Oireachtas Joint and Select Committees
Wednesday, 25 January 2023
Committee on Budgetary Oversight
Commission on Taxation and Welfare Report: Discussion
Neasa Hourigan (Dublin Central, Green Party)
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I welcome Dr. Aedín Doris from Maynooth University; Dr. Karina Doorley, Professor Conor O’Toole and Professor Seamus McGuinness from the Economic and Social Research Institute, ESRI; and Mr. Seamus Coffey from University College Cork.
Before we begin, I wish to 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 of witnesses physically present or who give evidence from within the parliamentary precincts is protected pursuant to both the Constitution and statute by absolute privilege. However, witnesses who are to give evidence from a location outside the parliamentary precincts may not benefit from the same level of immunity from legal proceedings as a witness who is physically present does. Witnesses are reminded of the long-standing parliamentary practice 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 witnesses' statements are potentially defamatory in relation to an identifiable person or entity, they will be directed to discontinue their remarks. It is imperative that they comply with any such direction.
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 or her identifiable. I remind members of the constitutional requirement that they 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 in meetings where they do not adhere to this constitutional requirement. Therefore, any member who attempts to participate from outside the precincts will be asked to leave the meeting.
I invite Dr. Doris to make her opening statement.
Dr. Aed?n Doris:
I thank the Chair for the invitation. I was invited to comment on chapters 9 to 12 of the Commission on Taxation and Welfare report. I am grateful to the committee for the opportunity to do so. My comments are based partly on my experience as a member of the Pensions Commission, which reported in 2021. I was on the technical expert group of that commission, along with Mr. Coffey. Some of the papers we produced are relevant to the Commission on Taxation and Welfare report. I also co-authored a report on the introduction of a living wage for the Low Pay Commission last year. That report considered how earnings interact with the tax and benefit systems, a matter which is also discussed in the commission’s report. My academic research has often addressed how the benefit and tax systems affect incentives to work. In my full submission, I commented on the commission recommendations that were most strongly related to these areas. I will outline the main points today.
Regarding sustainability, the Pensions Commission heard convincing evidence that public finances are not sustainable, partly due to the ageing of the population and because of challenges related to climate change. For this reason, I strongly agree with the arguments the Taxation and Welfare Commission makes in favour of broadening the tax base. The Pensions Commission recommended increasing PRSI receipts by removing the age exemption for those over 66 and removing the exemption on pension income other than the State pension. We also recommended increasing the self-employed PRSI contribution rate, initially from the current 4% to 10% and then to the same rate as the class A employer rate. The Commission on Taxation and Welfare has made similar recommendations. The commission also proposed other PRSI base-broadening measures, including applying PRSI contributions to employees earning below the current threshold albeit at a lower rate. This recommendation would improve sustainability and eliminate the problem associated with the current cliff edge of PRSI eligibility.
Commission recommendation 11.1 states that secondary benefits provided by Departments other than the Department of Social Protection should be designed jointly with the Department of Social Protection to ensure appropriate integration and I strongly concur. In our research on the possible introduction of a living wage, it was striking that in some counties, the introduction of the living wage could make a working parent currently eligible for the housing assistance payment, HAP, ineligible. This shows that the structure of HAP can be a strong disincentive to seeking higher earnings for some parents.
As regards the tax system, the commission recommends that the standard rate cut-off point be fully individualised, which I agree with. Irish women have been shown to be particularly responsive to wages. Any measure that increases the net wage rate for secondary earners, who are often women, tends to increase female participation. This would be beneficial for the sustainability of public finances and could also help to reduce the gender earnings gap. I note that Dr. Doorley has done a lot of work on this topic, and she is the expert in that area.
Regarding welfare payment adequacy, the commission recommends that the Government undertake a benchmarking exercise in respect of all working-age income supports, with multi-annual targets subsequently set for social welfare rate increases based on an evidence-led process. The Pensions Commission made a slightly different recommendation. We suggested a standing body, rather than a one-off benchmarking exercise. This body would be similar to the Low Pay Commission, carrying out periodic, regular evaluations of the adequacy of the State pension. If a body along the lines suggested by the Pensions Commission were set up, it would be feasible to cover working-age income supports as well as the State pension, as similar data would be needed to evaluate the adequacy of both types of payments. As regards the possibility of a pay-related jobseeker benefit, the commission gives cautious support. There are good economic reasons for linking benefits to previous earnings, as it would allow workers to be less risk-averse in their labour market decisions and may allow unemployed individuals more time to make better labour market matches with employers, both of which enhance productivity. However, I agree with the commission that the design of an earnings-related component needs to be carefully considered because any increase in benefit entitlement will reduce the incentive to find work to some extent; there is strong evidence that incentives matter to the duration of unemployment.
The commission makes a strong suggestion in recommendation 12.5 that the existing system of child income supports be reformed to provide a second-tier support linked to household income, rather than parental labour market status. This payment would be in addition to universal child benefit. I strongly support this. A second-tier payment for low-income households would allow the elimination of child dependent allowances in jobseeker payments. This second-tier payment would, in turn, reduce the replacement rate for parents and enhance employment incentives. In addition, a second-tier payment would allow much better targeting of child poverty, which is a serious problem. I thank the committee again for the invitation today and I welcome any questions.
Neasa Hourigan (Dublin Central, Green Party)
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I thank Dr. Doris. I invite Dr. Doorley to make her opening statement.
Dr. Karina Doorley:
I thank the Chair for the invitation to the ESRI to appear before the committee. I am joined by my colleagues Professor Seamus McGuinness and Professor Conor O’Toole. We are happy to provide our views on the report of the Commission on Taxation and Welfare. Part of the brief for the commission was to explore how the tax system promotes enterprise.
The focus of the review was to address the dual role taxation can play in both attracting and retaining foreign direct investment, FDI, firms but also supporting the development of indigenous enterprises and in particular micro, small and medium-sized enterprises.
Regarding taxation policy for multinationals and larger enterprises, the commission generally endorses the current corporate tax strategy, and especially participation in international efforts to tackle aggressive and harmful corporate tax practices by corporates. Given the importance of the FDI sector to Ireland’s economic performance, the alignment of Irish policies to those from upcoming multilateral agreements is understandable. Further discussion by the commission could have been focused on the specifics of the Irish situation in terms of its sectoral structure and in managing risks relating to the concentration of corporation tax revenues and their sustainability.
Considerable emphasis was placed by the commission on differentiating between the appropriate taxation measures for larger and small firms. This is an important distinction and addresses the well-established fact small firms face very different challenges from larger enterprises when it comes to credit access, encouraging capital expenditure and the cost and time of tax procedures. The development of bespoke instruments for SMEs to help encourage equity investment as a financing instrument through a revamped employment investment incentive scheme, EIIS, and the extension of entrepreneur relief to angel investors are welcome and address known issues of low SME financial diversification in Ireland. These instruments can help deal with long-standing issues around credit access for SMEs and their reliance on debt financing. Further important suggestions relate to measures to help foster productivity enhancing investment, and in particular the targeted research and development relief. Irish firms have been shown to have low levels of productivity and low expenditure on research and development; a more targeted research and development instrument may help to increase research and development spend and drive productivity-enhancing investments. In general, having differential policies and procedures for small firms throughout the tax system should be a key takeaway from the commission’s report and can help foster enterprise development and job creation.
I move to benefit adequacy. The Irish tax-benefit system performs more redistribution than most other European systems. While inequality in market income is higher in Ireland than in most other European countries, inequality in disposable or take-home income is close to the European average. There is a trade-off inherent to such redistribution through means-tested benefits or progressive taxation. On the one hand, such redistribution improves living standards of the poor and reduces income inequality. On the other hand, incentives to work may worsen. Determining if benefit levels are adequate is not straightforward and in practical terms is often investigated after benefit reform by estimating the effect of the reform on poverty or other metrics. However, there are a number of more formal ways to determine the appropriate value of a social welfare payment. It can be benchmarked to a proportion of average wages, determined based on the replacement rate deemed necessary to smooth consumption or set using a minimum essential standard of living, MESL, method. The last benchmarking exercise was undertaken in Ireland in the context of budget 2007. The commission presents evidence that, since then, the real value of social welfare payments has fluctuated considerably. In our post-budget analysis last year, the ESRI suggested a new benchmarking exercise would be a useful way of re-establishing the link between these payments and income adequacy.
On work incentives, the tax-benefit system in Ireland is structured such that some households may be in receipt of multiple cash and non-cash benefits and paying tax. Examples of benefits that may be cumulated with other benefits or employment income include medical cards, national childcare scheme subsidies, housing and jobseeker supports. Many of these supports have different eligibility criteria and withdrawal methods. The withdrawal of one or more of these benefits simultaneously as income increases can reduce work incentives, especially if recipients also pay income tax or receive the working families payment.
