Tuesday, 10 October 2017
Financial Resolution No. 3: Intangible Assets
(1) THAT section 291A of the Taxes Consolidation Act 1997 (No. 39 of 1997) be amended in subsection (6)(a) by substituting “exceed 80 per cent of” for “exceed”.
(2) THAT paragraph (1) of this Resolution applies to expenditure incurred by a company on or after 11 October 2017.
(3) IT is hereby declared that it is expedient in the public interest that this Resolution shall have statutory effect under the provisions of the Provisional Collection of Taxes Act 1927 (No. 7 of 1927).
In September this year, the Minister for Finance published the report of Mr. Seamus Coffey entitled, Review of Ireland's Corporation Tax Code. As part of his review, it was recommended that the increase in corporation tax receipts can be expected to be sustainable up to and including-----
Mr. Seamus Coffey's report stated the increase in corporation tax receipts can be expected to be sustainable up to and including 2020. However, to ensure some smoothing of the corporation tax revenues over time, it was also recommended the deduction for capital allowances for intangible assets and any related interest expense be reduced to 80% of the relevant income arising from the intangible asset in an accounting period. The Minister for Finance has taken on board this recommendation and is implementing it for claims made in respect of expenditure incurred by a company on intangible assets from midnight tonight.
The 80% cap will affect the timing of the relief in the form of capital allowances and related interest expenses for intangible assets. It will not affect the overall quantum of such relief. This is because any amounts restricted in one accounting period as a result of the cap will be available for carry-forward and use in a subsequent accounting period, subject to the application of the cap in the course of that period.
Notwithstanding that this is a timing issue, it is estimated the introduction of the 80% cap will raise an additional €150 million in 2018. To ensure fairness and that matters are clarified, it is not proposed there should be any period of uncertainty about this measure. That is why it is proposed to apply from midnight tonight. It is intended to put today's changes on a permanent statutory footing in the context of the forthcoming finance Bill.
I commend the resolution to the House.
Again, I will put the same question I put about stamp duty. There is €150 million allocated against this measure for next year. Is there absolute certainty with the forecasting model used by the Department that this amount will be raised?
The Coffey report was a welcome addition to our debate on corporation taxation. It is again important that on budget day we reiterate our commitment to maintaining that taxation rate in view of the various attacks being made on it. During the budgetary oversight process, Seamus Coffey, in his role as chairman of the Irish Fiscal Advisory Council, pointed out that potential changes to the common consolidated corporate tax base, CCCTB, are a bigger threat to our economy than even Brexit. It is important the backbone of the Government in standing up for our corporate tax rate is stiffened in the context of that assessment, as well as proposals made by the French President, Emmanuel Macron, and other European leaders around our corporate tax base.
Can the Minister stand over the projected €150 million figure? What are the Government's views of Seamus Coffey's remarks about the potential threat to our economy from changes to CCCTB?
On the cap of the intellectual property that will be written off against profits at 80%, unfortunately, over the past several years, we have seen hundreds of billions of euro worth of intellectual property in the State onshored.
The 2018 tax strategy paper shows that claims for capital allowances for intangible assets increased from €2.7 billion in 2014 to almost €29 billion in 2015 due to the onshoring of intellectual property by multinational companies. Sinn Féin tabled an amendment to try to capture some of that by making the measure retrospectively effective but, unfortunately, it was ruled out of order. Given the amount of money in question, it is regrettable the measure is only applicable from midnight. The Government needs to examine whether any of that money could be recouped.
I am very glad to have a chance to speak on this motion because it reveals and confirms the hidden secret of the Irish economic story that only the socialist left have been talking about for the past five years and which remained hidden in much of the budget debate because there was a deliberate attempt to narrow the debate on what was possible in the budget to a debate on fiscal space and whether that might be €300 million or €900 million. We suggested there was billions of euro in untaxed corporate profits that, if taxed, would be available for the housing measures we did not get in the budget and for spending on health, education, infrastructure and tax breaks for hard-pressed workers. This motion gives a glimpse of the truth of our argument by revealing the enormous tax breaks given to the corporate sector in allowances and deductions. The scale of it is staggering.
