The presentations are possibly complementary. The information I would like to give relates to looking at some of the numbers underlying the common consolidated corporation tax base, CCCTB, proposals and the implications for Ireland. I will run briefly through some of the points I made in the document I submitted.
First, the initial CCCTB proposals are perceived to be narrower than the existing base under domestic legislation. While a lot of the emphasis tends to be on the impact on multinationals and the distribution of the tax base there, if the base under this proposal is narrower, domestic companies, which come under the €750 million threshold may voluntarily choose to opt in if they can get a reduced taxable income using this system. That could be through the treatment of research and development expenditure. As Ms O’Brien mentioned, we do have quite a good regime with the R&D tax credit and the knowledge development box but in terms of the treatment of the expenditure it can be a 100% deduction plus an additional 50% under the CCCTB proposals. Equally, for something like entertainment expenses which are not deductible under the Irish regime, there would be a 50% deduction allowed under the new proposals. It could be that domestic companies would choose to opt in whether they are close or even at the €750 million threshold for turnover. It is difficult to assess the impact that would have but it is a possibility.
Second, as discussed before the committee previously, would be the impact on some of the rates Ireland applies. I refer, for example, to the 25% rate that is generally perceived to apply to non-traded income but it does apply to the traded income of those in mining and extractive industries which have some presence in Ireland. Equally, our 33% rate as applied to the capital gains of companies, although it is paid under corporation tax, it is paid at a 33% rate. In 2014 Ireland had approximately €2.5 billion of taxable income that was taxed at the 25% rate. If we were to go to a single rate and if that rate was 12.5% then, notionally, there would be a reduction in the gross tax due of €300 million simply by taking the amount of income that would be subject to the 25% rate and applying a much lower rate to it. How that translates in terms of actual tax revenue is quite difficult because some credits could be applied to that or if the next step is taken and the tax base is apportioned we do not know how much we would get. At present, our 25% rate brings in about €600 million in gross tax due a year.
It is also worth noting that for the capital gains tax, again looking at the most recent figures for 2014, companies had about €600 million of gains taxed at the 33% rate. Again, if that was at 12.5% one would be looking at a reduction in the gross tax due of €125 million, subject to the provisions about apportionment.
When it comes to looking at the broader impact of the common consolidated corporate tax base on Ireland, a number of studies have been undertaken. Ernst & Young, EY, was commissioned by the Department of Finance to undertake a study that was published in 2012 based on the 2011 CCCTB proposal. The Commission itself published an update on its revenue assessment impact of the most recent version of the CCCTB back in October. Both of the outcomes seem to be very benign from an Irish perspective. According to the EY analysis the loss in corporate tax revenue would be about €325 million and according to the European Commission analysis the loss would be equivalent to 0.14% of GDP, which based on 2014 figures would be €250 million of a total loss in corporate tax revenue for Ireland. I have major doubts about the veracity or applicability of either of the approaches to estimating the impact on Ireland. The studies used individual company data, which really does not follow geographic boundaries. It tells one what a company does but if one gets a company reporting on Ireland and one has information on its revenue, profit and tax that does not mean that all happened in Ireland. If one takes the EY and the Commission approaches, neither of them know where the companies make their sales.
A company's financial reports do not tell one, by and large, where the sales happen so both studies had to imply it. The EY approach was to do it with export shares, which may be the final destination of the products and the Commission simply ignored it. It applied an output measure as its way of attributing the information. We know in the case of Ireland the output is quite large but of course all the sales happen elsewhere so either of those factors would have major implications in terms of their applicability to the Irish situation where we know, first, that 80% of our corporation tax is paid by foreign-owned companies and, second, that the top 10% of payers pay 40% of the corporation tax and, third, there is an overexposure in Ireland of companies from the US. If the companies in the analyses do not reflect that they are not reflecting the corporation tax landscape in Ireland. One could ask how we will go about overcoming that. One way would be to try to look at aggregate data. One sector that is very important for Ireland is the manufacture of pharmaceuticals.
In any given year that sector contributes about one sixth of our corporation tax. For the years I have looked, from 2008 to 2012 where full data are available, we collected about €700 million per annum in corporation tax solely from the manufacturing of pharmaceuticals.