The commission recommends reforming the primary working-age payments so that there is one income-related working-age assistance payment available to all households. It suggests this might be developed in tandem with another of its recommendations, namely, a second tier of income-related child supports. This would expand and simplify the system of working-age supports while removing some of the complicated work disincentives. The partially-joint nature of the income tax system may also provide a disincentive for secondary earners, who are usually women, to join the labour market as, depending on the earnings level of the primary earner, the household may face a very high marginal tax rate on any earnings by the secondary earner. The European Commission’s work-life balance package strongly recommends removing fiscal disincentives for secondary earners.
On the matter of a universal basic income, UBI, the commission reviews some of the evidence related to it and recommends such a policy should not be supported for Ireland. The ESRI has recently undertaken a substantial review of the potential advantages and disadvantages of a UBI policy, in addition to setting out a range of recommendation for the design of any future UBI pilot in Ireland. In terms of potential benefits, a UBI would avoid situations where people choose not to work in order to retain means-tested benefits. It could give individuals the freedom to turn down or leave insecure, exploitative or low-paid work in pursuit of better employment opportunities. Furthermore, persons in informal and often unpaid work, such as childcare and adult care, receive some compensation for their labour. In terms of potential disadvantages, a UBI may not target those that are most in need as a large percentage of recipients will be high-earning individuals. Furthermore, a UBI is likely to be very expensive, even if other existing benefits, such as unemployment benefits, are no longer required. We estimate that the implementation of a UBI in Ireland in 2019 could have involved a gross cost of close to €50 billion per year. The net impacts of a UBI on labour supply are unclear.
The commission discusses the sustainability of the Social Insurance Fund, SIF. Reiterating findings from the report of the Commission on Pensions in 2021, it outlines the pressures that the fund is expected to come under in the short to medium term due to demographic change. It recommends a number of measures to broaden the PRSI base. These are in line with recommendations in previous chapters to improve horizontal equity in the tax and welfare system and remove cliff-edges, but they would also increase the revenues of the SIF. In particular, the commission recommends introducing PRSI for all earners and abolishing or minimising exemptions based on age or income source. This is in line with previous ESRI analysis on broadening the tax base.
We thank committee members for their time and the opportunity to discuss this important review and we look forward to answering related questions.
Neasa Hourigan (Dublin Central, Green Party)
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I thank Dr. Doorley and invite Dr. Coffey to make his opening statement.
Mr. Seamus Coffey:
I thank the Chair and the committee for the opportunity to present. I am here in a personal capacity. For the purposes of my statement, I will focus on chapter 9 of the commission's report, entitled Promoting Enterprise. I will briefly consider some of the commission’s conclusions on the rate of Ireland’s corporation tax and the main reliefs and credits available under the Irish regime. I am sure other topics will arise during the course of the discussion relating to corporation tax and other issues covered in the chapters of the commission’s report identified to be covered in this meeting and I hope to be able to offer some insight to members from my work in these areas.
The terms of reference for the Commission on Taxation and Welfare restricted the set of possible recommendations on corporation tax to those that retained the 12.5% rate. Specifically, the commission was asked to consider:
how Ireland can maintain a clear, sustainable, and stable taxation policy as regards Ireland’s attractiveness to Foreign Direct Investment in a changing global taxation environment, including retention of the 12.5% corporation tax rate.
Successive Governments have held the position the 12.5% rate was a cornerstone of economic policy. The commission endorsed this view. When considering the impact of the then-proposed two-pillar solution from the OECD for ongoing international tax reform in its final report of September 2022, it noted:
Public assurances have been given by the Irish Government with regard to the retention of the 12.5 per cent rate for the foreseeable future and companies and groups have organised themselves on that basis. A change to the domestic rate now, particularly against the current backdrop of ongoing international change, could impede the stability and certainty that is granted by providing timely notice of key changes where practicable; a measure underpinning Ireland’s corporate tax strategy.
However, the previous October the Government had already announced the domestic rate would change for all companies in Ireland with annual revenues more than €750 million. At the time of the announcement it was indicated this new rate of Ireland’s corporation tax would apply to 56 Irish multinationals and to the subsidiaries of 1,400 foreign multinationals operating in Ireland. This will bring to four the number of rates applicable under Ireland’s corporation tax code. The introduction of a new 15% rate goes significantly beyond the scope of the OECD agreement. The proposed minimum tax under pillar 2 requires only that Ireland ensure that Irish multinationals have paid a minimum of 15% on their profits in all jurisdictions in which they operate. It is the US that is required to ensure US multinationals have paid 15% on their profits. We have decided to move in front of this and apply a 15% rate to the profits of all companies operating in Ireland with revenues more than €750 million. This is not retaining the 12.5% rate as set out in the terms of reference of the commission or as assured by numerous Irish Governments.
On reliefs and credits, the Irish corporation tax system is one that could be characterised as applying a relatively low rate to a wide base.There are limited reliefs and credits within the Irish corporation tax system. In that system the largest deductions from gross tax due are double tax relief granted for tax paid in other jurisdictions on foreign income included in Ireland’s tax base and the existence of the research and development tax credit, which also includes a refundable element.
Irish-resident companies include their worldwide income in their Irish tax return. Thus, Irish-resident companies can be in receipt of dividends from their foreign subsidiaries or branches on which foreign tax has already been paid.
The Irish system grants a credit for the foreign tax paid and if the amount of foreign tax paid is less than the required Irish rate, a top-up Irish payment is required to bring the total tax paid to the required amount. As the relevant Irish rate is typically lower than the applicable foreign rate, little additional Irish corporation tax is due. If Ireland moved to a territorial regime for corporation tax, this foreign-source income would not be included in Irish tax returns. The commission made no recommendations on the nature of the Irish corporation tax regime.
The other large credit available for corporation tax in Ireland is the research and development tax credit. The cost of the credit varies and in 2020 it was €658 million, of which 70% was to companies with more than 250 employees. Similar to a recent report from this committee, the commission’s recommendations for the research and development credit focused on small and medium enterprises. The research and development credit was introduced in the Finance Act 2004, and the rate was increased from 20% to 25% of eligible expenditure from 2009. For large, foreign-owned companies it should be noted that the research and development credit was introduced and enhanced at a time when the rate of the US federal corporate income tax was 35%.
One result of the introduction of the research and development credit in Ireland was to bring near equivalence between the tax benefit of incurring research and development costs in Ireland and the US. In the US these costs would be deducted from revenues, with the company’s tax bill reduced by 35% of the amount deducted. If the same costs were incurred in Ireland, the company’s tax bill would be reduced by only 12.5% of the amount deducted, in the absence of the research and development credit. The research and development credit brought the tax benefit of eligible expenditure in Ireland up to 37.5% of the amount incurred. This is 12.5% from the standard deduction plus 25% from the research and development credit.
Following the introduction into law of the Tax Cuts and Jobs Act 2017 in the US, the rate of the US federal corporate income tax was reduced from 35% to 21% from 2018. This means that the tax benefit of US firms for research and development expenditure incurred in Ireland is significantly higher than if the same expenditure was incurred in the US. An examination by the Revenue Commissioners has shown that of the eligible €3.1 billion of research and development expenditure included in corporation tax returns filed in 2020, €2.6 billion, or 83%, was undertaken by foreign-owned multinationals, with US companies in the pharmaceutical and other sectors likely to be responsible for a large share of this.
A focus on the use of the research and development credit by SMEs is warranted but the benefits of most of the current tax expenditure go to large, foreign-owned multinational enterprises. Both the additionality that this tax foregone generates, and the size of the credit needed to generate any additionality, should be subject to review, particularly considering changes in the US tax rate. I thank the committee for the invitation to attend. I look forward to our discussions on this and other issues. I hope I can assist with the questions members have.
Mairead Farrell (Galway West, Sinn Fein)
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Gabhaim buíochas leis na finnéithe as teacht os comhair an choiste. I also have to go to another meeting so unfortunately my time might be a bit limited but I will try to get as much as I can out of it.
I noticed in her opening statement that Dr. Doorley mentioned it is a well-established fact that small firms face different challenges from larger enterprises when it comes to credit access. She also discussed the need to encourage equity investment for SMEs to wean themselves off debt financing. The commission has outlined certain tax measures, such as the EIIS. If we look back at the time of the Celtic tiger, one of the most successful indigenous exports to emerge from that era was software, and that was due in no small part to the then State-owned ICC Bank as a significant equity investor at the time. It was privatised but we have other banks in which we have significant ownership.
When we look at countries that pursued successful industrial policies, like Taiwan, Japan and South Korea, they set credit quotas for their banks and they required them to allocate certain parts of their SME loan books for lending related to a given industrial policy. That might be microchips, for example. That stood out to me from Dr. Doorley's opening statement and I wonder if that is something that could be done here. Could such a measure be set here or could tax measures be used for similar purposes? I notice what Mr. Coffey said about research and development and all that as well but one of the things that came up when I was meeting different businesses around budget time was the issue of small businesses finding it difficult to take the next step.
Dr. Conor O'Toole:
The issue of SME access to finance came to the fore after the financial crisis. We have done a huge amount of research, along with the ESRI, in recent years, which has tried to measure and quantify the access to finance constraints that are affecting many small firms. Coming out of that research the following matters were clear. First, Irish firms disproportionately used debt financing when they funded any of their external financing commitments, up until the financial crisis period. That evaporated pretty much overnight and the banking system structure changed. We had retrenchment in the financial sector and we have had market exits of some of the banks that lent to SMEs since then. There has been a huge amount of change in the Irish financial sector, therefore. We have had a historical challenge in this area as we were reliant on external financing from banks.