People should read the report of Seamus Coffey to which the Minister referred. I do not agree with its conclusions but the stunning facts about the tax giveaway are very helpfully provided on page 120 of the report. It shows that pre-tax corporate profit jumped from €70 billion in 2010 to €149 billion in 2015, which is an increase of more than 100%. There are allowances for intangible assets and other items and deductions for all sorts of things, including company cars, management expenses and so on. Total deductions and allowances for the €149 billion profits in 2015 were an incredible €96 billion. Some of the choice deductions and allowances in that year included losses brought forward by banks, for example, of €2.7 billion. That is a tax giveaway to banks and the corporate sector.
A very shocking allowance or deduction is the €9 billion given back in 2016 for what are known as intra-group transactions. One would need to be an accountant to know what intra-group transactions are but €9 billion of tax was foregone in 2016 because of them. I am quoting figures from a Department of Finance publication on the cost of tax allowances, credits, exemptions and reliefs. Intra-group transactions involve a subsidiary of a company selling a product to itself and, magically, a profit becomes a cost. If a company makes €500 million in profit but its subsidiary charges that profit as a loan or cost then, for accounting purposes, the profit becomes a tax-deductible cost. It is absolutely unbelievable. Much of the €9 billion in intra-group transactions involved intangible assets, royalty payments, interest payments and loans.
The total cost of research and development tax credits in 2015 was €707 million. All Members believe in research and development but the €707 million given back to approximately ten or 15 multinationals could have been given to our universities. Would research and development be better served by giving that €707 million to ten or 15 major multinationals or to third level institutions for research and development in science, the arts, engineering and elsewhere? I would spend the money in our universities and not give it back to some of the wealthiest companies in the world, which do not believe in paying tax.
The total of all these expenditures is about €23 billion and this financial resolution goes a tiny way towards revealing that but in the overall context it is pathetic. It will reduce what is deductible on intangible assets and the interest payments on them from the current 100% exemption to 80% and the State will get a bit of extra money. However, companies will still get 80% relief on the purchase of intangible assets from themselves. That is brilliant accounting. Imagine if a Deputy tried to do that. Imagine if a worker tried to say that he or she made losses last year, owed a lot of money on his or her credit card and mortgage, had a lot of outgoings on public transport and feeding himself or herself so that he or she could go to work and he or she wanted a tax break on all of that. That is what the corporate sector gets. A worker would be laughed out of school if he or she asked for tax breaks on those things but the corporate sector gets them on everything. The scale of the tax breaks is staggering.
This minor measure recommended by Seamus Coffey opens the door very slightly on how our tax code facilitates billions of euro of tax being foregone. That needs to be exposed. I have been trying to do so in the House for five years. There would not even be a Coffey report if we had not been challenging this issue at the Committee on Finance, Public Expenditure and Reform, and Taoiseach for the past five years and talking about how the effective corporate tax rate is not 12.5% but, rather, 2% or 3%. We forced that debate and there is now a little bit of a tilt towards it in this budget. In so far as it gives the State an extra €100 million, I welcome it but we could have gotten billions of euro by getting rid of those reliefs and enforcing the 12.5% corporation tax rate by closing down all of these loopholes. The affected companies would still be fantastically profitable and wealthy. They would still make far more in profits in this country than they would in any other country in Europe because of our low effective corporate tax rate.
Members should not believe the lie the Government tells when it says it only has €300 million, €600 million or €900 million and the only debate we can have is about that miserable bit of fiscal space. The truth is in the Coffey report: profits are up 100% and the wealth of the top 10% is up 51% in the same period because they are the beneficiaries as they own companies or have shares in them or benefit from property-related tax breaks the Government gave to speculators and vulture funds. There is no time to go into that issue but it is the other big element of the tax giveaway or corporate welfare that our tax code facilitates. The spongers in the corporate sector are leeching billions out of Exchequer funds and revenues that could be used for housing, health and education.
We get not a single extra council house next year because we are not prepared to tax these guys. Yes, in so far as this is a tiny tilt in the right direction, we will support it, but it is the tip of the iceberg, and that iceberg is what we should bring into the light in order that the public can see it and we can ask the public whether it thinks a little more tax, or a lot more, should be imposed on these vast profits.