If we consider the tax base around Europe, we can try and proxy this with a national accounting concept called gross operating surplus. In accounting terms, it is akin to earnings before interest, tax, deprecation and amortisation. It is close to the tax base but it has some differences and, crucially, it does not take account of depreciation. If we get a measure of the distribution of gross operating surplus across Europe, we can get a measure of the distribution of the tax base across Europe. Ireland has about one quarter of the tax base in the manufacturing of pharmaceuticals in the EU and from that we collect about €700 million in corporation tax per annum. The figure is probably higher now but for the five year period from 2008 to 2012 it was €700 million per annum.
If we consider what the CCCTB might do, on the basis of allocating profits on sales, employees, employee compensation and fixed assets, Ireland would not do too bad on the fixed assets. Approximately 8% of all fixed capital investment in the EU for the manufacture of pharmaceuticals takes place in Ireland. When it comes to employees and employee compensation, we have about 3% of both, but when it comes to sales, Ireland has less than 1%, simply by the nature of the size of our market. If the CCCTB was applied with the one third equal weights for sales, employees and fixed assets, we would get about 4% of the European-wide tax base. It would go from 25%, as it is now, to 4%, if the CCCTB was to be applied. That is making many assumptions but is based on the aggregate data. It would mean a loss in tax revenue of over €550 million for Ireland if we were to move from having the value added that is created or taxed here to having it allocated on the basis of sales, employees and fixed assets.
A big difficulty with all these analyses of the CCCTB is that they are on the basis on what companies do now. Companies engage in tax planning. A CCCTB is not going to stop that. Companies are always going to engage in tax planning, therefore, we cannot be sure how the companies will react. One issue is that in order for a country to be allocated some of the tax base, the company must have a taxable presence there, or a permanent establishment. At present a company might have a sales function in various countries and that sales function would trigger a permanent establishment. It might not be very profitable because it might not be where the company creates a value but, under the system of the CCCTB, it would be enough to create a permanent establishment. We could have companies in a sense changing. They would not set up permanent establishments or tax presences in various countries. Perhaps they could outsource the sales to an independent import distributor if it was possible for them to do so. They could concentrate their activities in certain countries. We are not sure how that might play out and as Ireland is a peripheral country that is a little distant from the large markets in the EU, I do not think they will be concentrating their activities here. In terms of the impact a CCCTB will have, we must recognise that the companies will respond. They will not simply continue with their existing activities and have an entirely new tax system imposed on them and not react to it.
Equally, the CCCTB in its objective of reducing tax avoidance will still make transfer pricing necessary for extra EU transactions. In the case of Ireland, this is hugely important, given the presence of US companies here and the fact that their operations here use technology and platforms that are developed in the US, and they must be paid for through various patent royalties, etc. This pricing will still exist under the CCCTB. This proposal would not necessarily increase, on its own, the amount of taxable profit in the EU. If we have US companies, they will still be able to allocate their profits to the various research and development, R&D, that takes place in the US, and rightly so. The CCCTB would simply redistribute the profit to be taxed around the EU. It would not necessarily change the amount of it. In view of that, there might be an incentive for smaller countries not to be as strong on transfer pricing. Why would Ireland or another small country engage in very aggressive transfer pricing when the benefits of that will be distributed, mainly to the larger countries in the EU? There is a bit of mismatch of incentives there.
The CCCTB presents a significant threat for Ireland. We clearly have had the impact of multinationals and we know that 80% of our corporation tax comes from multinationals but, equally, if domestic companies want to avail of a lower rate or a narrower base, they may opt into the system. Given the large amount of Ireland's corporation tax that comes from exports from either domestic or foreign owned sectors, and we know that possibly the top ten companies that pay 40% are all likely to be huge exporters, it is not unduly pessimistic to say that Ireland could lose up to 50% of its current corporation tax base if the CCCTB was introduced and there are likely to be further knock-on consequences as companies react to the introduction of such a system. At present as well as around €3 billion of corporation tax, US companies pay €6 billion of salary costs in Ireland, undertake an average of €3 billion in fixed capital investment and buy around €3 billion of goods and services from Irish suppliers. That is a €15 billion contribution to the Irish economy every year.
As has been outlined, there is no doubt that the system of taxing transnational companies has not kept pace with the modern economy and it is in need of reform. However, it is hard to imagine any reform, even unilateral US tax reform, posing a greater threat to the huge gains from Ireland's most successful economic policy of attracting foreign direct investment than the proposed CCCTB.
