Tuesday, 13 October 2020
Financial Resolution No. 4: Corporation Tax
(1) THAT section 288 of the Taxes Consolidation Act 1997 (No. 39 of 1997) be amended, in subsection (3C), by substituting “incurred before 14 October 2020 on the provision” for “incurred on the provision”.
(2) THAT paragraph (1) of this Resolution shall have effect as on and from 14 October 2020.
(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).
Financial Resolution No. 4 ensures that Ireland's tax regime for intellectual property, IP, is consistent with international best practice with effect from tonight. As Deputies are aware, tax relief for the cost of capital assets used for the purpose of a trade is generally provided through the capital allowances regime. Like many other countries, Ireland has since 2009 granted capital allowances on certain intangible assets which a company manages, develops or exploits. These IP allowances encourage substantive activity and high quality employment in Ireland.
The IP allowance rules are more restrictive than normal capital allowance rules and similar reliefs in other countries in some respects. However, the operation of the balancing charge mechanism has been identified as being less restrictive than most, but not all, other jurisdictions with similar reliefs. At present, no clawback of capital allowances arises where an intangible asset is disposed of after five years and the disposal proceeds exceed the cost not yet relieved through IP allowances. This differs from the treatment of a disposal within five years where any such excess would be treated as a taxable receipt to a company. Therefore, the Minister is moving to address this issue by amending section 288 of the Taxes Consolidation Act 1997 to provide that all intangible assets acquired from tonight will be fully within the scope of balancing charge rules.
It is not anticipated that this amendment will give rise to significant additional tax revenue, given the current profile of claims as shown in Revenue data. Revenue understands that the type of intellectual property typically situated in Ireland includes items such as patents on pharmaceutical products. The value of this type of asset declines as the patent runs out and as the asset is depreciated in the company's accounts. Nevertheless, this is an important change to bring our rules in line with those applying internationally. It signals our commitment to taking action where it is needed and, given the type of measure, it is logical to implement it by way of financial resolution. This financial resolution will allow this change to take legal effect after tonight to ensure Ireland's tax regime for intellectual property, together with the broader corporation tax regime, remains competitive, legitimate and sustainable. I commend the resolution to the House.
I propose to speak on Financial Resolutions Nos. 5 and 6.
Financial Resolution No. 5 is an anti-tax avoidance measure. It provides that section 541 of the Taxes Consolidation Act 1997, that is, Act No. 39 of 1997, be amended with respect to disposals made on or after 14 October 2020, by insertion of a new subsection (6A). The purpose of this amendment is to correct an anomaly recently identified by the Revenue Commissioners whereby the same foreign currency transfer between accounts held by the same person has the potential to create significant capital gains tax, CGT, losses which could then be used to offset CGT gains, even though there is no economic loss.
It is not possible to cost this matter accurately other than to say that one example of which the Revenue Commissioners are aware to date involved the transfer of sterling between different accounts generating a CGT loss of approximately €3 million. Our concern is that if this anomaly is not corrected, it may facilitate the generation of further CGT losses, thus reducing overall tax revenue, whereas these losses did not really occur.
Because of the nature of this tax anomaly, a financial resolution is considered necessary. In order to provide certainty and to avoid creating any window of opportunity for the avoidance of transactions, we would like this to be done before business tomorrow morning.
Financial Resolution No. 6 is an amendment to section 629 of the Taxes Consolidation Act 1997 and relates to interest and deferred payments of the exit tax. The resolution provides for a technical amendment to the exit tax regime for companies introduced in budget 2019 as part of our commitments under the EU anti-tax avoidance directive, ATAD. The exit tax provisions impose a charge to tax on unrealised gains arising where a company migrates its residence or transfers assets offshore such as it leaves the charge to Irish tax. In accordance with ATAD, companies have the right in certain circumstances to pay the exit tax in equal annual instalments over five years and interest applies over the period of deferral.
This provision makes a technical amendment to the interest charging provision to ensure that it operates as intended and this change is being introduced by financial resolution to bring immediate clarity to this charging provision. I commend it to the House.
Financial Resolutions Nos. 5 and 6 seem fine to me. However, I want to express concern about Financial Resolution No. 4. The main mechanism through which some of the wealthiest corporations in the world avoid tax is through the category of intangible assets, such as patents on intellectual property, whereby big multinationals pay for the use of their own patents. For example, one subsidiary of a company pays another subsidiary of the same company for the use of its own patent and, by doing that, it can write down its profits. Effectively, it can charge itself whatever it likes.