We have moved to a position where our firms are financing a huge amount of investment from their internal funds so we spent quite a bit of time trying to understand if that is because of supply side challenges like access to credit, if they have become more risk-averse or if the demand for that investment is not there. We publish an annual SME investment report on this and we have published various papers on it and the conclusion is that it is a bit of both. Financing constraints are an issue and debt financing is a problem within that mix but there is also a reluctance on the part of SMEs to invest. That is part of the reason SMEs, in particular, invest in things like intangible assets or research and development, where there are things that are good for the economy in terms of productivity growth in the long term. We have to think about what role the tax system plays in that and how we can try to help to get more different types of financing, because our banking system has changed.
When you look at other countries, you see that more equity financing is used in many other markets. It is harder in smaller countries like Ireland because often equity markets come from wealthy individuals and in large countries there are just more wealthy individuals. Trying to encourage an investment culture to draw equity into small businesses in Ireland is a good step forward to try to diversify the financing mix. We have not had options historically and we want to give small businesses options. Equity financing through the EISS or any revamped equivalent or some sort of relief or angel financing are only one part of the story but we want to try to develop a range of options so that SMEs can choose the financing mix that suits their business ventures at that particular time.
If we are thinking about the recommendations from the commission, in particular, I would be supportive of the entrepreneurs relief. Extending that to third-party investors is a good idea because that would allow the angel investors to derisk a little bit and get involved a little bit more. When you read the detail of the EISS, you see that the commission suggests that a lot more research needs to be done to find out exactly what the financing challenges and barriers are and to examine how we set up that scheme to address the issues around SME access to finance. Having a more diversified structure in which SMEs have access to many different things is the way to have a well-functioning financial system.
Mairead Farrell (Galway West, Sinn Fein)
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That is interesting. I have another question on Dr. Doorley's opening statement. Dr. Doorley was talking about UBI and concerns around it. Has research been done on alternatives to that? I know Dr. Doorley mentioned MESL as her alternative to UBI. Should we bring standards up to MESL or do we need a different alternative? What are Dr. Doorley's views on that?
Mairead Farrell (Galway West, Sinn Fein)
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In that case, I may throw in a question to Dr. McGuinness about his views on the job guarantee. I like to read about these things so I would like to hear his views.
Dr. Seamus McGuinness:
On universal basic income, what we basically did here was we undertook a review of the existing research. We did not evaluate UBI as such but we did look at evidence from pilots out there. What we found was that as Dr. Doorley said, there are some advantages to UBI, particularly in relation to removing the stigma associated with welfare payments, taking away its effects and allowing people to search for more secure employment. However, a big disadvantage is-----
Mairead Farrell (Galway West, Sinn Fein)
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Dr. McGuinness's machine must be restarting. Does anyone else want to come in on that? It is something I am interested in so I would like to hear our guests' views.
Dr. Karina Doorley:
Dr. McGuinness made a good point about the stigma of social welfare. One of the positive things about UBI is that there is no stigma attached to it. It is for everybody. Take-up of social welfare is strongly linked to how universal it is. You find that with social welfare payments which are somewhat complicated in how they are designed or in their income or employment requirements, take-up tends to be low. On the other side, payments like child benefit or pensions, where you have very clear eligibility criteria, have very high levels of take-up. The Deputy's question was about finding alternatives to UBI which might be seen as far too expensive to be even considered. Increasing take-up of social welfare is really important. Social welfare cannot function to alleviate poverty unless people actually avail of it. The ways to do that include automating it but to do that you need information - for example, you need Revenue records linked to Department of Social Protection records so that you can automatically give people the payments they are entitled to. Another way to do it is by simplifying payments, as the commission has recommended. Professor McGuinness is back with us.
Mairead Farrell (Galway West, Sinn Fein)
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That automation would be brilliant. I know from people coming into my clinics that people have no idea what they can get and are entitled to.
Dr. Seamus McGuinness:
The downside to UBI is that it can be hugely expensive. In addition, we do not know what the impacts of inequality and poverty are and some people can be made worse off so there is a need for supplementary top-ups to take those people up so that they are not negatively affected. The alternative to the UBI approach depends on the objectives. There is an approach where you can identify a subset of individuals and target minimum payments towards those individuals. That is called a guaranteed minimum income scheme. We have something running for people in the arts sector. It has somewhat the same principles as UBI. It is not means-tested but it is not universal and it is targeted towards particular groups of people or subsets within the population. It could be targeted towards individuals or households at most risk of poverty. We looked at it across the board and evidence suggests that those kinds of guaranteed minimum income schemes which are targeted towards particular groups of individuals are shown to have more positive impacts on poverty rates than the evidence that has come from the UBI pilots.
Mairead Farrell (Galway West, Sinn Fein)
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I have heard the professor's views on the jobs guarantee. That is something I am interested in. If anyone else would like to say something on it, I am interested.
Mairead Farrell (Galway West, Sinn Fein)
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It is just because we were talking about UBI that I thought I would ask. It is okay. We can move on.
Mairead Farrell (Galway West, Sinn Fein)
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That is perfect. If anyone else wants to come in on that, that would be fine. My slot has gone on and there are other speakers to come. I need to pop out so I will leave it at that and come back.
Neasa Hourigan (Dublin Central, Green Party)
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Our next speaker is Deputy Boyd Barrett.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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The Chair might let somebody else go first.
Gerald Nash (Louth, Labour)
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Do the witnesses have a view on the Department of Enterprise, Trade and Employment's indigenous enterprise review, which was published recently? It pointed up a lot of problems with our indigenous enterprise base. It refers to low productivity and what might be done with the research and development situation. I will put that first to the ESRI and then Mr. Coffey might respond.
Dr. Conor O'Toole:
One of the big challenges with the SME sector is that it is really heterogeneous. There are loads of different types of firms doing an awful lot of different things. For many of those, particularly in domestically non-traded sectors, or services sectors providing the kinds of services we consume daily, it is very difficult to achieve high productivity. When we talk about a research and development gap or a productivity gap for SMEs, we are talking much more about the type of firm that could be oriented towards export-ready internationally traded firms. What is clear from that group of firms is that investment in intangibles in Ireland is lower definitely than in other assets and there is some evidence that it is lower than other countries. The real challenge is to understand why. We definitely need more research on this because, as I mentioned earlier, there are supply-side factors involved. Access to credit can be much more difficult when you are trying to become an exporter because there are big sunk costs to exporting. That is a risky business decision so without a lot of collateral, third-party investors or the financial sector find it more difficult to allocate credit. They are the type of enablers that we can help with when we are trying to build a business environment to help firms to export. We can help with State supports around financing activity. It is much more difficult on the demand side. Some of the things that our report tried to look at were investor appetite, the role of uncertainty and the role of risk aversion. Some of the evidence we have is that after the financial crisis many firms just lost the risk appetite to invest, perhaps because of their past experience about how challenging the environment was when they expanded too much. Without commenting too much on the paper the Deputy mentioned but more broadly on how we think about how we set out the policy enablers that help to build an enterprise base domestically that can support jobs growth and indigenous exporters, it is about trying to unpick what those factors are. On the supply side, it may be a question of credit issues or other barriers to exporting, such as information or market access, or it may have something to do with risk appetite, which is much more difficult to deal with.
Gerald Nash (Louth, Labour)
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The experience over many decades has been that is has been difficult to enable microbusinesses or SMEs to scale up sufficiently where they are getting seriously involved in exporting, which is where the added value is and is where they become more productive and of greater benefit by adding higher value jobs and so on. When plans were first announced to revise the indigenous enterprise strategy, it was presented as an effort to recast Ireland's industrial strategy but it was nothing of the sort. It struck me as something that the Taoiseach wanted to get off his desk before he left the Department of Enterprise, Trade and Employment. I think more elaboration is required in that document and by the Department and Enterprise Ireland about their ambitions for the scaling up of Irish enterprise for a number of reasons.
That moves me on to Mr. Coffey and his area of expertise.
I have taken a significant interest in his very important work on corporation tax in recent years in respect of the public's understanding of where we are coming from and where we are going and the inherent risks to our industrial strategy and policy, and to Exchequer revenues and jobs, potentially. We know the risks and they have been well ventilated here and elsewhere. We are aware of them and we speak about them ad nauseam. This is what annoys me about it because the expectation was that we would have a new industrial policy where we would consider how we would scale up our SMEs and work to make our business enterprises more productive, export-oriented and so on. There is no doubt but there are significant risks there and in the two pillar process we have signed up to relating to the OECD reforms. We have been repeatedly told by the Department of Finance that the likelihood is, by virtue of our signing up to those reforms, that we will lose, on average, €2 billion a year potentially to the Exchequer. I have never bought that. I do not believe that there is any real basis for that contention. I am not certain what are the current views of the witnesses on that. It is very uncertain and we know that 50% of all of those record receipts from the past year for corporation tax have now overtaken VAT in its significance, extraordinarily, under the tax headings. Does Mr. Coffey agree with the assessment that is being repeated from the Department of Finance, with minimal evidence, that there is a risk of a €2 billion per annum drop to our corporation tax base? I appreciate that there are many moving parts to this.
