Joint Sub-Committee on Global Corporate Taxation debate -
Tuesday, 17 Jun 2014

Assessment of Measures Relating to Corporation Tax in Ireland: Discussion

Vice Chairman Deputy Liam Twomey

Our business today involves an assessment of the various measures relating to the effective rate of corporation tax in Ireland. I welcome Professor Jim Stewart, associate professor of finance, Trinity College Dublin, and Ms Cora O'Brien, policy director and director of technical services, Irish Tax Institute. The sub-committee will first hear opening statements by Professor Stewart and Ms O'Brien and then engage in a question and answer session.

By virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the sub-committee.

However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to do so, they will be entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair to the effect that members should not comment on not criticise or make charges against any person outside the Houses or any official by name or in such a way as to make him or her identifiable.

Would Professor Stewart like to begin?

Professor Jim Stewart

I thank the sub-committee for inviting me today to assist it in relation to measuring corporate tax rates. I have been engaged in researching the area of effective tax rates over a considerable time period. My initial research was conducted for a PhD thesis submitted to the London School of Economics in 1985 and subsequently published as a book. I would like to briefly describe my research approach because it illustrates a number of issues that arise in measuring effective tax rates. First, the concept itself is relatively simple. The tax rate paid on corporate profits for an individual firm can be defined as tax paid divided by pre-tax profits. When we try to measure this empirically, abiguities immediately arise.

The tables included in my circulated opening statement include an illustration of the foregoing in respect of an Irish public company. Table 1 shows pre-tax profits and other data for the most recent three-year period and also shows three possible measures of effective tax rates. Measure 1 shows the effective tax rate defined as the tax charge in the profit and loss account divided by pre-tax profits, again taken from the profit and loss account. This measure is described in company accounts as "the effective tax rate". Measure 2 shows the tax actually paid divided by pre-tax profits. Cash actually paid is set out in the cash flow statement. When I did my research initially, one had to calculate this, but it is now regularly produced in all cash flow statements of public companies. The aggregate of tax actually paid is the number shown in Revenue statistics for corporate tax receipts in any given year. If one aggregates that across the entire corporate sector, one should have the number shown in Revenue statistics, allowing for timing differences. Measure 3 is similar to measure 2, but includes provision for accounting depreciation in the tax base - the denominator. The reason for this is that accounting depreciation in contrast to other measures of depreciation such as accelerated depreciation is not a tax deductible expense. We have a wider definition of the tax base and could make our other adjustments as well.

Table 1 sets out the difference in the effective tax rate for 2013 across the three measures being 12.5% under measure 1, 4% under measure 2 and 2.7% under measure 3. Measure 3 is often used in academic studies to estimate effective tax rates while measure 2 appears to be the measure of individual tax rates used in studies by the US Permanent Subcommittee on Investigations, or PSI, in its various reports. In almost all cases of which I am aware, the tax paid in the cash flow statements is less than the tax charge.

Broad-based measures of effective tax rates may be estimated by first of all calculating individual tax rates for each firm. Measures of effective tax rates for the economy as a whole can then be calculated by summing the data for individual companies across the entire economy. This could be done by treating each firm as a separate observation and equally weighted, and calculating means and other distribution statistics. In addition, averages could be calculated by aggregating data across all firms. In this latter case, average effective tax rates will be dominated by firms with the largest profits and tax rates. The bigger the firm, the greater the weighting it has in the aggregate data. US Bureau of Economic Analysis data uses this latter approach.

In an earlier study which I referred to, I estimated effective tax rates over the 21 year period 1964-1984 for all Irsh non-financial plcs treating each firm as an individual observation and then aggregating them in various ways. However anomalies can arise. Rather than paying corporation tax, a firm may receive corporation tax because of overpayments in previous years. Hence the numerator will be negative resulting in a negative effective tax rate. A firm could both receive tax payments in the current year and report losses in the current year. In this case, both numerator and denominator are negative, -T/-P, resulting in a positive effective tax rate. A firm could pay tax even though losses were reported. This could arise because corporate tax payments are paid in arrears. Hence, the measure of effective tax rates is negative. This is less likely to occur than in previous years because lags in corporate tax payments have been reduced. A firm could report small positive tax payments but report low profits, resulting in a very high measured effective tax rates. In large data sets all these problems arise. One solution is to estimate effective tax rates over a running three year period. However, anomalies will still remain. A more usual approach is to estimate effective tax rates for only those firms reporting positive profits.