If the sales and revenue of a company such as a pharmaceutical or IT company amount to €1 billion, it can decide that one of its own subsidiaries will charge it €900 million for the use of that patent, thus writing down its tax liability to virtually nothing. It is essentially a way in which big multinationals are allowed and facilitated to write their own tax bills. It is why the 12.5% tax rate, itself one of the lowest corporate tax rates in the world, is a complete joke. The big multinationals do not pay anything close to that because of their exploitation of this category of intangible assets.
I recommend that any economics nerds take a look at the table produced by Revenue every year with regard to corporate tax deductions, reliefs and allowances. The table covers approximately two pages in very small print and lists approximately 100 tax reliefs. Buried in this tiny print is a line on intragroup transactions. The intragroup transaction relief granted in the latest available figures totalled €16 billion. This is an increase from the previous year's figure of €9 billion and that of the year before, which was approximately €6 billion. One can see exponential growth in the tax reliefs being claimed in respect of intangible assets through these intragroup transactions, which is to say transactions between different subsidiaries of the same multinational corporation designed to write down taxable profits to negligible levels in order to pay no tax.
How does this measure in the budget book, which is very ill-explained, fit in to that scandalous picture? I invite Deputies to look at the briefing note in the Estimates book. It is three lines long and tells one absolutely nothing. We do not know what this measure does. It relates to balancing charges in some way but we do not know which way it will balance matters. Does it balance them in favour of the multinationals and allow even more assets into this category in order that already negligible tax liabilities can be written down even further?
This is the scandal of budgets and of economies in the modern world, including the Irish economy. While we spend all of our time discussing the crumbs, some of which we have to beg for such as the pandemic unemployment payment or additional expenditure on health or education, the cake is in this little document produced by Revenue, namely, its list of tax reliefs.
People need to understand the scale of this. In the last available figures, one can see that €189 billion was accumulated in pre-tax gross profits, the tax liability in respect of which amounted to approximately 5%. To put that figure of €189 billion in pre-tax gross trading profits in context, it is up from approximately €79 billion in 2010. Pre-tax corporate profits have more than doubled over the last ten years. That is absolutely extraordinary when these companies are paying approximately 5% tax on average. Of course, the big corporations that can exploit the category of intangible assets to avail of tax deductions or allowances to write down their tax liabilities are paying far less than 5%.
It is an utter scandal. They are not only robbing the people of this country but ordinary people all over the world. It is the major contributor to growing global inequality between rich and poor and the staggering, astonishing and shameful concentration of wealth in the hands of a tiny number of corporations owned by multibillionaires whose wealth is beyond the imagination of normal human beings. We are a major facilitator of such activity. The category of intangible assets is the key facilitator allowing these companies to do this. This motion has something to do with that although, interestingly, it has been explained in three lines that tell one absolutely nothing. I am deeply suspicious. I wonder who knows about this. Does the Minister who introduced the motion even understand it? It would be helpful to get an explanation of what it actually does. I am suspicious and, unless I hear a good explanation from somebody, I am inclined to vote against it.
I would like the Minister to come back and explain what is happening here in some detail. The explanatory note we were sent, to which Deputy Boyd Barrett referred, simply says that the resolution amends the balancing charge rules in section 288 of the Taxes Consolidation Act 1997 to ensure that Ireland's tax regime for intellectual property is fully consistent with international best practice. That is just not good enough when asking people to vote on something important tonight. We get this note and are then expected to vote on the measure.
The resolution relates to the section in the Taxes Consolidation Act 1997 on balancing charges. Balancing charges are effectively the opposite of a capital allowance. They reduce the amount of tax relief of which a company can avail. The section, before being amended by this proposal tonight, says "a balancing charge shall not be made by reference to a wear and tear allowance made to a company [...] in respect of capital expenditure incurred on the provision of a specified intangible asset" within certain meanings. This is to be changed to "in respect of capital expenditure incurred before 14 October 2020 on the provision of a specified intangible asset". It draws a line and prevents the future operation of this effective exemption to balancing charges being made.
From my reading, it probably does cut off a certain tax loophole, although I would like the Minister to explain and clarify exactly how this measure works. If, however, it is to do what it purports to do, it would probably have significant financial implications so I wonder why a figure is not attached with regard to the money to be raised by it. It would be helpful to get some detail as to how this is to work.
