Seán Fleming (Laois-Offaly, Fianna Fail) | Oireachtas source

The cost of assets that are used to generate taxable trading profits are recognised as legitimate business expenses. While these costs are not fully tax deductible in the year in which they are incurred, tax relief is available through capital allowances, which spreads the cost of the asset over a number of years. This gives a fairer reflection of the performance of the business for accounting and tax purposes, which is why capital allowances are a well-established feature of most OECD tax codes.

By the early to mid-2000s, it was clear that the development and exploitation of intangible assets had become a significant driver of economic growth in OECD economies, some of which had introduced specific tax schemes to address the particular features of these assets. Therefore, the Finance Act 2009 introduced capital allowances for certain intangible assets that a company manages, develops and exploits. These intellectual property, IP, allowances encourage substantive activity and high-quality employment in the management and exploitation of intangible assets such as patents, trademarks, know-how, customer lists and research rights.

The success of Ireland’s approach to encouraging real substantive investment is clear from Revenue’s analysis, which shows that claims of intellectual property allowances accounted for 24% of net corporation tax payments in 2019. In addition to corporation tax, claims of IP allowances are making a significant contribution to the Exchequer from all payroll tax receipts.

When IP allowances were introduced, the maximum deduction for IP allowances and related interest was restricted to 80% of income from the relevant trade. No such cap applies to other capital allowances, so the cap was removed in the Finance Act 2014 to bring the tax treatment of intangible assets into line with the tax treatment of other assets and of similar assets in other jurisdictions.

The 80% cap was reintroduced in budget 2018 in response to a recommendation in the Coffey report, with the aim of smoothing corporation tax receipts and helping to support their sustainability.As the Senator is well aware, changes to tax law are generally made on a prospective basis such that they apply only from the date on which they have been given effect. I know the Senator was referring to prior years in his contribution. The cap does not affect the overall quantum of relief. It merely extends the period over which intellectual property allowances are used, with any restricted amounts carried forward for use in later periods, subject to the 80% cap in those periods. It is relevant to note that IDA Ireland’s assessment is that Ireland offers a strong and growing research, development and innovation environment and found that a third of multinationals in Ireland have had operations here for more than 20 years. These companies have long-established and deep-rooted links with the Irish economy, which are supported by Ireland’s stable and transparent taxation approach.

The Coffey report said that it is right that we tax these companies, and we clearly do so. It also said it is essential that our tax regime is robust, is not subject to challenge and allows companies to plan ahead, invest and generate real activity and employment in the country with reasonable certainty. It is important to maintain this certainty as part of our overall tax regime, and to change it from year to year would cause uncertainty. People would not know the implications of making long-term investments if significant changes were made every year.

Seamus Coffey's report goes on to say:

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%.

The tax came in at 80%, went up to 100%, and Mr. Coffey reckoned it should be brought back to 80%, and we have done that.

None of these issues will increase the amount of corporation tax that will be paid. All it is doing is extending the period over which to pay corporation tax. The Senator mentioned in his contribution that this may lead to a flight of capital from the country. I would not support a measure where the person proposing it recognises that, if it were implemented, it could lead to a capital flight from the country.

Essentially, what the Seamus Coffey report has done, which is good, is to say that by putting a cap on how much of the allowances can be claimed each year, it will take longer for them to get the full tax relief for their intellectual property intangible asset. When we know a company is going to make a certain amount of profit in the years ahead, and bear in mind these multinationals we are talking about pay the majority of corporation tax already, we are now saying to them that we want a more sustainable flow of corporation tax rather than a big surge one year, a drop-off the next year followed by another big surge. We cannot plan our health services if the tax coming into the country goes up and down like that. That is why we have restricted it to 80% as it will allow for a more stable environment. Companies can only write it off over a longer period so there cannot be any major reduction in tax in a year if they have a bigger write-off allowed in any particular year. Having the 80% limit spreads out longer the amount of tax that will be paid. There will be no more and no less tax paid but it can be paid over a longer period. That ensures we have, in the years ahead, a certain level of corporation tax coming to us in the medium term rather than taking a big bulk of it now and being short of tax in two or three years' time because we grabbed it all now. I think that it is far better, and I am not talking from the multinational perspective but from the perspective of the Irish public, that we have a little stability in the flow of corporation tax into the Exchequer, and that we do not try to grab it all now and leave ourselves short next year and in the following years.

The regime that is in place is excellent. We have had a very recent review and I do not see a need to review the matter again because by doing so it may cause uncertainty about this issue. We have certainty and a guaranteed sustainable tax flow from this system for a number of years ahead. I would not like to interfere with that plus I do not think that we need a report because we are satisfied with the regime as is.