It is likely that these issues are endemic to Irish data. Table 2 in my presentation shows that for 2011, 1% of firms - 433 firms - account for 81.1% of corporate tax payments. It is quite likely in fact that 50 firms account for in excess of 50% of total corporate tax payments. I note that 76.8% of all firms account for 3.56% of corporate tax payments and 38.8% of firms report zero or negative net trading income. Reporting zero or negative net trading income is not due to having zero taxable profits and tax payments on foot of being able to afford expensive accounting and tax advice, but because companies are making losses. We have come through a very severe financial crisis. Firms that report losses in one year are likely to report losses in succeeding years. They may eventually close. Finally, reported losses by banks will have had a major impact on corporate profitability in Ireland and measures of effective tax rates.

I will say something briefly on aggregate data. National accounts in Ireland are currently based on what is described as the income and expenditure approach and in future an output approach will be incorporated into the GDP compilation process. It will be interesting to see what change that makes on the big numbers. Aggregate data, such as profit estimates from the national accounts, ignores issues relating to the inclusion of firms making losses. What one really wants is a measure of the effective tax rate on those firms making profits. Aggregate data cannot be interpreted as indicating effective tax rates for the median or typical firm. For this reason, empirical studies of measures of effective tax rates in the finance, accounting and taxation literature use data from accounting records - either publicly available or from surveys of firms which report their own accounting records as in the US Bureau of Economic Analysis data - rather than aggregate data contained in the national accounts. I found in an earlier study of US Bureau of Economic Analysis data that the effective tax rates using such data on one measure was 2.2% while it was 3.8% on another measure. That is for US companies incorporated in Ireland.

In addition in Ireland, particular issues arise from the likely underestimation of profits arising in the IFSC. The IFSC had over €3 trillion in gross assets in 2011. If we assume a net rate of return net of all expenses of 1%, that is €20 billion. However, it is very difficult to find those kinds of numbers in the national accounts. The exclusion of those firms that are incorporated in Ireland but regarded as resident for corporate tax purposes in another jurisdiction poses another difficulty in estimating effective tax rates using aggregate data.

I turn to the issue of company location. The Department of Finance argues that these firms should be excluded from Irish data as they are not located within Ireland for corporate tax purposes albeit that they are incorporated here. If a firm is incorporated in Ireland, the auditor must be located in Ireland by law. If a company is registered in Ireland, the books of account must be maintained in Ireland. Several of these companies that claim not to be tax resident in Ireland have employees here and hence are liable to pay employers' PRSI. It is not then true that they are exempt in Ireland because they are tax resident in Bermuda. If they have employees here, they must pay PRSI. Several of these companies are liable for VAT and hence satisfy the requirements of residence for VAT purposes. I acknowledge that those residence requirements are different from those for corporation tax purposes. The European Court of Justice has ruled that the place of incorporation is key to where the central management and control exists. Place of incorporation is therefore very important for corporate law purposes. EUROSTAT regards brass plate firms with no fixed assets or employees as being located where they are incorporated, a rule which is likely to be followed by the Revenue Commissioners regarding the various brass plate firms located in the IFSC.

In conclusion, estimating effective tax rates is best done using data extracted from company accounts. Estimating effective tax rates from national accounts is likely to produce an underestimate of effective tax rates because of the inclusion of firms making losses as well as for other reasons.

Ms Cora O'Brien

I thank the Vice Chairman and members for their invitation to appear before the sub-committee on the issue of effective corporate tax rates. We appreciate that it has invested much time in this issue and that others have made contributions to this module and the general public debate on effective tax rates. The Irish Tax Institute has not published a specific report on effective corporate tax rates. However, I hope our experience, knowledge and research will offer some insights and bring a greater understanding to an issue that is complex, detailed and very often difficult.