I do not have the same concerns as the previous two speakers with regard to Financial Resolution No. 4. I see it as an anti-tax avoidance measure. In fact, a balancing charge is a means of making sure a company does not claim tax relief on the costs of an asset. It is a clawback mechanism and so is a good measure to put in place to ensure that multinational companies do not use tax avoidance or similar measures to offset against the taxes they should pay. To use the words of the Minister for Finance, it "will ensure that our tax regime for intellectual property [...] remains competitive, legitimate and sustainable".
What I do find interesting about this measure, however, is that it comes a number of days after my colleague, Teachta Doherty, was attacked by the Tánaiste for recommending exactly the same thing. Teachta Doherty proposed a very similar measure, which came from the same expert review panel set up by the former Minister for Finance, Michael Noonan, in 2017. The Tánaiste got a rush of blood to the head when he saw Teachta Doherty talking about corporation tax and, instead of trying to understand what was being said, went into attack mode, which backfired. I do, however, welcome that Fine Gael has recently had some sort of conversion with regard to the introduction of anti-tax avoidance measures. If it was not for Teachta Doherty, some of the previous speakers and others, measures of this kind would not be looked at. These measures are important. The measure Teachta Doherty proposed would have raised an additional €720 million.
That could have been used to better support our hospitality sector, spend more on public housing stock or for better services in health and other areas.
It is the same with Financial Resolutions Nos. 5 and 6. They are also important measures. Over recent budgets, and again this evening, we have pointed out that the special assignee relief programme, SARP, allows high-income employees, on salaries of up to €1 million a year, to reduce their income tax bills by up to €111,000 each year. That reduces their tax rate down to 28%, while many workers on middle incomes pay tax at 40%. These types of tax relief should, therefore, be reduced.
We have seen a drip feed of measures, such as these, in the last several budgets. I welcome them and they are a welcome departure from the rhetoric we used to get from Fine Gael in recent years. It used to be a case of depicting the sort of tax avoidance measures that were in place as not existing, not being there or that we were reading too much into the situation. We were not, we have been vindicated and we welcome the Tánaiste, Deputy Varadkar, and his party having a late conversion to closing these loopholes and that they are, at least, making some effort to do so. I congratulate my colleague, Teachta Doherty, and others, who have been putting the Tánaiste and his colleagues under pressure on this issue.
I take it that there are no objections to Financial Resolutions Nos. 5 and 6, which are anti-tax avoidance and technical measures. The same goes for Financial Resolution No. 4, to which Deputy Cullinane referred. To avoid any confusion, this is an anti-avoidance measure and a technical measure. The Government is proposing and supports it, and it is very much in line with what we have been doing in recent years, whether that is abolishing the concept of stateless corporations or removing the double Irish. There is no conversion. In the different Governments of which I have been a member, going back to 2011, we have always sought the close tax loopholes. When clever tax lawyers find ways around our tax laws, we then find clever ways around them. Deputy Howlin can attest to that, so there is no conversion here at all. We have been doing this since 2011.
What Deputy Doherty proposed was quite different. It was an additional tax of €720 million on multinational corporations. We are not proposing that tonight. That would be a very different proposal and it is one with which I respectfully disagree. Why do I disagree with it? It is because I think we should have learned something from the past 12 years. We are experiencing the second recession in 12 years. This is a very different type of recession but one thing has been constant in these two recessions, and that is that the strength of our multinational corporations has helped Ireland recover.
The first recession concerned a banking crash and a construction and property bubble that went bust. We were lifted out of that recession by our multinational corporations, which kept employing people, exporting and paying taxes. I refer also to other traded sectors, such tourism and agri-food. The reason why our economy has only shrunk this year by about 2%, which is much less than other countries, is because of the strength of our multinational corporations, such as the technology companies, the pharmaceutical companies and the medical device companies.
Those are the companies that have been making a lot of money during this period because people have needed their services. If it was not for those companies, and the taxes they pay and the people they employ, we would be in a much worse position today. If Sinn Féin was in office, leading a Government, or if we had a Government of the left in Ireland, I have no doubt but that our country would be less attractive to those companies and that they would be elsewhere. With them would go the investment, the jobs and the taxes, and there would be less money for health, education and everything else that we found money for today.
I will try to address some of the issues raised by Deputies. Following on from what the Tánaiste has said, these measures are in the context of wider reviews of corporate tax regimes and the wider process of ongoing corporate tax reform in recent years. This has been taking place internationally and at a European and OECD level. A part of those endeavours has involved an examination of capital allowance measures.
