I am the principal officer in the business tax unit of the Department of Finance. I thank the joint committee for its invitation to attend the meeting. I am joined by my colleague, Mr. Brendan Crowley, who handles the Department’s international tax files. I am also joined by two colleagues from the Revenue Commissioners, Ms Kate Levey, principal officer in the EU branch of the international division, and Ms Yvonne Quirke, also from Revenue’s international division.
On 25 October the European Commission published a package of tax measures, containing three distinct legislative proposals. The first is an anti-tax avoidance directive to deal with hybrid mismatches. These are situations in which a particular instrument or entity goes untaxed because of differing tax treatment in different jurisdictions. The directive is at an advanced stage and was discussed at this morning's meeting of ECOFIN. Ireland supports the work on this directive which mirrors the work done at OECD level.
The second proposal seeks to improve dispute resolution mechanisms within the European Union. Ireland is supportive of this proposal which will be helpful in resolving disputes in a timely way under tax treaties. This will improve certainty within the system and be good for business and tax authorities. My Revenue colleague, Ms Levey, will say a little more about this proposal.
The third element is the proposal for a common consolidated corporate tax base which I understand is the main focus of this discussion. Strictly, the Commission has made two proposals. The first is a proposal for a common tax base, TB, which is to be discussed in its own right as a “double C” TB. The Commission has made a second proposal on consolidation – a “treble C” TB – which is intended to be negotiated if and when a common base is agreed to.
A common corporate tax base would consist of agreed rules for how a company calculated its taxable profits in each member state. The member state would then apply its own tax rate to these profits. It would replace the entire existing corporate tax system for large companies with a whole new set of rules for how their taxable profits would be calculated. The proposal for a common tax base is, by necessity, very complex. Each member state currently applies different rules to what income is taxable, which deductions are allowed, which credits are given, etc. Ireland currently has a very wide tax base, while some member states have narrow bases.
The second stage of the process, consolidation, involves how profits are attributed to each country in the European Union. A common base would give countries common rules for how to calculate profits, but it would not impact on where the profits and, therefore, taxing rights would be attributed. Currently, member states use OECD transfer pricing rules in determining how profits are attributable to each country. Under the transfer pricing rules, one looks at where the real value-added activities happen and attributes a proportionate share of the profits to these activities. Consolidation would replace the transfer pricing approach within the European Union with a formula for dividing profits among member states. The formula would be based on where sales happened, where staff were located and where a company’s assets were. Under this formula each corporate group’s total EU profits would be added together and divided among countries. The country concerned would then tax the profits attributed to it at its corporate tax rate. Consolidation would not legally impact on a country's tax rate, but it would have a significant impact on how much tax was paid in each member state. The impact assessment published by the Commission states the CCCTB can lift growth in the European Union by up to 1.2%, but it is silent on the impact on growth in member states individually.
How does the new CCCTB proposal compare to the previous one? The CCCTB proposal has a long history. It dates back to 2001 when the Commission first put it forward as long-term, comprehensive measure to reform corporate tax rules within the European Union. The concept was discussed at ECOFIN and technical working group meetings from 2004 and the Commission published a detailed proposal in 2011 which would be superseded by the new proposal. With a proposal such as the CCCTB proposal which has been debated publically and at length for many years, it is perhaps tempting for us to simply reheat our old analysis and pick up where we left off. However, it is important that we consider it anew and with fresh eyes, given that the proposal includes some important differences when compared to its predecessor.
The separation of a common base from the more problematic issue of consolidation is significant. This is a separation which Ireland has supported since its Presidency. Most significantly, adhering to the CCCTB proposal would be mandatory for multinational companies with a group turnover of more than €750 million, whereas adhering to the 2011 proposal was optional for all companies. The new proposal allows smaller companies to opt in to the CCCTB rules or remain taxable under our existing corporate tax rules. This would require Ireland to operate two corporate tax systems side by side, namely, the CCCTB rules for large companies and a domestic system for smaller companies that did not opt to adhere to the CCCTB rules.
While the consolidation aspect of the proposal is broadly similar to the 2011 version, there are a number of substantial technical differences in the design of the proposed common base. For example, allowance for growth and investment is included in the new proposal which effectively allows a business to claim a tax deduction for equity investment in the business. Additionally, under the common base proposal, an enhanced research and development deduction is proposed of between 25% and 100% of qualifying research and development expenditure.
It is also important to recognise that there have been significant changes on the corporate tax landscape since the previous proposal was published in 2011. Since 2011 the OECD base erosion and profit shifting, BEPS, process has been launched and 15 comprehensive BEPS reports were published in October 2015. The implementation of the BEPS reports is under way at national and international level, including through the EU anti-tax avoidance directive. The business environment has also changed considerably since 2011. The profile of taxpayers in Ireland will naturally have changed in the past five years. This is also true of the broader international environment, in which issues such as Brexit and US tax reform are part of the backdrop to our assessment of the CCCTB proposal.
How is the CCCTB proposal different from our existing system? A focus of our work since the proposal was published has been comparing the common base proposed by the Commission to the existing Irish corporate tax base. There are some significant technical differences. In some areas the proposed common tax base is likely to be significantly narrower than the existing Irish tax base. For example, the CCCTB proposal allows much broader rules for deducting business expenses, for example, business client entertainment expenses which are not deductible in Ireland would be 50% deductible under the common base proposals. There are broad exemptions for foreign income earned by Irish companies, a new tax deduction for equity investment - the allowance for growth and investment that I mentioned - while the anti-avoidance rules are less specific across all aspects of the base.
As I said, under the Commission's proposals there is a super deduction for research and development expenditure, which would raise a question about the continuation of our best-in-the-class research and development tax credit. The Commission's proposals do not appear to distinguish between trading and non-trading profits, nor do they include separate tax treatment for capital gains. This raises a question about whether we would get to keep our 25% rate for non-trading profits or our 33% capital gains tax rate.
Neither the Minister for Finance nor the Government has taken a position on CCCTB at this point. As with any complex proposal, at this stage it is appropriate that officials would undertake a detailed analysis to understand the implications for Ireland and to inform our advice on Ireland's negotiating position. Some preliminary work is under way in the Department and the Revenue Commissioners, but we will consider commissioning a more detailed analysis if we feel it is necessary. Obviously, this is a Commission proposal that requires the unanimous approval of all 28 member states. There are months of detailed technical analysis and negotiation ahead, during which the proposal is likely to change shape. We will engage constructively with this process as things progress.
The new CCCTB represents a significant proposal that warrants careful consideration and analysis. That work is now under way and will take some time. We are happy to assist the committee with its deliberations and to answer its questions.
