a group. They are all part of the normal way in which a group operates. It is not one the Department sees as a loss of revenue as such.

On stakeholder participation, and I know Deputy Boyd Barrett will not agree with me------

Photo of Richard Boyd BarrettRichard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I am a bit sceptical.

Ms Deirdre Donaghy:

The Department does a huge amount of stakeholder participation. I know Deputy Boyd Barrett has a particular focus on film and that is one instance. I cannot talk to that particular instance but certainly the Department has a very open engagement policy across all elements of taxation. We do public consultations, take pre-budget submissions and meet with representative bodies. Over the last number of years we have been making huge changes to the corporation tax system from the anti-tax avoidance directives and we do a whole process of consultation papers, of feedback statements and public meetings. The Department ran a public stakeholder event a couple of years ago specifically targeted at SMEs and small businesses where we looked at the EII relief and the key employee engagement programme and the small business aspect of research and development. There is always something that has not been done but looking beyond that one particular instance, a huge amount of stakeholder engagement goes on although undoubtedly we cannot meet everybody.

Photo of Neasa HouriganNeasa Hourigan (Dublin Central, Green Party)
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Okay I am going to draw the meeting to a close although I am sure Deputy Boyd Barrett has more questions.

I thank the officials from the Department of Finance, the Department of Enterprise, Trade and Employment and the representatives of the Revenue Commissioners for attending today's engagement with the committee. It was genuinely very useful to us. The next public committee meeting is scheduled for 29 June when the committee will meet with stakeholders to hear their views on the review of the film tax credit.

The joint committee adjourned at 7.37 p.m. until 5.30 p.m. on Wednesday, 29 June 2022.