Gerald Nash (Louth, Labour)
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It is a dynamic situation.
Dr. Seamus McGuinness:
I am sure that there is underlying analysis behind that analysis but it has not been made public or published. It could be informal analysis undertaken within the Department. It should be noted that this analysis, whether the numbers are right or wrong, is solely based on pillar 1, which is the reallocation of taxing rights to market countries. We make and sell a great amount of stuff, particularly through the foreign companies. The suggestion under pillar 1, which looks like it is struggling to get international agreement, is that the taxing rights would go more to the market countries. It is not certain or clear which countries would lose. Would it be a production or producer country, like Ireland, or would it be the other research and innovative countries like the US, from which many of these products originally derived?
There is a solid basis for saying, yes, that Ireland would lose a certain amount of a tax base if more of the taxable income was to be taxed in the market countries. Quantifying that, however, is quite difficult.
On the other hand, in respect of the risks, if we look at pillar 2, at the global minimum tax rate and the decision that Ireland has taken, which was set out in my opening statement, to move to a 15% rate for large companies; in the main, that should be revenue positive. A move from 12.5% to 15% is a 20% increase in the rate. If, as we did in the past year, we collected €20 billion, and we increase the rate by one fifth, just on a standstill basis, that would be an additional €4 billion of tax revenue, which was the total of such revenue collected in 2014.
Gerald Nash (Louth, Labour)
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Yes, that was back in 2015.
Dr. Seamus McGuinness:
The Deputy is completely correct about the changing environment. Would I agree about the €2 billion figure? I believe that there is no basis to agree or disagree with it but it is likely that pillar 1, if it gets agreement and it looks like it is struggling, would be a negative for Ireland. Then, on the other hand, because of the rate, and assuming that nothing else changes, that would be revenue positive. Given the way the rules, the companies, and profitability are changing, however, one cannot have any solid basis for any of that.
Gerald Nash (Louth, Labour)
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I thank Dr. McGuinness.
Neasa Hourigan (Dublin Central, Green Party)
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I thank Deputy Nash and call Deputy Michael Healy-Rae now, please.
Michael Healy-Rae (Kerry, Independent)
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I thank the witnesses for giving their valuable time this evening. I appreciate what they have contributed so far. I have a couple of queries.
In the first instance, we have heard of the broadening of the tax base. I appreciate, bcause of what we call the pensions ticking timebomb and all that that is, why a person of expertise and knowledge in this field would use the term “broadening the tax base” but I have to look at it then the other way, from the point of view of business. I hear many people talking about small and big business, but everything is relative. Whether one is small or big; if one is big, the problems are compounded more and one still does not have any magic mechanism to shelter oneself from the challenges a large business would have, no more than a small business, except that in a smaller business, pro rata, one does not have any big defence mechanism to protect oneself from the trials and tribulations of running that business. Business at present is difficult. The witnesses do not need me to give them an explanation as to how difficult it is but at the same time, my job as a Deputy is to represent people. In effect, the Chairperson has often heard me say that a Deputy is a messenger of the people.
The message I wish to deliver to the committee today is an example, which is a very short, sharp one, of how truly difficult it is. I feel very free to give these statistics because they are my own. When I do this, I have to declare an interest in what I am talking about quite simply because I am a small employer and provide employment to a good number of people in a number of different fields of life. I will give one example.
In a small service station with a shop on the side of the road, the energy bill would have been €1,500 or €2,000 maximum every through two months. The most recent bill I received was for €12,300. The income going into that shop is not any more than it ever would have been. There are still approximately 17 people making a living out of that business. That business is in a very precarious position at the moment and I cannot deny that. When I am telling that story, which is my story, I am also telling the story of my friends and neighbours who run the same type and style of business, where they are not relying upon what I would call an exorbitant amount of energy. The model of some of the people with whom I would be dealing would be exactly the same as mine. They might employ 15 to 20 people in that size of a business and the bill would have been approximately €2,000 and has now gone over €12,000. How is that supposed to be sustainable?
In case anybody thinks I am not acknowledging the work that was done by the Government with regard to the energy credit scheme; I thank the Government for it, acknowledge their work on it and I appreciate it. Its meaning in reality is minuscule to the people involved. The headlines sound great but it is not actually great when one is trying to apply for it and see what it is going to actually mean to you. That is just an example of how bad things really are on the ground.
With regard to the foreign investment into this country, to my colleagues in opposition who they know I am not a critic of, the exact opposite is the case, in fact. I find in many of these cases I would have the same concerns they would have with respect to the positive sides of their opposing positions to the Government. I would, however, have concerns about the Opposition’s reputation when it comes to foreign direct investment. I do not want to see a situation where we will take measures in this country, whether it is to do with the preferential tax rate or whether it is making it unattractive for those people to retain and enhance the jobs that they have here. I believe we have been served well by the fact that we have been so attractive to foreign investment and that people have seen fit to bring their much-needed and wanted jobs here. Anything we do in the future should be to try and keep that as a cornerstone of business in Ireland and to continue to attract those jobs because they mean so much in every different sphere of life to this country.
I turn to access to credit. Restructuring debt, no matter what a person does, still leaves debt. If the costs, such as those I have outlined, are going through the roof, it puts an unbearable strain on business. Before the meeting started, a small employer was on the phone to me. Obviously, I will not say his name. I will not even say whether he was from County Kerry or not. Let us put it this way; he is in the Republic, runs a small business and has 11 employees. He is dealing with AIB, which I name for a simple reason. I know we are not supposed to name individual organisations, but when I see the signs that state "We're backing brave", I would love to go into every bank, tear the signs down, take them outside the door and put them into the rubbish bin because they are not backing brave; they are backing nobody. There was a time when a person could go to his or her local bank to access credit and get direct access to funds. Unless I am living on a different planet, that is what a bank is meant to be. It takes money from one person, puts it into an investment and gives it out to somebody else. That is what makes the world tick and the world go around. Unfortunately, at present, it does not matter if you are a young person looking for a mortgage or an established person with a business, never mind if you are - God help you from all harm - a new business person trying to start off. If people go to AIB or any other bank looking for a loan, they will see how they get on. I can guarantee they will not be welcome. I am not criticising individuals working in the banks. The system has gone wrong. It is the fact that the bank manager or chairperson seems to have no more say than Tom the cat in running the bank because it is a case of having to refer things to Dublin. There was a time when people could go into a bank and the boss was the manager. If they could convince the manager that they were a good punt to take a risk on and if he or she believed in them, my goodness, that was it. They had that person to canvas, to cajole, to try to get him or her to come around, and then to earn their own reputation by working hard and paying their debts, thereby getting a track record behind them. Now, if they go into a bank with a track record as good as the Virgin Mary, staff still will not listen to them or want to give them a loan. What exactly does a person have to do now to get credit? As far as I can see, it is like the three-card trick; now you see it, now you do not. The signs "We're backing brave" are totally misleading and erroneous and, quite simply, not true.
Neasa Hourigan (Dublin Central, Green Party)
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I thank the Deputy for not naming any particular group. His time is coming to an end. Is it okay if I allow the witnesses to respond to his contribution?
Michael Healy-Rae (Kerry, Independent)
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Yes, of course. As always, I will take the Chairperson's direction.
Neasa Hourigan (Dublin Central, Green Party)
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The Deputy has a question on access to credit. Who would like to take that?
Dr. Conor O'Toole:
I am happy to talk about the access to credit issue. I refer to some of the themes mentioned by the Deputy, especially the historical banking structures in Ireland that were based on relationship banking. That was the way banking was done for many years. Banking is changing. It is becoming much more data driven. Decision making is becoming more centralised, as is credit access. There are a number of impacts because of that. It can be more challenging for firms that historically used relationship banking to transition to a new environment where they have to produce more data or financials. In that context, for many Irish firms, there is probably a skills gap such as in financial literacy. Providing supports in that context can help.
The key point behind this is that, historically, we had a reliance on the banking sector to provide credit to firms. We then had the financial crisis, which changed irreparably our banking system and caused an increase in credit constraints. We have had a pick-up in credit since then. The key issue is that there were no, or fewer, other options for companies. That is where some of the recommendations in the commission's report are important. Continuing to try and encourage equity investment through schemes, such as the employment and investment incentive scheme, EIIS, or the extension of entrepreneur relief, provide the building blocks to develop an equity-financing-type structure in Ireland that could help compliment the banking system as it changes and a new banking landscape develops.
Neasa Hourigan (Dublin Central, Green Party)
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I am sorry to interrupt but, unfortunately, a vote has been called in the Dáil Chamber. I will suspend the meeting until 7 o'clock. It will give the witnesses a chance to take a break.