The debate on effective tax rates is part of the wider debate on international tax issues. There is much attention focused on the matter in Ireland, given the high level of foreign direct investment, in particular by US companies. The fact that US tax residence rules differ from the tax rules of most other countries has led to many of the tax complexities or issues at the centre of the tax debate globally. Before talking about attempts to measure the effective corporate tax rates of a country, I would first like to focus on the principles of an effective corporate tax rate regime in a company, as that will help to bring some context to our discussion.

The effective rate of tax is generally understood to refer to the tax arising for a company as a percentage of the profits of the company. The effective corporate tax rate factors in the various deductions and reliefs a company is fully entitled to claim before it applies the 12.5% rate in Ireland’s case in trading income, the 25% rate on investment income and the 33% rate on gains. The majority of studies indicate the effective corporate tax rate here is generally very close to 12.5%, as there are few deductions and reliefs within our corporate tax regime. We have built our corporate tax strategy on having an attractive low transparent 12.5% rate which is simple to understand and administer for companies operating in Ireland and subject to tax here. In principle, the calculation of an effective corporate tax rate is somewhat akin to the calculation of an effective personal tax rate. A person could pay tax at the standard tax rate, yet his or her effective tax rate will be somewhat lower. Under Irish tax law, a person will see his or her overall income tax bill reduced when he or she factors in medical expenses, rent relief, mortgage interest relief, tax credits and many other items. It is the same in principle with effective corporate tax rates, albeit a more complex process.

Some of the negative coverage of the Irish tax system in recent times has held the suggestion Ireland has an effective rate of tax of around 2%, implying that global companies in Ireland can secure, so to speak, a 2% effective corporate tax rate if based here. The difficulty and confusion surrounding the effective tax rate issue come from the mixing of legal rules on incorporation with tax rules. If a global company is legally entitled to be incorporated in a country such as Ireland, it does not mean that it is taxed on all of its global profits in Ireland. It is only liable to be taxed in Ireland on the activities subject to Irish tax under rules recognised and accepted not just in Ireland but also by other countries and the OECD. A company may be incorporated in Ireland, but the management and control of that company may be located elsewhere, which means that under Irish tax law the company is not liable to Irish tax on foreign income. Ireland’s residence rules have been in place since 1922 and would not be regarded as being unusual but rather consistent with those of many countries and the model OECD treaties.

A global company based in Ireland that has its origins in the United States and is US-owned could have operations in 20 countries and derive its sales income from 70 countries worldwide. Incorporation in Ireland does not automatically mean tax residency in Ireland and does not mean entitlement to the profits from these 70 countries. Where a company is not Irish tax resident, Ireland can only legally lay claim to the tax that arises from relevant activity in Ireland. Taking an Irish incorporated company’s total global tax bill and dividing it by its total global profit in an attempt to estimate an Irish-based effective corporate tax rate from it is incorrect and distortionary. Trying to extrapolate an overall effective Irish corporate tax rate from these company figures is also distortionary and incorrect. The effective corporate tax rate of a company is a mathematical computation arrived at by virtue of the activity of a company and the application of the tax rules relevant to that exact activity in each jurisdiction in which the company operates.

In my comments so far I have dealt with the principle of calculating the effective corporate tax rate of a company, but calculating the overall effective tax rate for a country, whether Ireland or anywhere else, is very complex. There is no agreed definition of what a country’s effective tax rate means or how to calculate it and, for this reason, it is open to many interpretations. The Department of Finance's technical paper of April 2014 has reviewed eight approaches using three model types. There is no single, internationally agreed methodology in calculating the effective rate of corporation tax for a country. As a result, we have seen a variety of conflicting answers where different methodologies are applied to different data sources. While acknowledging that there is no agreed definition of a country’s effective corporate tax rate, the paper concludes "that the approaches based on national aggregate statistics are the most suitable". It cites the work on effective tax rates on the "net operating surplus" and "tax due" as a proportion of taxable income, approaches Nos. 3 and 5 in the report, which deliver an average effective corporate tax rate of 10.9% and 10.7%, respectively. Companies operating globally can have a combined low global effective tax rate, but one cannot attribute that rate to any one country or say it is its effective rate.

