Tuesday, 6 December 2016
I welcome the Minister of State to the House to discuss this very important matter. As he is aware, in September the Brazilian tax authorities issued normative instruction 1658/2016, adding Ireland to its list of designated tax havens also known as the blacklist. The change came into effect on 1 October. Ireland joins the illustrious company of states such as Panama, Monaco and the Isle of Man on the blacklist and, needless to say, such classification is damaging to our international reputation. The category that includes Ireland has countries that have no tax, that hide banking or trade information or that have a corporate income tax rate of less than 20%. This is unwelcome news, considering the increased international scrutiny this year already as a result of the Apple tax ruling and the startling GDP results. With Brazil being one of the top ten economies in the world, this is seriously problematic for the Ireland-Brazil trading relationship and poses significant challenges to Irish exporters, particularly in the post-Brexit world.
Any transactions involving entities resident in Ireland are now subject to greater Brazilian tax regulation, including mandatory transfer pricing rules for any transaction involving goods, services and rights, even if between non-related parties; stricter thin capitalisation rules; stricter tax deductibility rules that require detailed identification of the effective beneficiary of payments made; and the fact that transactions with entities resident in countries on the blacklist are subject to increased holding taxes of 25% instead of the regular level of 15%. The ruling has particular effect on three key areas where Ireland and Irish companies in particular have a strong strategic interest, namely aircraft leasing, agriculture and insurance.
Over 60% of commercial aircraft in Brazil are leased through Ireland and the country has, rightly, developed a reputation as the international hub for aircraft leasing. This decision, if it is not reversed, will likely have a negative effect on this area. The European Union is currently preparing details of a trade deal with Brazil and the wider Mercosur region. While offering potential benefits, this deal is of particular concern to the Irish beef industry. This recent ruling will greatly undermine Ireland's negotiation stance entering these talks. The ruling is also having major effects on the insurance sector, where there are a number of Irish companies active in Brazil. They are unable to enter any new business while contracts with an automatic renewal clause can only be renewed for one more year as of the suspension date.
I am aware that the Irish ambassador to Brazil met representatives of the Brazilian revenue service to refute these allegations and seek Ireland's removal from the blacklist. A formal request for Ireland to be removed from the Brazilian list was submitted on 27 September. However, it appears there has been no official response as of yet from the Brazilian authorities to our request to be removed from this blacklist. For the reasons outlined, it is imperative this is changed as soon as possible.
I thank Senator Richmond for raising the issue and giving me the opportunity to update the House on the matter. The Minister, Deputy Noonan, and I were surprised and disappointed to learn in September that the Brazilian Federal Revenue Service had, without warning, added Ireland to Brazil's tax blacklist. The operation of the listing was initially backdated to 1 August but it was subsequently suspended until 1 October. No notice of this decision was given to the Irish Government by the Brazilian Federal Revenue Service and no explanation was received as to why Ireland has been included on the list.
Being included on the list has a number of negative consequences, including greater Brazilian taxation on flows of income from Brazil to Ireland. Since the listing was published, we have sought to engage with Brazilian revenue to seek Ireland's removal from the list. The Irish ambassador to Brazil is leading our engagement with the Brazilian Federal Revenue Service, doing a fantastic job on behalf of the Government. Officials from the Department of Finance and the Department of Foreign Affairs and Trade are in close contact with the ambassador and supporting these efforts.Senior officials from both Departments have also held meetings with the Brazilian ambassador to Ireland to express our concern with being included on the Brazilian list.
A formal request for Ireland to be removed from the Brazilian list was submitted to the Brazilian Federal Revenue Service on 27 September. The request also sought for the listing to be suspended to allow technical discussions to take place between officials. The request remained under consideration by the Brazilian Federal Revenue Service until we received a response on 17 November.
While the request was still under consideration, the Brazilian Federal Revenue Service made some changes to the operation of the listing. These changes were designed to remove the aviation sector from the scope of taxes imposed as a result of the listing. The change means that withholding tax is not included on the payment of aircraft lease rentals from Brazilian airlines to Irish aircraft leasing companies.
Unfortunately, the reply from the Brazilian Federal Revenue Service on 17 November rejected our request for the listing to be suspended. Following follow-up discussions, the Brazilian Federal Revenue Service has agreed to meet a technical delegation from the Department of Finance and the Revenue Commissioners to discuss the issue further. The Irish ambassador in Brazil is now working on scheduling a meeting as soon as possible. I was in contact with him on Friday of last week on two separate occasions discussing this issue to see what kind of timeline we can have for those meetings to go forward as quickly as possible.
The response received from the Brazilian Federal Revenue Service makes it clear that Ireland was included on the list because our statutory rate of corporation tax is below 17%, which is the benchmark set under Brazilian law. In our formal submission to Brazil we highlighted that Ireland has a 25% corporation tax rate on passive income and a 33% rate on chargeable gains. We also stressed that the 12.5% rate has been settled policy in Ireland since 2003 and that Ireland's corporation tax take has typically been very close to the EU and OECD averages, both in terms of corporate tax as a percentage of GDP and in terms of corporation tax as a percentage of total tax revenue. We believe it is inappropriate to include Ireland on a blacklist simply because we apply a low tax rate to a wide tax base, which is fully in line with recommended OECD best practice. We remain hopeful that discussions between the Brazilian Federal Revenue Service and Irish officials will enable us to fully explain our corporate tax system and, hopefully, see Ireland removed from the Brazilian list.
I should add that the response received from Brazil on 17 November makes it clear that Brazil does not consider Ireland to be a tax haven. I strongly reject allegations that we are a tax haven. Ireland does not meet any of the international standards for being considered a tax haven. Ireland is fully compliant with all international best practice in the areas of tax transparency and exchange of information. Ireland's corporate tax policies are designed to attract real and substantive operations to Ireland. Ireland has not been and will never be a brassplate location. Ireland only has and wants real substantive foreign direct investment, the kind that brings real jobs and investment.
Ireland is an active participant in global work to reform the international corporate tax system. We have implemented country-by-country reporting, agreed the anti-tax avoidance directive and are working towards the implementation of the remaining OECD base erosion and profit sharing, BEPS, recommendations both domestically and internationally. On budget day the Minister for Finance, Deputy Noonan, published an update on Ireland's international tax strategy that highlights our continuing efforts in this regard.
I thank the Minister of State for his detailed response. I share his disappointment with the Brazilian reply so far. I fully appreciate that this matter is being handled to the best of the Government's ability. I ask that the Government engages with the various entities and companies that have an interest in Brazil to see if they can work together to smooth out this matter as quickly as possible.
I thank the Senator for raising the matter. The Irish Government takes this issue very seriously. As Minister of State with responsibility for international financial services, I take the matter seriously. We have done a lot of work in recent weeks and months with the various stakeholders involved to make sure that we can progress this issue and get a satisfactory outcome for all concerned.