Neasa Hourigan (Dublin Central, Green Party)
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Deputy Aindrias Moynihan would like to take this slot and Deputy Boyd Barrett would like to wait until the end. Technically it is Deputy Canney's turn and Deputy Doherty is going to come back but, in the meantime, I will take the opportunity to ask some questions myself.
Going back to the issue of corporation tax and how it interacts with research and development, I would like to revisit the interplay between our rate and the US rate. Mr. Coffey has said that companies write down research and development spending against a tax rate that was 35% and which is now 21%. Ireland had an effective deduction of 37% rather than 12.5%. Am I correct that the difference between the 35% and 37% was marginal and that, although it made it worthwhile, it was not a great difference but that the newer 21% rate makes the differential significant?
Mr. Seamus Coffey:
Yes, that was the key point being made. To go back to the debates made in committee here in 2004, the reasons given for the research and development tax credit were about moving up the value chain. We had foreign-owned enterprises in Ireland that were largely involved in manufacturing and production. It was a question of whether we could get more of their higher value-added activity located in Ireland. The response was that, if such activity was done in the US, the tax deduction was worth 35% while it was only worth 12.5% if that activity was done in Ireland. The numbers do not equate. That was one reason for the introduction of the research and development tax credit. The world has now changed, however. As the Chair said, the US tax rate has changed. Are we getting additional activity? Are companies bringing research and development activity to Ireland because of this credit, resulting in a benefit to us, or is it the case that activity is already here and we are subsidising it? Would that activity be here if the credit was lower? Is the gap between 37.5% and 21% so large that our rate is not attracting any additional research and development activity? If the gap was smaller, perhaps if the rate was 25%, would we have the same level of activity here?
There are also other changes under way. Many of these US companies have moved their intangible assets to Ireland. That is likely to be linked to research and development activity. Again, it is down to additionality. Is the tax expenditure we are incurring generating benefits that would not be generated in the absence of the tax credit? Are we providing a subsidy for activity that would be here anyway because of other factors? The world has changed. It is nearly 20 years since we introduced the research and development tax credit. The US tax code has changed, as has the international environment. It is always important to review these things. I appreciate what this committee has done with regard to SMEs. The commission's report discusses the trade-off between using tax credits and using grants and is much more focused on the SMEs but the bulk of the expenditure is going on the large companies and that is where the review should be.
Neasa Hourigan (Dublin Central, Green Party)
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Mr. Coffey says that the world has changed. Even in the short time we have been on this committee, the tone has certainly changed with regard to whether FDI companies will stay. At the outset of this committee's term and the Thirty-third Dáil, there was a suggestion that this was a significant threat and that a lot of foreign direct investment could leave. There certainly seems to have been a tonal change over the past year or so which suggests that this is unlikely and that these companies seem fairly embedded here. While this is purely a matter of opinion, does Mr. Coffey believe that is because of this ever-widening gap and the 14% or 15% benefit these companies are receiving? Does he believe that there is a new confidence that, if we hold onto that gap, these companies are not going anywhere?
Mr. Seamus Coffey:
It is only an opinion but I find it hard to imagine that the existence of the research and development credit is key to maintaining levels of foreign direct investment in the country. It probably plays some role for some companies and some activities but, given the overall portfolio of companies that are here, I doubt that the credit or that gap is central to their presence here. People may talk about a risk of a flight of foreign direct investment. At times, some of these suggestions have been pretty poorly founded and based on idle speculation rather than on fact. When it comes to much of the FDI in Ireland, we are not talking about companies that have been here for years or even decades. We are not talking about the companies that have been here for generations, having arrived in the late 1960s, the 1970s or the 1980s. These have been here for a considerable period of time. Ireland has advantages when it comes to the maintenance of that level of activity in that we have a reputation for delivering. That is why some companies in certain sectors including pharmaceuticals and manufacturing make multibillion investments in Ireland with regard to facilities and plant. The research and development credit has a role to play. I just hope it is generating additional activity. If it is costing close to €600 million a year, we need to be getting a net gain from it. The most recent review carried out by the Department of Finance related to 2016 and said that there was a gain. If this credit was perfect and if no activity had been subsidised, there would have been additional credit equivalent to four times the cost of the credit. That is if it was perfect and just generated entirely new activity. At that time, the Department found that the additionality was 2.4 times the cost, which is to say that approximately 40% of the activity would have happened anyway and that there was no need for the credit in those cases. However, a gain of 2.4 times the cost in additional activity is a gain.
Overall, it was a net benefit but that was in 2016.
Neasa Hourigan (Dublin Central, Green Party)
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It is difficult to surmise how one calibrates that to get a higher return. If Mr. Coffey was looking to do a review this time, I presume he would want a review not just compared with the US tax code but also with regard to the 15% that we might move to.
Neasa Hourigan (Dublin Central, Green Party)
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I am aware that when we talk about these percentages, we are talking about incredibly large amounts.
Bernard Durkan (Kildare North, Fine Gael)
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I am sorry for coming late to the meeting. I was in three or four different places at the same time. I have been listening to the debate and there is a certain amount of déjà vu. Around the time of the financial crash, there was much doomsday speculation that we had limited opportunities, we were going to go down and would be down for years and decades, potentially 50 or 60 years, and that we would have a second bailout. All the economic speculators told us what was going to happen. They were all wrong. I bring to people's attention that one can go from relative ease in the economy to a disaster in a very short time if one makes the wrong moves. When we are getting all this advice about what to do, let us think back to the UK, which has a bigger economy than ours. Certain moves were made and the result was disastrous. The effects will continue for a long time. While I encourage new information and new thinking, I think about Venezuela with its many mineral resources and a huge economy, which is not there anymore. It is gone.
If we want to scare people and set the €600 million or €800 million against the total benefit on a speculative basis and hope that it will not scare investors away, my advice to the witnesses is to keep it quiet. We are in a challenging place with the economic climate in the globe. Those challenges will not go away and they will be around for a considerable time. My advice is to be careful that we do not cause, say or do anything that might bring about a rethink. Do not forget that we are also in a situation where many tech companies are changing the rules. They are reducing their workforces worldwide. We should have regard for what is happening in a serious way and try to make sure that we do what is right for the country, not just what theoretically could be right.
I again apologise to all the economists I apologised to previously. After the financial crash, they all came forward with doomsday solutions and predictions of worse to come, but that is not what won the day. What won the day was hard thinking, shrewd decisions, investment in the right place at the right time, not going with the flow or with populism, but doing what needed to be done to retain jobs and to reverse the flow of decades. Let us remember where we came from. We once exported our population to cities and countries all over the world in the hope that they could get a job. Almost every family in this country has a history of various family members going abroad, not because they wanted to go abroad but because they had to. That has been reversed. It took much effort and we should not throw it away.
My last point is about the wealth tax. I hate when people jump up and down to say how wonderful the wealth tax would be and how much more money we would make from it. We had a wealth tax in this country and it was abolished because it was not doing the job it was expected to do. It was doing the reverse. I would ask how much wealth we have and what it is based on. It is based on salaries and property. We spend much of our time talking about the wealthiest people in the country who happen to be living here, for whatever reason, and how much more money we can take from them. Do we really think that they want to let us do that to them? I do not think so. In the marketing world, one always has to have regard to the ambient conditions. Those conditions tell a different tale.
Neasa Hourigan (Dublin Central, Green Party)
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Would the witnesses like to comment on any points made by the Deputy?
Mr. Seamus Coffey:
I reiterate the point about the regime that is in place for attracting investment. The commission's report makes clear that the intention is to maintain the attraction for investment. Whatever money is being used, whether direct expenditure or tax expenditure, which are equivalent from a budgetary perspective, with €1 of a reduction in tax or €1 of additional spending having the same impact on budgetary outcomes, one wants to be sure that one is getting value for money. If one is offering a tax credit, one might want to make sure that there is additional activity and more jobs and that one is not necessarily subsidising jobs that already exist. These things have to be taken into consideration. The Department of Finance reviews the research and development tax credit and it would be good to see another one. In the main, the reviews to date support the continuation of the research and development tax credit. An updated one would be of benefit.
The Deputy briefly mentioned the wealth tax towards the end. One of the themes of the commission's report was broadening the base. It focused on capital taxes, wealth taxes, capital gains and capital acquisitions tax. It would put business taxes, corporate taxes and labour taxes, maybe excluding social insurance, a bit further down its list of priorities. Broadening the tax base is an ongoing medium-term project. There is a role for capital taxes. We have a limited one in Ireland in the form of the property tax, which could generate more if the rates or bands were changed. It would not be a huge change. It would take place over a period.
Bernard Durkan (Kildare North, Fine Gael)
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Let us not forget that we had another property tax which brought in substantial money for local authorities and the Exchequer. There was a bad reaction, particularly on the south side of Dublin. It had to be abolished.
Neasa Hourigan (Dublin Central, Green Party)
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Let us not relitigate why we abolished rates. That would be a different session altogether.
Bernard Durkan (Kildare North, Fine Gael)
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This is not about rates but a different property tax that had to be abolished. It applied to houses over a certain valuation. They were in Dublin in what used to be called the stockbroker belt. It was not positive, it did not bring in what it was intended to bring in and it was punitive for those it affected.