In that context, Revenue officials here conducted an informal review of the publicly-available information and data concerning tax bases in different jurisdictions, and examining, in particular, tax reliefs for intangible assets in 15 other countries. That was designed to ascertain a degree of best practice across those countries, and it identified that the Irish IP allowance regime was more restrictive in comparison with other jurisdictions in some respects. Regarding the operation of the balancing charge mechanism, however, which we are talking about this evening, it was identified that the Irish regime in this regard was less restrictive than most, but not all, of the comparator countries. The main reason for that was that, at present, where an intangible asset is disposed of after more than five years, it is then outside the scope of a balancing charge.
The Minister is moving to address that situation through this resolution and to ensure that Ireland's IP allowances are consistent with international best practice. As a result, section 288 of the Taxes Consolidation Act 1997 is to be amended to provide that all assets acquired after tonight will be fully within the scope of the balancing charge rules. The measure we are introducing, therefore, will bring certain disposals into the charge to tax, so this is broadening out that applicability.
Deputy Paul Murphy asked if this will lead to a significant increase in revenue. It is not expected that there will be, given the current profile of claims demonstrated by Revenue data. The Revenue understands that the type of intellectual property typically situated in Ireland includes items such as patents on pharmaceutical products, and the value of those types of assets declines as the patent runs out and the asset is depreciated in the company's accounts. As we are extending this measure to IP older than five years, the values of those patents probably will have declined at this stage and that is why it is understood that there will not be a significant financial revenue windfall from this measure. The primary reason this measure is being introduced, however, is to ensure that our tax regime for intellectual property, as part of our broader tax regime, will remain competitive, legitimate and sustainable.
Yes, but only briefly. I thank the Minister, Deputy O'Gorman, for that explanation, which satisfies me in respect of Financial Resolution No. 4.
I will make a brief point in response to what the Tánaiste has said. I refer to the idea that loopholes are just found by very smart lawyers and then are very quickly closed by the Government, as it moves to stop any kind of tax avoidance. That is patently ridiculous and is not what happens. That is like the Cayman Islands claiming to have slipped and fallen, and then accidentally having become a tax haven.
The loopholes are created. We have a budget today which has measures extending a very definite loophole, namely, the knowledge development box. That is what that initiative is; it is a loophole for corporations to avoid and minimise their taxation. That is a fact, and the double Irish was similarly created. It is clearly part of the unfortunate developmental model being pursued by Fianna Fáil and Fine Gael to position Ireland in a particular role in a chain of global tax avoidance. It is not the Cayman Islands, it is something different, but Ireland very definitely plays a role in major multinational corporations minimising, to an extreme degree, the amount of tax that they pay. In the process, those corporations are robbing not just the people in this country but people around the world, including those in some of the poorest countries on the planet.
That is not an accident but a conscious policy being pursued by the Government. The Tánaiste is correct in stating that that is a policy that a Government of the left would bring to an end. Such a Government would also insist, at a minimum, that the corporations pay the taxes that they are supposed to and, yes, it would increase the amount of tax paid by those multinational corporations, rather than hitting ordinary people. The Tánaiste thinks that is a political choice that just cannot be made and that is crazy. He thinks it is, however, okay to cut the PUP. He does not think there is a problem with doing that, but he does think that it is impossible to go after the corporations and the massive profits that they make.
What we are dealing with in these resolutions is closing tax loopholes. Deputy Doherty proposed closing a tax loophole that essentially allows for multinational companies to offset capital allowances against 100% of their profits on intangible assets, which would raise €720 million. This loophole is very similar to some of those the Government now claims credit for closing and in respect of which the Tánaiste says it was not converted. At times, the Tánaiste represents everything he claims those on the left and those he opposes represent. He spouts right-wing populism and throws out the sound bite that Sinn Féin is against multinational companies. I have many friends and family members who work for multinational companies. Neither I nor my party would take any action that would put those jobs at risk. The Tánaiste knows full well that my party has not advocated an increase in the 12.5% corporation tax rate. However, we believe that multinationals should pay their fair share and that the tax loopholes should be closed.
The Tánaiste rushed for his base instinct when he heard Deputy Doherty again advocate that a tax loophole, of which only multinational companies can avail, be closed. He got a rush of blood to the head and did not fully understand exactly what was being called for. If he did understand, as he now claims, that is even worse because I do not understand how anyone could support this loophole which allows multinational companies to offset their capital allowances against 100% of their profits made from intangible assets. This is simply about making sure multinational companies cannot avail of additional loopholes, on top of the fact that many of them do not actually pay the 12.5% corporation tax rate. Many ordinary working people out there pay 40% PAYE on their earnings and many on very low incomes also pay tax. We all have to pay our taxes, including multinationals. It is very easy for the Tánaiste to sit there and accuse my party of being against business and multinationals when he knows full well that we do not believe the 12.5% should be increased, though other parties on the left have a different view and want to increase corporation tax. We have not called for that and we have said the rate should be maintained because we want to protect jobs. However, we believe corporations should pay that rate and should not avail of these loopholes. We do not make any apology for that.