One thing we should all remember is the danger of assuming a very simple way of getting extraordinary amounts of revenue from an unexpected source. Our 12.5% profits tax is well known and well recognised globally. It has worked extremely well for us in this country, it continues to work and I hope it will work for us well in the future. However, another issue is arising now, namely, whether we should collect taxes on profits earned in other jurisdictions, and the answer to that is a firm "no". Obviously, taxes should be collected in the country in which the profits were made, not in a second or third country. If we are suggesting for a moment that we change that and become tax collectors for a myriad of companies all over the globe, we are going down the wrong road and will find that out very quickly. More importantly, if we proceed as is being suggested, that we become tax collectors in respect of moneys earned in other jurisdictions, the attractiveness of this country as a location for foreign direct investment will disappear overnight. There are two sectors: the indigenous sector and foreign direct investors. There are vested interests. I have heard them and I have listened to them. Some of them are in Europe and some of them are elsewhere. They have an interest in reducing the attractiveness of this country as a location for foreign direct investment. Why we seem to be singled out in this way I do not know because we are not that big, but we have been identified. We have been assured by the Revenue Commissioners here that we have adhered to the spirit and the letter of all international tax laws in the past and we will continue to do. The point is simply that we need to be careful in that if we decide to collect taxes on profits earned in other jurisdictions, we will pay a very high price.
I know Deputy Calleary has raised the issue of the costings of this measure. The budget book shows that €150 million will be gained as a result of reverting to the 2014 position. I find it interesting that the Department was able to come up with such a figure with such accuracy. When I asked a parliamentary question, which was answered just a couple of days ago, the Department could not give any figures in this regard. One would imagine it would have been able to give more concrete information because it would have had more data. At that time we asked for it to be reinstated and retrospective and we knew, as the Department knows, that capital allowances for intangible assets increased over the 12 months in 2014 from €2.7 billion to €28.9 billion. There are serious questions as to the sequencing of all this.
It should be remembered that this was at a time when I and others were arguing that the Government needed to close the double Irish. To refresh Deputies' memories, the previous Minister, Deputy Noonan, said the only thing wrong with the double Irish is that it had "Irish" in its title, that it was completely outside the control of this Legislature to close that loophole. Lo and behold, when more and more pressure was put on him, when the international spotlight was put on us regarding how we were allowing for this tax loophole in our own tax code, the former Minister finally moved and closed the double Irish. However, when he did so, he opened up another massive loophole at the same time in 2014. He changed the amount that could be used against intangible assets from 80% up to 100%, which means one could write off 100% of one's properties against intellectual property, IP. It should be remembered that these companies, many of which had been availing of the double Irish, are household names. Apple, for example, is one of the major beneficiaries of this change introduced in 2014, together with other multinational companies when they onshored massive amounts of IP to Ireland. This is why we had leprechaun economics, as it was called. All this IP was taken onshore and it was shown that our GDP increased by 26%. There are questions surrounding this, and I have my own suspicions as to whether this was a wee cosy arrangement done with the multinationals to close down one loophole because of the international pressure, including from Sinn Féin and others, being put on the Government and to provide these companies with a nice sweetheart deal to allow them to take all this IP onshore and write down their tax liabilities to single digits. According to the Comptroller and Auditor General in his report just a couple of weeks ago, 13 of the top companies in this State pay an effective tax rate of less than 1%. It is through these mechanisms, things that the Government deliberately put into the tax code, that they are able to do that, and that is what this is about.
How is the Department able to confirm a figure of €150 million when just two weeks ago it was not able to give any figure? I would like an answer to that. Will the Minister explain why he is not capturing this tax? These are capital allowances that will be claimed year after year. This is not about collecting tax in other jurisdictions. The IP is in this State, the profits are being recorded in this State, and capital allowances are put against those profits to write down their tax liability to negligible numbers. I have those questions, I have my own suspicions and we will deal with this in greater detail when the Finance Bill comes through. However, I am deeply disappointed. One of the big problems here is that Opposition Members cannot table amendments that could result in a cost to the Exchequer. This was a sensible amendment coming from Sinn Féin that this should be applied not just to IP taken onshore from today but also to the tens of billions of euro in IP that has been brought onshore in recent years. Again, we always know who wins in these scenarios, namely, the big multinational companies with which the Minister and the Government consult before they introduce these types of measures on budget day. We know it is the bankers who will benefit, because they will not pay any tax, and the big vulture funds. The arrangement between the Government and Fianna Fáil about the capital gains allowance, the seven-year exemption, is a con job. It should be remembered that there are people who will be selling commercial property next year, and this is not vacant land because this applies to office blocks, hotels and so on, who will no longer be liable to 33% on the gains they made as a result of the measure the Government is bringing in. This is despite the fact we know the land hoarding is going on not because of the seven-year capital gains tax rule, and I am sure Fianna Fáil knows that as well, but because of a different measure that this Government introduced last year in the Finance Bill, facilitated by Fianna Fáil, and that is the five-year exemption from CGT.
