Pearse Doherty (Donegal South West, Sinn Fein)
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78. To ask the Minister for Finance if he has considered imposing limits on the transfer of losses within group companies; if such a precedent exists for this limiting in other States; the conditions that currently apply to the transfer of losses in group companies. [26067/13]

Pearse Doherty (Donegal South West, Sinn Fein)
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81. To ask the Minister for Finance the estimated loss to the Exchequer in corporation tax as a result of loss transfers among group companies; his views on whether this is aggressive tax planning and avoidance; the steps he has taken to alleviate the impact of this on the Exchequer; and the steps he has taken at European level to ensure this type of activity is limited. [26070/13]

Michael Noonan (Limerick City, Fine Gael)
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I propose to take Questions Nos. 78 and 81 together.

In recognition of the fact that groups of companies generally comprise a single economic entity, the Taxes Consolidation Act 1997 provides that trading losses of a group company in an accounting period may be surrendered and offset against the profits of another group company in the corresponding accounting period.

To qualify for the relief, both the surrendering company and the claimant company must be resident in the State and be members of the same group. Two companies are members of a group of companies if one company is a 75% subsidiary of the other or both are 75% subsidiaries of a third company, where the third company is resident in the State or a treaty partner country or is quoted on a recognised stock exchange. A company is a 75% subsidiary of another company where not less than 75% of its ordinary share capital is owned directly or indirectly by that other group company.

Under the existing group relief provisions, only current year trading losses may be surrendered by one group company to another group company and any losses surrendered must be used by the claimant company in the same or corresponding accounting period. The relief does not apply in respect of trading losses brought forward by the surrendering company from previous accounting periods. Also, any losses surrendered to a claimant group company cannot be carried forward by that company to future accounting periods.

Based on preliminary data derived from corporation returns for the year 2011, the total amount of trading losses for which group relief was claimed in these returns was €2,443 million and the estimated tax cost in respect of these claims was €305 million. This cost does not take account of any behavioural response by companies to ensure continued utilisation of the losses concerned were group relief to be removed.

Group relief is a common feature of corporate tax systems and similar relief in one form or another is available in many other countries, although the terms and conditions will vary from country to country. The availability of group relief is an important facility for Irish and multinational enterprises which conduct their business operations within a group of companies. Imposing a limit on such relief would put these enterprises at a disadvantage vis-à-vis enterprises that operate through branch structures rather than subsidiaries and, in the absence of other countries applying such a limit, could be detrimental to our international competitiveness.

The transfer of losses within a group, by claiming group relief as provided for in the legislation in respect of losses that have been incurred by the group, could not be said to constitute aggressive tax planning and I would not see this as an activity to be limited in the context of initiatives at European level to counter aggressive tax planning. However, I would point out that the Taxes Consolidation Act does contain restrictions to counter the transfer of losses from one company to another for tax avoidance purposes, often referred to as “loss buying”. For example, Section 400 of the TCA provides that, where a loss-making trade is transferred from one company to another company in a group situation, the transferred trade is treated as a separate trade distinct from any other trading activities carried on by the successor. Any unused losses forward of the transferred trade are only allowable against profits attributable to that separate trade. This ensures that trading losses are ring-fenced to that trade and may not be offset against other trading income of the successor.

In addition, Section 401 of TCA provides that where, within a period of 3 years, there is both a change of ownership of a company and a major change in the nature or conduct of the trade carried on by the company (e.g. major change in products, services, customers or markets), trading losses incurred by the company before the change of ownership are not allowable against trading income of the company after the change of ownership. The effect of these provisions to counter “loss buying” is to restrict the scope for utilising losses for tax planning purposes by combining loss-making and profitable business activities. These provisions are kept under review and, if any loopholes or weaknesses that pose a tax risk are identified, I will not hesitate to introduce appropriate legislative amendments.

I should add, finally, that the Revenue Commissioners monitor and assess claims for group relief as part of their ongoing risk management and audit programme. Revenue has a range of resources at its disposal, both legislative and administrative, to counter tax avoidance and it will not hesitate to challenge claims for relief in respect of losses that are contrived and not genuine commercial losses incurred by an enterprise.