If the Government had gone for that measure and taken in that €720 million, it would have been in a better position today to reverse some of the cuts it made over the last number of weeks to the PUP, the wage subsidy scheme, protections for renters and so on. That is what the Government has done over the summer months. It wasted the summer by not taking the opportunity to build up capacity in our health service but it certainly did not waste it when it came to attacking ordinary working people and paring back their payments. It could have taken the opportunity of raising this €720 million, although not by raising taxes because that is not what Deputy Doherty proposed. He was not proposing to increase corporation tax. He was proposing to close a loophole, one of many which are similar to those the Government has now tried to take credit for closing, even though it was dragged kicking and screaming on the double Irish loophole and the others. That was not closed because of clever tax lawyers, as the Tánaiste put it, but because of the pressure that came from people in this Chamber and others outside it who told the Government that multinational companies were availing of these loopholes. The Tánaiste may not have been a Minister at the time but we got the response from Fine Gael time and again that that was not the case, that multinational companies were paying their fair share, that the loopholes did not exist and that they were somehow a figment of our imagination. They were not. We were proven right and the Government had to close some of them but it has not closed all of them. It should take the opportunity in next year's budget to do what an Teachta Doherty has advocated on some of the other loopholes.
In fairness, people other than Teachta Doherty have been making these points for some time. I am satisfied with the Minister's answer on this resolution. I am glad we have had the debate because I have raised this issue at the Committee on Budgetary Oversight and the finance committee over the past number of years. We never discuss tax reliefs in the same way we discuss expenditure, and we should because they are expenditures of public money in exactly the same way as the budget we discussed today is. They are exactly the same, yet we do not discuss them. Tax reliefs are a shadow budget that the public does not see and I suspect most Deputies are only vaguely aware of it but the scale is absolutely enormous. Just one of the categories in that shadow budget of tax reliefs, namely, intergroup transactions, is the same size as the additional expenditure in the entire budget we discussed today. That was €16 billion according to the most recent available figures. That is huge. There is massive fanfare and debate all over the country today about the fact that additional expenditure of €17 billion has been allocated in the budget, but the amount for just one category in a litany of tax reliefs is €16 billion. That money is all going to between 20 and 30 companies, and it is only one relief.
The research and development tax credit involves an amount of approximately €700 million per year. One would think that such a tax credit is a good idea but would that €700 million be better off going to Google, Facebook, Pfizer, Eli Lilly etc., or being invested in our public universities for research and development purposes? I would love to see a cost-benefit analysis of the benefit that has for society and the economy, particularly given the Covid pandemic, how little money goes into Science Foundation Ireland and how underfunded research is in general.
It is worth noting, because it will not get discussed anywhere else in the budget debate, that the amount of money for health research in the health budget this year is static. There is no change. Is that not interesting? In the midst of a pandemic and when we are desperate for therapies, vaccine research and so on, one would think that a significant additional amount of money would be put into health research but there is not one cent extra. However, hundreds of millions of euro are going into the pockets of some of the big, private, for-profit pharmaceutical and IT companies.
There are other credits that I will not even go into but of the €180 billion pre-tax gross profits for all corporations, tax is only paid on approximately €80 billion. Such is the scale of the reliefs provided. That is a scandal that needs to be addressed and discussed and we need to assess the benefit of those reliefs overall. The point the Tánaiste does not really address is whether we have really looked at what the benefit would be if we redirected some of them elsewhere.
I do not think corporations would run out of this country if they were made to pay the 12.5% tax rate or even a little more. They need to be in the European Union. For the most part, they want to be based in English-speaking countries and there will not be many of those left in the European Union after the exit of Britain, so where would they go running, just because they are made pay 12.5% tax? I do not believe it for a minute. We do not need to get down on our knees and beg these people. They are making an awful lot of money; staggering amounts of money. It would at least be worthwhile for us to discuss the shadow budget of tax reliefs and allowances as part of these budgets, and whether these public moneys should be expended in boosting public research, public universities, public infrastructure and public services.