Pearse Doherty (Donegal, Sinn Fein)
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I apologise for being absent for the voting session and all that. I will be brief because I know others want to speak. I thank the witnesses for their work not only on their submissions but on the publications that we received last year. Their reports are food for thought. While not all of us agree with everything in the submissions, we recognise and value the expertise, time and effort that the witnesses put into compiling information. It raises serious questions about the conversations we need to have on the medium and long-term sustainability of finances. One of the benefits is that we have a bit of time if we act now. It does not have to be quite as sharp as if we delay, when the adjustment could be more significant or severe.
I apologise because I missed the first part of one of the questions and Deputy Durkan's questions. If I am repeating anything, I can look back at the Official Report and we can move on. I have a question for Mr. Coffey on his submission and his focus on corporate tax rates, the OECD base erosion and profit shifting, BEPS, process, and how the implementation of that is evolving or has evolved.
We are conscious in all of this that the European Commission is going to implement pillar 2 through a directive and that a proposal has passed the US Congress that deviates from the OECD agreement in terms of pillar 2. In his opening statement Mr. Coffey says the introduction of a 15% rate goes significantly beyond the scope of the agreement and that the proposed minimum tax under pillar 2 requires only that Ireland ensure that Irish multinationals have paid a minimum of 15% on their profits in all jurisdictions in which they operate. He says it is the US that is required to ensure that US multinationals have paid 15% of their profits. He also says we have decided to move in front of this and apply a 15% rate to the profits of all companies operating in Ireland with revenue over €750 million. I think he goes on to say that is not defending the 12.5% tax rate.
I want to tease this out with Mr. Coffey. Is it the case that if Ireland were not to implement a 15% tax rate on all multinationals operating here, and it was only to apply the rate to Irish multinationals, as is the minimum required under the OECD agreement, it would be the US that would collect those tax revenues through the income inclusion rule and the under-tax payment rule? Therefore, does it not make logical sense, because this can only work if all parties are involved, for us to collect the tax, if the tax is going to be paid by these companies anyway? For the sake of argument, if we have a company like Apple here and it must pay a minimum 15% tax rate under the OECD pillar 2 rules, if the US signed up to it in that way, why would we not ensure that the tax is paid to us and is paid to the United States? Is it not the sensible thing for the State to go down that road, or am I missing something?
Mr. Seamus Coffey:
The point is well made. It is not a case of assessing whether the decision is right or wrong. It is more about highlighting the significance of the decision. After nearly 20 years of saying that this rate was a bedrock of economic policy, in a short statement the Minister for Finance will announce a change to the rate. It has not yet been introduced. It was expected to be introduced by 1 January 2023, but implementation agreement at EU level has slowed it down, so it will possibly be next year before that is the case. It is a significant change. Is it the case that the tax will be paid anyway? Possibly, although the Commission does make the point that given the broad base on which Ireland charges the 12.5% rate, it is possible that the effective rate on the base in the OECD agreement would be close to 15% anyway, so there would not be much additional tax. That would be subject to the fine detail of the agreement and how the corporate tax base on which the 15% rate would be assessed would be set.
Deputy Doherty is correct that if there was a phenomenal difference between the 12.5% in Ireland and the 15% at the pillar 2 rate, then the company would have to pay 2.5%, so he asks why we should not just collect it in Ireland. That is the logic of the announcement that was made that the rate would move to 15% and Revenue would collect it here rather than somewhere else. That is a perfectly sound and reasonable logic for something to happen, but if this is a bedrock of our economic policy, we have now signed up to the principle of a global minimum tax and who is to say the rate would not be different? Why in five, seven or ten years' time would there not be a renegotiation, and everyone would come around the table and say they have all agreed to the principle here, now they are just changing the rate, so why not go to 17.5%, 20% or 22.5%?
What is the purpose of pillar 2? Why is it in place? Is it to collect additional tax revenue? Not really. Most companies are likely paying tax rates of 15% or higher on average anyway. While there might be some additional tax revenue, it will not be significant. One of the key impacts that the rate will have is that it will reduce the tax competition smaller countries can use to attract investment. While Ireland might have a 12.5% rate, and the rate in France might be 30%, a 15% rate initially will not make that much of a difference. We will still have a lower tax rate than the likes of France, but if the rate was to increase further, that gap would narrow and the relative attractiveness generated by smaller countries with lower tax rates would be reduced.
What has happened with the OECD agreement is very significant. It should not be just on a whim that we change our tax rate from 12.5% to 15%. That is not to say it is wrong, but it should be something that is subject to careful assessment.
Pearse Doherty (Donegal, Sinn Fein)
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I agree with Mr. Coffey's analysis that the change was made by press release. There was a long tale in regard to where it was going and all the rest. People were sufficiently conditioned for the outcome of the negotiations at that level.
There are two points I wish to make to tease this out. Mr. Coffey asked what this is about. I agree with his analysis that this is about tax competition and limiting the ability to have that breadth of advantages in terms of certain member states. We are in a position with the 15% that we are still competitive in terms of tax but that could change, not just because of renegotiation but because of other players deciding to reduce their marginal rates. On the basis that this is a minimum effective tax rate, does it not do far more than that? Does it not look at aggressive tax planning? Is it not the case that it is an effective tax rate as opposed to a tax rate?
Mr. Seamus Coffey:
Potentially, it will be, but if we look at the 140 countries that have signed up under the inclusive framework, it includes the Cayman Islands and Bermuda. They are not going to levy 15% on anyone. They do not have corporate income taxes. They cannot have a 15% rate. They will continue to have no corporate income tax. They have signed up to this. They would have been central to some of the most aggressive tax minimalisation strategies that we have seen. I accept it will have some impact, but a key will be the home country of those multinationals. That is the reason, from an Irish perspective, a lot of the focus will be on what is happening in the US and whether it has OECD-compliant minimum tax. At present, it does not look like it. Given the way the congressional elections have gone, it is hard to see anything happening in the next two years that will change anything over there. The global intangible low-taxed income, GILTI, is a form of a minimum tax but it is at a lower rate and a different base. Making it compliant with what the OECD has agreed is not straightforward. It must be brought through congress. The President cannot magic it up. It must come through Congress, so that will be a difficulty.
Does it reduce the aggressive tax practices we have seen? It has some impact, but I think other changes have been far more significant. I refer to changes in transfer pricing rules and the US itself getting rid of deferral. Those have had a much bigger impact than the minimum tax will have.
Pearse Doherty (Donegal, Sinn Fein)
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To go back to tax competition, Mr. Coffey mentioned the Cayman Islands. What have they signed up to? They will probably not apply a 15% rate.
Pearse Doherty (Donegal, Sinn Fein)
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Yes, they do not have corporation tax. Owing to the income inclusion rule, other member states are able to get that tax off the company regardless.
Pearse Doherty (Donegal, Sinn Fein)
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That takes away the advantage for the company locating in the Caymans in the first place because it will have to pay tax.
Pearse Doherty (Donegal, Sinn Fein)
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I have questioned the Minister in particular on the implementation of pillar 2 in order to get his thinking on where we are at. We are supportive of the agreement. When I say "we", I am talking about my party. However, Mr. Coffey raises a valid point, which is that now that the principle has been ceded in terms of tax sovereignty and minimum effective tax, what will happen in five years' time, seven years' time and so on and so forth. We might not even have a first time, depending on how the US and some of the big players go.
One of the issues that concerns me is relates to the implementation of pillar 2, which is not just for us as it is also a European directive. Will we have not seen it twice in regard to taxation, which was also another one of our sovereignty staples in terms of taxes? Now we have allowed for the implementation of this measure, not through what we will do in the Parliament but through a European directive that we are legally bound to implement to the minimum standards.
Mr. Seamus Coffey:
Yes, implementation will happen through the EU. I am not necessarily sure that I agree we have ceded twice. We could potentially have done so if the words "at least" had remained in the OECD agreement. Then there would be another round of negotiation at EU level to establish what we think "at least 15%" means.
It could have been a different rate. The EU could have decided that, at EU level, that means 17.5% or 20%.
Pearse Doherty (Donegal, Sinn Fein)
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I take Mr. Coffey's point regarding the opening up of those negotiations. What I mean is that it is conceding twice. It is accepting the principle of minimum taxation at OECD level but also accepting the principle that the EU can legislate for corporation tax matters in this State through the directive. That is the point. It was a bit of a Holy Grail here for many years.
Pearse Doherty (Donegal, Sinn Fein)
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It would be the first time in the context of corporation tax.
Pearse Doherty (Donegal, Sinn Fein)
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We always had a veto on that, however. That is the key point.
Mr. Seamus Coffey:
Yes. A number of countries would have opposed it. Once all EU member states had signed up at OECD level, it was always going to be implemented at EU level. It is not as though EU member states signed up and then the European Commission decided that now they had all signed up, it would create an EU directive. It had the directive almost ready to go. It applies to corporation tax and it has an impact. It did not change the domestic rate of corporation tax in Ireland, however. That was a decision taken by the State. We could implement the EU directive and maintain a 12.5% rate of corporation tax. It did not force us to go from 12.5% to 15% for large companies; the State chose to do that.
