I thank the Chairman and the committee for inviting us to speak about our recent report. I have submitted an opening statement which is on the detailed side. As such, there would not be great value for the members if I went over it again. I propose, therefore, to read a more simplified version.
Our report set out to determine whether the Government was justified in claiming that Irish tax policy does not and cannot undermine the tax take of developing countries. The spillover analysis of 2014 concluded that the size of economic and financial linkages between Ireland and developing countries was so small as to make any fiscal impact of the Irish tax regime insignificant. This conclusion was reached in substance on the basis of a sample study of years and countries of trade, portfolio investments and foreign direct investment flows from Ireland to developing countries. Our research shows that the years and countries chosen by the researchers were unrepresentative of investment from Ireland into developing countries in the period 2009 to 2015. The researchers took the years 2009 and 2012 as their sample years. While these did, indeed, show low levels of foreign direct investment from Ireland to developing countries, our research shows that 2009 and 2012 were anomalous and that 2010, 2011, 2013 and 2014 showed higher levels of foreign direct investment to developing countries. In addition, the countries chosen for the analysis also proved to be untypical of the flows of foreign direct investment to developing countries. In other words, other countries were more significant recipients of foreign direct or portfolio investment than those focused on by the researchers.
The research also ignored the fact that even small amounts of foreign direct investment into developing countries might represent a relatively large amount for developing countries, especially compared to GDP or the overall tax take of an individual country. The Irish spillover analysis failed to make specific estimates of investment returns to Ireland from individual developing countries or the tax treatment of those returns. In other words, in contrast to the spillover analysis conducted by countries like the Netherlands, the Government's analysis made no attempt to estimate the size of potential tax impacts at all. We have tried to show some simple methods by which such estimates could be made.
Overall, our research estimates that between €500 million and €1.6 billion is being returned to Ireland from developing countries. This is the return on foreign direct and portfolio investments into developing countries. While the sums are not huge in the global scheme of things, the tax treatment of that money cannot be dismissed as insignificant. It is approximately two to four times the size of Irish overseas aid. According to these simple estimates, South Africa may have lost out on withholding tax over three times the amount of Irish aid it received. In Zambia in the three years before the revision of the tax treaty between that country and Ireland, withholding tax forgone and interest on dividends may have been the equivalent of between 20% and 40% of Irish development aid to Zambia.
Our numbers in this regard are undeniably ballpark figures as they are based on a simple ratio analysis. That is to say we know how much foreign direct or portfolio investment goes to developing countries from Ireland and we know what percentage that represents of Ireland's overall outgoing foreign direct and portfolio investment. The Government publishes consolidated global figures only rather than figures broken down by region, never mind country, of the rate of returns from that foreign direct or portfolio investment to Ireland. We can make an estimate by applying the same ratio of Irish foreign direct investment as a percentage of global FDI to the overall global figure being returned. Assuming developing countries retain approximately 15% of those returns as withholding taxes, we can estimate roughly how much comes back to Ireland post tax. For individual developing countries, we can be more specific on tax rates and the size of investments. It is not exact but it provides initial figures for analysts to work with. It is a contribution as an alternative methodology which the researchers might have adopted and might want to revisit. It is also the case that the Government is likely to have unpublished data on returns from overseas investments from different regions or countries and on other financial flows which would provide a more accurate picture still.
There is a second set of problems with the Government's spillover analysis. It claims that certain aspects of Irish tax law, in particular after reforms in 2013 and 2014, make various tax avoidance structures impossible. However, our research shows that two years after that reform such structures are not only possible, they are already in operation by some multinationals, including those with significant revenues from developing countries. For example, a scheme dismissed by the Government's researchers as impossible is a structure which allowed the double Irish tax avoidance scheme to exist. Our research shows that as early as 2014 tax advisers were already offering alternative structures to the double Irish which were very similar in nature. Instead of Cayman or Bermuda, they used Malta, which provided exactly the same outcome with negative impacts on the revenue take of developing countries.
Why does any of this matter? We consider these things important for the reasons set out in the written presentation I submitted to the committee beforehand but it is worth going over them here. Clearly, there is an ethical dimension to all of this. We cannot in good conscience, however inadvertently, undermine the tax take of some of the poorest countries in the world. Irish corporation tax policy has served Irish people well, but that cannot be at the expense of others. The Government is committed to ensuring there is policy coherence across Government in support of development. This commitment is reflected in various policy positions of the Department of Finance and Irish Aid. Indeed, policy coherence for development is codified in the Lisbon treaty. As such, we have a legal and moral obligation to ensure the policies of one Department do not undermine Irish Aid's objectives. Irish citizens and taxpayers have a legitimate expectation that their contribution to Irish Aid is put to the best and most effective use and not undermined by the policies of another Department.
The sustainable development goals negotiated so effectively under Ireland's joint stewardship require unprecedented levels of policy coherence in order to be achieved. Having played such an important role in bringing the goals into existence, Ireland's performance in achieving them will be keenly observed.
Moreover, achieving greater coherence across often competing objectives - not limited to taxation, but also climate concerns and peace-building - will be an important indicator of Ireland’s progress to achieving the strategic development goals, SDGs.
Ireland has established itself as a leader in the area of spillover work. The Department of Finance was under no obligation to conduct this research and deserves credit for taking it on. The Netherlands is the only other country in the world to have carried out a spillover analysis and its particular history of colonialism and ties to its former colonies made its spillover analysis qualitatively different to that carried out by the researchers for the Department of Finance. Ireland therefore has established itself as something of a world leader in this area, which is why it is so important that we get it right. Other countries are already looking to Ireland as an example.
Reputational damage is also an issue. We are all aware that a month rarely goes by in which our corporation tax policy is not subject to international criticism. Whatever the merits of these criticisms, they are unquestionably damaging to our reputation. Conducting a spillover analysis and, more importantly, addressing the gaps we identify in our report to make it the best in class is a really important way of showing that Ireland is not a maverick operator in matters of tax, as characterised by some, and takes its international commitments very seriously.
Ireland must have an overarching vision of what it wishes to do with its tax system. It should be based on human rights and should recognise the obligations Ireland has, not just to itself, its people, the constituents of Members of these Houses and their jobs, but also to the lives of people around the world who are dependent on the natural resources of their own countries.
