Paul Gavan (Sinn Fein) | Oireachtas source

I move recommendation No. 7:

In page 54, between lines 23 and 24, to insert the following:

“Report on restoring cap on intangible assets

23. The Minister shall, within six months of the passing of this Act, prepare and lay before both Houses of the Oireachtas a report on restoring the 80 per cent cap on intangible assets onshored between 2015 and 2017 that can be written off against profits at the rate of 100 per cent.".

This recommendation basically calls on the Minister to prepare and lay before both Houses, within six months of the passing of the legislation, a report on restoring the 80% cap on intangible assets onshored between 2015 and 2017 that can be written off against profits at the rate of 100%. The recommendation seeks a report on implementing an 80% cap on capital allowances. This arises from recommendation No. 18 of Seamus Coffey's review of Ireland's corporation tax code, which states:

In order to ensure some smoothing of corporation tax revenues over time, it is recommended that the limitation on the quantum of relevant income against which capital allowances for intangible assets and any related interest expense may be deducted in a tax year be reduced to 80%.

This policy was endorsed by Stephen Kinsella, associate professor of economics at the University of Limerick, in January 2020. It is worth quoting what Professor Kinsella had to say. He stated:

Sinn Féin have correctly identified that intangible assets are a key resource for the Irish economy in the 21st century. I argued for a rethinking of Ireland’s relationship with intangible assets some weeks ago, but more importantly, so did the Fiscal Council's Seamus Coffey. Sinn Féin want to tax these intangible assets properly. Introducing an 80% cap on profits in intangible assets, particularly those on-shored between 2015 and 2018 by multinationals.

He went to state:

This is an excellent idea that will result in some capital flight from the country, no doubt, but which will fund the Exchequer handsomely and help offset the inevitable loss of tax revenue from the introduction of new OECD rules on digital taxes.

The amount of capital allowances claimed by companies increased by €27.4 billion in 2015 to reach a level of €51.8 billion. These are truly eye-watering amounts. The use of capital allowances has increased significantly from €8.5 billion in 2011 to €45.2 billion in 2015. This likely reflects a greater amount of capital allowances available but also increased profitability of companies carrying capital allowances and thus able to use existing allowances. Unused capital allowances in one year are carried forward as trading losses for use in subsequent periods when there is taxable income to offset against them. Capital allowances for intangible assets are claimed under section 291A of the Taxes Consolidation Act 1997. This section provides for the offsetting of capital expenditure on the development or acquisition of a range of intangible assets against the income arising from the use of that intangible.

Ireland's national accounts have been impacted by a number of intangible onshoring events in recent years with the profit generated by these intangible assets now included in gross measures of Ireland's national income. Most notably, there was an increase in the stock of intangible assets in Ireland of approximately €250 billion in quarter 1 of 2015, while the quarterly national accounts for quarter 4 of 2016 show investment in the acquisition of intangibles of approximately €25 billion. There may have been other events that were not as readily identifiable in the accounts while the possibility of future large onshoring events cannot be discounted. In nominal terms, Ireland's gross capital stock rose from €756 billion to €1.088 trillion, an increase of €332 billion. Changes in the capital stock are usually driven by investments, either outright purchase or internal development, and obsolescence, withdrawal from use, giving entries and exits to the capital stock. However, in 2015, investment in capital was €54.1 billion. As a result, nearly 85% of the €332 billion increase in the capital stock cannot be explained by investment. Table 9.8 of Seamus Coffey's review of the corporation tax code gives the composition of Ireland's gross capital stock for 2014 and 2015. In the 2015 data, two categories were suppressed for confidentiality reasons, namely, those relating to transport equipment and research and development.The categories reflect aircraft leasing and the onshoring of intellectual property assets. The categories for which data are provided recorded an increase of €42 billion in 2015, so the remaining €289 billion is accounted for by the missing categories of transport equipment and intangibles. It is probable that the bulk of this was due to intangibles.

From an industrial policy perspective, the decision of companies to locate some of their intangible assets in Ireland can be considered another spoke in the wheel. Although these assets are inherently mobile, the decision to locate them here strengthens existing investment in Ireland. The link to future investment is less clear but ongoing changes at international level in how corporate income tax is assessed have the link between profit and substance as a key motivation. Many companies that are likely considering the location of their intangibles in this changed environment already have significant operations in Ireland. This substance will likely be a factor some companies will consider when making these decisions, and it is likely that further substance will follow to the location chosen.

We are asking for a report on this. It is a very reasonable and important request that has the backing of key respected economists who already do good work for the Government.