US Bureau of Economic Analysis, BEA, data suggesting a 2% effective rate for Ireland are incorrect. For example, the US BEA data provide a combined global tax rate for companies that are incorporated in Ireland and US-owned but operate in dozens of countries. In reviewing this data the Department of Finance concluded "the BEA data does highlight the ability of certain US companies to achieve very low effective rates for the foreign tax paid on their non-US sourced profits arising from their operations across multiple jurisdictions (including Ireland) but cannot give an appropriate measure of the effective corporate tax rate applying on their Irish profits".

I acknowledged that the debate on effective corporate tax rates was part of a far wider debate on international tax rules. This is what the OECD’s Base Erosion and Profit Shifting, BEPS, project is about and the Government is playing its part in the process. Last October we issued an international tax strategy setting out our position on international tax and emphasising the three key strands to our corporation tax strategy - rate, regime and reputation. We have a separate Irish consultation launched by the Department of Finance on the BEPS in an Irish context. The institute is also very engaged in this work. We highlighted many of the issues concerned at our global tax policy conference held last October in Dublin, made several submissions to the OECD and met Mr. Pascal Saint Amans, director of the OECD's Centre for Tax Policy and Administration at the OECD's headquarters in Paris last month.

I appreciate that there are many views on the international tax rules applied and corporate tax issues in general. The OECD, through its BEPS project, is working with member countries on its action plan to address what are accepted as outdated rules which have not kept pace in an increasingly globalised and digitalised world. The Department of Finance's consultation gives Ireland and its stakeholders a forum in which we can make a real and honest assessment of all the issues involved relating to the BEPS and the impact on Ireland and its future. Global investment is highly competitive and will always remain so; we must be acutely aware that other countries will look to fiercely highlight their own competitive tax advantages if there are perceived weaknesses among others. There are many strands to Ireland’s overall tax strategy, from the regime to rate and reputation. They must all receive the attention warranted if we are to play our part in the BEPS process and also if we are to make the best decision for Ireland and its future. I hope this presentation and discussion will help to shed light on some of the issues involved in that process. I thank the sub-committee for its time.

Deputy Michael McGrath

I welcome Professor Stewart and Ms O'Brien and thank them for their presentations.

I will start by asking Professor Stewart questions in order to tease out his main thesis. As he will know, there is a fundamental distinction between the incorporation of a company and tax residency of a company. It seems that the US data, which he has relied heavily on, included in its calculation the global operations of US companies which are incorporated here. It did not restrict its analysis to the operations of companies that are tax resident here. Can he explain the rationale behind his findings? He put a lot of emphasis on the US data which, in my view, is not a fair commentary on Ireland. The key issue which determines where a company's profits are taxable is where it is resident. He seems to have placed a lot of emphasis on incorporation, which is a different issue.

Professor Jim Stewart

The general rule in Irish corporation tax law, and in US law, is that tax residency occurs where one is incorporated. In the case of Ireland, if a company is foreign owned then different rules apply. These rules relate to where one is management controlled or where there is a permanent establishment if the management and control applies. The US Bureau of Economic Analysis data uses this latter approach and its data relates to subsidiaries incorporated in Ireland. The US data is very useful because it looks at US data, by survey, across 53 different countries which means anomalies are removed. Companies are not allocated to two different countries so the data has an economical basis. The US Bureau of Economic Analysis will have spent a considerable period working out the anomalies, consistent through time, and comprehensive in looking at profits of US companies in particular countries.

I do not accept that because companies are incorporated in Ireland that they are reporting the profits of their Dutch and other subsidiaries because that would be double counting. They would say that the subsidiary in Australia, for example, would also be included in the Irish data.

Deputy Michael McGrath

Does he accept the premise that where a company is tax resident determines where it pays its tax?