Pearse Doherty (Donegal, Sinn Fein)
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I appreciate that. There is much more we could discuss in respect of corporation tax but I wish to touch on two other items. I know I am running-----
Neasa Hourigan (Dublin Central, Green Party)
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The Deputy is way over time.
Pearse Doherty (Donegal, Sinn Fein)
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On research and development tax credits, we have been arguing for a long time that they should be focused on SMEs and there should be additional supports in place in that regard. In fairness to the previous Minister, he accepted one of our proposals for a higher rate for SMEs. Even though it was legislated for, it could not be implemented because of state aid rules and complexity that was causing too many issues. What are the recommendations of the witnesses in respect of research and development, particularly in terms of SMEs more generally?
As regards the aspect of the commission's report relating to supporting those in work and the issue of refundable tax credits, we know in-work credits grew in popularity in the 1990s and 2000s. Where is there scope for refundable tax credits in the context of the taxation system in terms of encouraging more people to work? I know this formed a large part of the two opening statements but what is the view of the witnesses on the issue of a second person in the home - this predominantly relates to females - working, and the disincentive that applies to those persons in the tax code?
Neasa Hourigan (Dublin Central, Green Party)
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I am not sure which of the witnesses wishes to respond first.
Dr. Karina Doorley:
I will start with the Deputy's last point, relating to the issue of work incentives for secondary earners in a household. Typically, secondary earners tend to be women. They have the lower potential earnings for a range of reasons, including the gender wage gap, but also traditional divisions between work and caring roles. Most European countries are moving to a system of individual taxation from systems of joint taxation, or have been doing so for the past couple of decades. The reason for that is it provides a better incentive for the secondary earner in a couple to work, that is, either to join the labour force or, if he or she is already in the labour force, to work more hours, such as by moving from part-time work to full-time work.
Ireland began the system of switching to individual taxation at the turn of the millennium. There were a couple of budgets that steadily increased the standard rate band for two-earner couples and for singles while keeping constant the standard rate band for one-earner couples. The system of joint taxation turned into a system where just one third of the standard rate band was allowed to be shared between members of a couple. It became a sort of hybrid system, but it became more individual than joint. There is a measurable effect there. It increased the proportion of married women in the labour market by approximately five percentage points at the time, so it was quite significant. There is scope to do more. We are still in a hybrid system where, if the secondary earner in a couple is not working and decides to join the labour market after staying home for child-rearing duties or whatever, his or her marginal tax rate is higher than it would otherwise have been if we were in a situation of individual taxation. In the current situation, where there is a very tight labour force, a shortage of workers in certain key occupations and we are facing population ageing and so on, it makes sense to reduce barriers to work. It is not about forcing people to go to work if they want to stay home and care for children; it is about removing financial barriers to work for those who want to go to the labour market. The commission recommends individualising taxation and our research to date shows that is a sensible path to take.
Pearse Doherty (Donegal, Sinn Fein)
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For clarity in respect of individualising taxation, for a two-person household where both are working, basically, whether it is individualised or the hybrid system we currently have, the tax liability of that household would remain the same. If it is individualised and only one member of the couple is working, however, the tax liability on that household would be higher than it is under the hybrid model. Is that correct?
Dr. Karina Doorley:
The system could be designed to be revenue neutral. As regards the policy change implemented in the early 2000s, there was lots of money to spend at the time. The situation of one-earner couples did not change in nominal terms. They did not lose anything; their situation was exactly the same. The tax bill on two-earner couples and singles, however, went down. In a scenario where Exchequer funds were available to pay for that, that would be the way to do it because it does not penalise anybody. Otherwise, switching to individual taxation for one-earner couples will have a financial impact on them because the secondary earner will no longer be able to share part of his or her standard rate band with the primary earner.
Pearse Doherty (Donegal, Sinn Fein)
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That would be an issue for people who are caring-----
Pearse Doherty (Donegal, Sinn Fein)
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------for an incapacitated child, for example. It might be an issue for those who have young children at home or an elderly parent living with them. It gives rise to those kinds of issues.
Dr. Karina Doorley:
Absolutely. There are legitimate reasons for a member of a couple wanting or needing to stay at home for caring duties. That is a contribution to the economy and the care economy. There are better ways to incentivise that or pay for it. Joint taxation or partially joint taxation is not at all dependent on having a child or caring for a person; it is simply dependent on being married. It is not the most efficient way to target those people.
Pearse Doherty (Donegal, Sinn Fein)
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I appreciate that. I thank Dr. Doorley.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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As Mr. Coffey is aware, one of my favourite subjects is the effective corporate tax rate. It was also addressed by Deputy Doherty. If I heard Mr. Coffey correctly, he stated that the level of deductions and allowances is relatively minimal.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Reliefs and credits. In the document, however, they look pretty huge. The document provides the most recent figures, for 2020, with €193 billion in gross trading profits. After allowances and losses forward, the taxable figure goes down to €114 billion. The amount to be taxed drops by 70% or 80%. Mr. Coffey is probably better at maths than I am. It drops by an enormous amount. It is almost halved. It is slightly less than halved but it is a significant fall. Am I right in saying that a lot of that is the royalties and so on that are being paid by companies to their own subsidiaries? Is that still what a lot of it is?
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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It is further down the table.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Okay. The amount accounted for by capital allowances and trading losses forward is huge but Mr. Coffey is saying there is even more further down the table. Where is that-----
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Charges and deductions.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Before. The Revenue table is another of my favourite documents. It refers to intragroup transactions, which have jumped astoundingly in the last few years. The latest figure I saw for 2021 was something incredible like €35 billion, and it is describing that as revenue foregone in its list of deductions, reliefs and allowances. That had jumped from €19 billion and before that it was €11 billion. These are staggering figures.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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It is referred to in the Revenue table as intragroup transactions.
Mr. Seamus Coffey:
I am not familiar with it. I will look it up. In the main, when it comes to the presentation, in my opening statement I would not have referenced the table here, but you would always know your audience, and we have had a number of discussions about the figures in this table before. That was maybe one reason for including it, and I am glad the Deputy has picked up on it. My opening statement focused a lot on the credits and reliefs which come after taxation has been calculated - the research and development tax credit and the double taxation relief. What we are looking at here with regard to deductions is where people have spent money, so the Deputy is absolutely right that the figure for capital allowances is huge, and Revenue has a figure of €76 billion in deductions under capital allowances for 2020. However, that is a deduction of expenditure - it is the treatment of capital expenditure. Somebody has bought an asset, whether it is a machine, a factory or, as we know, intellectually property, IP. They have bought something, so they have incurred an expense.
Should we have concerns about it? Possibly, but not necessarily from an Irish perspective. One concern with IP is that almost all of it is internally generated. This is US companies trading licences between US subsidiaries. They were previously in Bermuda and because transfer pricing rules changed, that could not continue, and because of the abolition of deferral in the US tax code, it was not really worth their while to do it, so they had two choices, namely, to bring the IP back to the US, as many companies have done, or move it elsewhere where they have substance. Many of those companies have substance in Ireland, so they have moved their IP to Ireland. The Irish subsidiary bought it and it incurred a huge expense in buying it, and the capital allowance is just how that expenditure is treated for tax purposes. Yes, it is different to salaries, electricity and other costs that firms incur, but it is an expense that the firm has incurred.
One concern would be that it is these intragroup transactions of US companies trading with themselves. The second concern would be where the IP came from. If this was coming from countries that had applicable capital gains taxes, the company selling would be paying significant capital gains tax on the IP it is selling to Ireland. However, we know it is coming from Bermuda and the Cayman Islands, where not only is there no corporation tax but there is no capital gains tax, so no tax is being paid there.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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We have a bit of that here as well, of course, in certain areas.
Mr. Seamus Coffey:
While we are saying the reliefs and credits are minimal in the Irish system, once we get the calculation of the amount of tax that is due, the capital allowances are huge. They do differ from the royalties, which have continued to grow. The number in the tax tables has fallen but the amount of royalties being deducted is well over €100 billion and is heading for €120 billion per annum. One point is that this is being paid to the US, so maybe we have less concern about royalties being paid to the US because it is subject to immediate taxation there. When the royalties are going to Bermuda, we know that unless they took that profit back into the US, the tax was not being paid. At least now, the royalties are being paid to the US.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Is that definitely happening in all cases or do we know? Are there still offshore, no tax and low tax locations being utilised for tax avoidance purposes?
Mr. Seamus Coffey:
The CSO has the figures on where the royalties go. Essentially, the flows to those offshore financial centres have stopped. There is still probably some but it is a tiny fraction. Before this, it used to be most of it, but it has now almost stopped. The bulk of it is going to the US.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Would Mr. Coffey say that intellectual property, which is very different from purchasing a machine or a factory, is very vulnerable to games being played by corporations, which have a history, let us be honest, of trying to minimise how much tax they pay?