We have heard a lot about NAMA, for example, and the document that was released through a freedom of information request about the 50,000 units that could be built on NAMA lands. It is claimed by Fianna Fáil, and indeed the Government now, that the barrier for this is the seven-year CGT exemption. Do they think we are fools? The CGT exemption did not apply in the first year of those sales for a start and did not apply in the past three years. Some 80% of the lands that were sold by NAMA were outside the scope of the CGT. Then we are told by Deputy Cowen and others that it was vulture funds that bought the land and the CGT exemption applies to them. Vulture funds do not pay CGT within the funds because of the tax code in this State. The only tax they pay is a tax that I forced the Government to introduce, namely, dividend withholding tax. The reason it is now more profitable for those companies to hold on to vacant sites is, as the Minister's officials told him before the Finance Bill was signed into law last year, that the Government built in a measure in the funds whereby it is now more profitable to hold lands that were sold to vultures from NAMA for five years. I am therefore deeply suspicious of the type of measure the Minister is introducing. I would love to see €150 million additional brought in through this measure but I would like to see the hundreds upon hundreds of millions if this measure were not capped at being introduced at midnight tonight.
Before we vote on the resolution, will the Minister tell us how the Government was able to come up with this figure and what is the genuine reason for not applying the measure to intellectual property that was onshore before? Will he tell us who the tax advisers were and the multinational companies the Government consulted before the resolution was brought before the House?
Essentially, two issues have been raised by the four speakers. First, on the manner in which the cost of approximately €150 million was arrived at, I never confirmed that the figure was €150 million. It is an estimate. While it could well transpire to be accurate, it is not a figure that can be confirmed.
The second issue concerns the capital allowance in the first instance. I acknowledge that there are difficulties in assessing the potential for changes, given the nature of the companies involved, the predictions of their future behaviour and the expenditure amounts involved. However, in recent times the Revenue Commissioners have reviewed the data for prior year claims under section 291A and the profits of and the corporation tax paid by companies using the section. Using these data and extrapolating an estimated level of intangible assets to be placed onshore in the future, it is expected that this measure will raise in the region of €150 million next year. This is an issue that can be discussed in detail later this year in the context of the Finance Bill.
Deputy Richard Boyd Barrett has referred to these measures as loopholes, but I do not accept that. Neither do I accept what Deputy Pearse Doherty has said about cosy arrangements and sweetheart or secret deals. It is fair to say there is, not only in this jurisdiction but also right across the world, a general move towards the co-location of intangible assets. There has been substantial activity in response to international tax initiatives, particularly with reference to the OECD, an issue that has been discussed both at committee level and across the House in the context of base erosion and profit sharing. The capital allowance regime in this jurisdiction is very important in attracting substantial economic activity. I do not need to remind the House of the importance of foreign direct investment in job creation in the economy and of the contribution it has made for many years but, in particular, in recent times as we have moved towards recovery. In that regard, intangible assets are becoming increasingly important in global business. They are the key to innovation and the exploitation of new products and markets and an important source of a competitive advantage for businesses in Ireland. There is a growing trend towards centralising the management and exploitation of these assets in global or regional hubs. It is important, therefore, that we continue to ensure Ireland is well positioned as an attractive location for global businesses seeking to develop and commercialise on the international stage.
It is important that we proceed with this resolution. It is also important to reflect on the fact that, prior to the introduction of the scheme, the tax system provided for an allowance of a limited nature, for example, for patent rights, computer software and know-how, but in recent times we have moved towards a more broadly based scheme for assets under section 291A. That is why it was important that it be used to address the needs of the tax system. I do not believe we are dealing with any secret or sweetheart deal. In fact, the evidence clearly shows that Ireland has followed the international norm in this regard and taken a similar approach to that taken in countries such as the United Kingdom, our nearest neighbour, and the USA. This is important in the context of the current regime in the United States and the manner in which it is dealing with revenue and tax issues. It is also important in the context of the impending withdrawal of the United Kingdom from the European Union.