Professor Jim Stewart

No, where a company is incorporated determines where it pays its tax. That is the general rule.

Deputy Michael McGrath

That is not the rule in Ireland

Professor Jim Stewart

It is the rule in Ireland. Where a company is incorporated is where it pays its tax, except in the case of foreign owned companies. For a domestic Irish company there is no ambiguity. If a company is incorporated here and owned here then it pays tax here. It is only if one is owned by another company, outside of Ireland, that an ambiguity arises and then all these rules come into play. For example, one must ask where is central management and control or where is the permanent establishment located. Unfortunately, as we know, and as Revenue guidelines state, where central management and control arises can be very ambiguous. It is not particularly where one has board meetings because they can be conducted by telephone. One could attend a meeting by using the telephone. The question is where is one located for that purpose.

There are all these complicated rules about a permanent establishment which amounts to about 80 pages but in the tax treaty it is about 25 words. However, in the definition of permanent establishment there are about 80 pages of complex rules. Some of them are complicated and so much so that I will give the following example. If one's name, literally, is on a shoebox for six months then one can be located there for tax purposes.

Deputy Michael McGrath

Are there characteristics of the Irish residency rule that are particular to Ireland? Are we out of step with other countries in terms of our definition of tax residency and the management and control test?

Professor Jim Stewart

That is one of the issues. Obviously facts differ in each case and, therefore, decisions are made on a case by case basis. All we could say is that Revenue decides on a case by case basis but that depends on the facts. This is not public information. Although we do know that the US Permanent Subcommittee on Investigations considered, and from some well known cases, that Revenue has taken a very lenient approach to the definition of where a company is located. However, we must remember that where companies claim to be located they may often not have employees and it may simply be an address of a legal firm, company formation agent or whatever. There may be no substance there at all. That is why the OECD wants to tackle this matter.

By the way, it is not just the OECD that wants to do so. Individual countries have taken unilateral action. PricewaterhouseCoopers conducted a study of 200 multinational companies. It found that in 37% of the cases the companies were in dispute with revenue authorities, in various countries, on where they were located or had a permanent establishment.

Deputy Michael McGrath

The professor's main issue is that he is challenging Revenue decisions on where a company is tax resident.

Professor Jim Stewart

No, I am not. I do not know what its decisions are based on.

Deputy Michael McGrath

His analysis seems to suggest that, regarding companies incorporated, he has accepted the US data-----

Professor Jim Stewart

Yes.

Deputy Michael McGrath

-----that stated such companies have an effective tax rate of somewhere around 2%.

Professor Jim Stewart

Yes.

Deputy Michael McGrath

He accepts that it includes data in respect of companies that are not tax resident here at all. He seems to hold the view that those profits should be taxable in Ireland even though they are not, according to Revenue, and it has decided that the company has a different tax residency elsewhere. That seems to be what the professor is challenging.

Professor Jim Stewart

Let us take the case of a company with several thousand employees in Ireland that produces output in Ireland and pays VAT. We would find it very odd if the CSO said that it will not count those employees and include them in its survey because the IDA has said they are not VAT or PRSI statistics. We seem to be saying, just in relation to corporation tax, that the company is not here. For every other purposes, such as employees' VAT and PRSI, it is here and its output is here but just in relation to corporation tax we will regard it as not being here. That seems to me to be unreasonable. I would say that it is reasonable to consider that the profits should be allocated to this subsidiary, which is incorporated in Ireland, where all of this other activity is going on in Ireland and where there is considerable management control.

Deputy Michael McGrath

Is he saying that in the case of US multinationals, with operations in Ireland, there should be no distinction between incorporation and residency?

Professor Jim Stewart

Does the Deputy mean for tax residency and coverage in tax residence?

Deputy Michael McGrath

Yes, tax residency. Is he saying there should be no distinction and if they are incorporated here then they should be deemed to be tax resident here?

Professor Jim Stewart

Yes. If one reads the newspapers that seems to be the proposal that is being talked about. We must remember that section 39 of the Finance Act 2013 removed the stateless provision relating to some companies. It seems to me that we are moving in that direction, yes.