Mr. Seamus Coffey:
One would hope a global system would be able to counteract that. For example, if the selling country had an effective capital gains tax, that would act as a disincentive to boost the price. From an Irish perspective, we cannot really control that Bermuda does not have a capital gains tax, so are those companies going to boost the price? They should be at an arm’s length and the legislation requires that they be at an arm’s length. By and large, it seems that when the IP has come, the profits have surged, so these are clearly very valuable. If somebody has the right to use the IP of these companies, they can earn tens of billions of profit, and that then means the IP is worth hundreds of billions. We are talking huge figures so, clearly, we can say whether it is right or wrong to a certain degree, but in ballpark terms, they appear to be right.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Have I more time?
Neasa Hourigan (Dublin Central, Green Party)
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The Deputy is at the end of his time but he may continue.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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On research and development, we have shortages of skills all over the place, for example, in the health service, construction and teaching, and we can go through a long list of places where we do not have people where we need qualified specialist people. Should we be rethinking our way of looking at this? If research and development tax reliefs are currently largely benefiting a small number of multinationals and have, therefore, led to our economy being very dependent on a few sectors, which we now realise are quite vulnerable when we look at what has happened with layoffs, there is a sort of opportunity cost. Even if it is given to SMEs, it is not actually meeting our strategic need to have people doing research and becoming highly qualified in areas where we have major deficits. In other words, we are just thinking jobs, jobs, jobs, and we think it is great that we have loads of jobs in one area, but the problem is that we have loads of areas where we desperately need people and we do not have them.
To give one example that springs to my mind, one of the problems in our health service is the lack of integration of computer systems and, indeed, we were hacked by the Russians and all the rest of it. We have a completely rubbish sort of computer system in our health service but then we have loads of people working on stuff for Google, Facebook and God knows what. Is there a case for looking at where public expenditure should be going in order to get people qualified in IT who would help our public services, rather than just saying that any job which may be produced by a research and development tax benefit is a good job? Does Mr. Coffey get my point? It may be a slightly convoluted argument.
On a question to all of the witnesses, do they have any comment on the Oxfam stuff? They may not agree with the wealth tax but do they have any comment on the Oxfam figures, which essentially show that the rich are getting richer every year, and that there is a greater year-on-year concentration of wealth at the top, whereas 50% of the population have only 1.1% of the wealth. That gap is growing all of the time. Are any of the measures that are being proposed in the Commission on Taxation really going to shift that trajectory? It seems to me that some of them are laudable, and there are some I am not so sure of, but is there any real belief that they are going to address that problem? To me, that is a problem and I believe we need quite radical measures if we are going to shift that trajectory. I ask the witnesses to consider that.
I have one very last question.
Neasa Hourigan (Dublin Central, Green Party)
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The Deputy said that the last time.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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On a point that I absolutely agree with, the commission says we should avoid cliff edges when it comes to welfare. One of the cliff edges that is at the centre of one of the biggest problems in the country at the moment is the fact that if a person is above a social housing income threshold, they get nothing in terms of support to put a roof over their head. If the threshold is now, say, €45,000 - it depends on the area - and the person is on €44,999, they can get HAP at least - they should get a council house but at least they get HAP to reduce their rent. However, if the person is on €51,000, they get zero, zilch, and they are in serious trouble.
That is not to say that people who get HAP are in a great position but they are in a slightly better one that someone who gets nothing at all, given the cost of accommodation. I would be interested in hearing the witnesses' comments on these points.
Dr. Aed?n Doris:
I will address the Deputy's final point, as I raised HAP in my submission. This is an issue we encountered when my colleagues and I were working on the living wage report. Although there is a broader point about incentives in general, we were examining what benefits people currently on the minimum wage would lose if their wages were increased to the level of the living wage. The Deputy is right, in that it varies by county, so there are three bands. It also varies by the number of kids someone has. What we found was that, in a random and non-systemic pattern, there were people who would, through the introduction of a living wage, be pushed over the HAP threshold and lose it. The value of losing it would far outweigh the gain of the living wage.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Yes.
Dr. Aed?n Doris:
We made the point that there would have to be a systematic approach to means testing if the living wage was introduced, given that it could have all kinds of perverse consequences. Someone has since pointed out to me that a somewhat similar situation applies to the new childcare payment, in that the thresholds are such that, by increasing wages, someone can lose so much that it outweighs the benefits.
The commission raised this issue and stated that there needed to be more co-ordination with the Department of Social Protection when benefits were being introduced by other Departments. The Department of Social Protection has an understanding of the question of incentives. There is also a cliff edge with PRSI, of course, so it is not that everything was perfect previously.
HAP was a fairly minor issue until relatively recently. The problem has gone from the odd unlucky person falling into this trap to something much more general. This issue needs to be considered seriously.
Neasa Hourigan (Dublin Central, Green Party)
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Does one of the witnesses wish to address Deputy Boyd Barrett's comments on workforce planning in a national sense?
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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The Chair came up with a good phrase for it. Fair play to her.
Dr. Seamus McGuinness:
I can have a go at that, as I lead labour market research in the institute. I am not of the view that switches in research and development tax policy would have a great impact on the labour market in terms of shortages and skills. It is important to distinguish between skill shortages, where there is a genuine lack of people with the qualifications and skills to do a particular job, and manpower shortages, which may be related to wages and poor working conditions. We do not have great information and data on those points, but using the ICT skills spectrum as an example, we produce a large number of ICT graduates in key tactical areas. The solution to these types of shortage are foresight in terms of skills planning and co-ordination with the further education and university sector. If there are market failures and the Government is to intervene, the solution is for it to intervene with firms to ensure there are subsidised training programmes in areas where there are key skill shortages. That is the general approach to the issues raised.
Neasa Hourigan (Dublin Central, Green Party)
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I thank Dr. McGuinness. Unfortunately, a vote has been called. As we are so late into the meeting, we will adjourn. Deputy Ryan was the only speaker remaining, so I hope that is okay with her.
Patricia Ryan (Kildare South, Sinn Fein)
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Yes. I understand completely.
Neasa Hourigan (Dublin Central, Green Party)
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If there was a particular question she wanted to put to the witnesses-----
Patricia Ryan (Kildare South, Sinn Fein)
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I will ask a brief question. I thank the witnesses and apologise for dipping in and out. Are there more appropriate and efficient incentives than tax incentives for promoting research and development?
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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Was the vote called just now?
Neasa Hourigan (Dublin Central, Green Party)
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It was showing on the screen two seconds ago, but the banner seems to have gone. I apologise.
Dr. Conor O'Toole:
I am happy to come in on Deputy Ryan's question, as it relates to something that Deputies Boyd Barrett and Doherty mentioned. It is like the rationale for a research and development tax credit in the first place. The OECD's assessment of Irish SME policy and entrepreneurship highlighted low productivity among SMEs. From international evidence, one of the well-proven ways of boosting productivity is investment in research and development. This allows firms to unlock technical change and gain productivity benefits. Research and development is risky, and these reliefs allow it to be de-risked somewhat.
A complementary set of policies that has been introduced internationally is bespoke access to finance for research and development-specific credit constraints. Research and development is difficult to collateralise. A firm cannot use it as borrowing capacity with a bank. Firms that undertake research and development often face higher financing constraints than they do in respect of other assets they purchase.
There is a clear rationale for research and development tax credits from a productivity perspective and there is a strong rationale for having a bespoke facility that would allow the heterogeneity and complexity of the SME sector to be covered by it. This would work in conjunction with other enablers, for example, access to finance, or other levers that would help to de-risk research and development investment.
Patricia Ryan (Kildare South, Sinn Fein)
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I thank Dr. O'Toole. A vote has been called, so I appreciate his answer.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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It has just been called. If we have time, could someone comment on the question of wealth and the richer getting richer?
Neasa Hourigan (Dublin Central, Green Party)
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Mr. Coffey will have to be quick.
Mr. Seamus Coffey:
Wealth is unequally distributed. In some sense, that is the way it should be. A 62-year-old at the end of his or her working career should have more wealth than a 22-year-old at the start. It is not income; wealth is different. There are extreme gaps, though. One of the questions is on what we should place the focus. Much of the focus can be on business equity that founders have in companies they started. There was undue focus on the Collison brothers in recent weeks in terms of treating billionaires as a policy failure. Surely, we would view them as being a policy success.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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In one sense.
Mr. Seamus Coffey:
It is not their fault that people invest in their business. There is equity going into the business they created that values it at €100 billion. They do not have €100 billion. They established a business that people value at €100 billion. That company might not even be making a profit. The reason it is valued at €100 billion is because there is an expectation that it will be successful. That is absolutely a significant gap, but I am not sure it is something that could be addressed with a wealth tax. The Collisons do not even live in Ireland. If we imposed a 5% wealth tax on them, would they move back?
Oxfam makes valid points and there is considerable poverty and inequality in the world, but if the analysis on wealth was presented as a student assessment, I am not sure it would score highly.
Neasa Hourigan (Dublin Central, Green Party)
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On that bombshell, I will adjourn the meeting. I thank the witnesses for attending and staying late into the evening. I apologise for the disruptions.