Deputy Michael McGrath

I would like to hear Ms O'Brien's reaction to what Professor Stewart stated. I would like to hear her views on incorporation, residency and the relative importance of from a taxation point of view and impact if we go down the road, as Professor Stewart has said, of eliminating the distinction from a taxation point of view.

Ms Cora O'Brien

On the issue of the definition of residency, if a company is managed and controlled in Ireland then it is subject to Irish tax on its worldwide income. We have a worldwide tax system. If it is not managed and controlled in Ireland then it is subject to Irish tax on the profits that are attributable to Ireland. Those are the rules in terms of Irish residency.

The question of whether we change the residency rules is a matter which is open to discussion in the Department of Finance's consultation paper that has been published. There has been comment in the media about the possibility. It sounds like it may be possible to extend the definition of residency to something similar to what the UK has done, although there are exclusions to the UK incorporation test as well.

The residency issue is quite clear. If one is managed and controlled here then one is taxed on everything in Ireland. If one is not managed and controlled here then we have no entitlement to tax profits that are not attributable to activities that are carried on in Ireland. That is regardless of the rules for VAT, PAYE and PRSI. It is not any sort of statement of the rights and wrongs; it is just a statement on what the law is at the minute.

Deputy Michael McGrath

What criteria does Revenue use for the management and control test? Is it common for countries to have a separate tax residency test from the incorporation question?

Ms Cora O'Brien

First, Revenue would not really opine on whether somebody is resident or not. The definition of management and control is set down in case law. It is about where the effective centre of management and control is. It is where all the critical decisions about the company are made.

It is about where strategic issues are decided, where board meetings are held and where the substance of the major issues is determined. That is what determines where the centre of management and control is. Management and control is a common test used throughout the OECD. It is important that it be a common test because, where companies operate across borders, if there are different rules on residence, there will be a lot of confusion. There must be an agreed framework - the management and control framework. Where there is a question about whether a company is resident in one country or another, it comes back under the treaty to where the centre of management and control of the company is. That determines its residence and the taxing rights of the country.

Deputy Michael McGrath

They sound like long-established principles on tax residency and the definition of the management and control test, yet Professor Stewart's analysis puts this aside and states US companies legally incorporated here should be taxed in Ireland on their global operations.

Professor Jim Stewart

The problem is that the central management and control tests are extremely ambiguous. Revenue rules indicate that where a company is centrally managed and controlled is not necessarily where board meetings take place. The issue is complex. Section 5 of the annex to the treaty which refers to the permanent establishment rules runs to 83 pages. That is what the OECD is all about. It is stating the rules are so complicated that, for one purpose, a company can decide to be located here and, for another purpose, that it is not. Action No. 6 refers to tackling the issue of base erosion. The rules are extremely ambiguous and companies can decide to be located here when it suits them and not to be located here when it does not. Countries have taken cases to challenge this and state they are located here. Spain and other countries are going through this process. If they are located in a particular country, companies must pay corporation tax and value added tax. It is extremely ambiguous as to where a company is located and where central management and control takes place. The European Court of Justice decided, in the case of Eurofood, an Irish company, that where the company was incorporated was where it was centrally managed and controlled. That is the case according to company law.

Deputy Michael McGrath

Is Professor Stewart advocating that Ireland make certain changes unilaterally outside of the OECD base erosion and profit sharing, BEPS, process? What does he suggest, if anything, we do unilaterally as a country?

Professor Jim Stewart

It is very difficult to answer that question. Ireland has got itself into a position where we must respond to what others are doing and we may not have much choice in the actions we take. One of the problems is that we have a tax-driven industrial policy. We do not have control over tax policy as it depends on the European Union, the United States or other countries. That is why it is risky. How should Ireland respond? I do not know because we must bear in mind the effect of the tax. How important is the fact that companies can undertake various activities to reduce their tax rates? Are the companies located here because of the availability of skilled labour or there is access to markets?

Deputy Michael McGrath

Is Professor Stewart advocating that Ireland make any change?

Professor Jim Stewart

The realpolitik is that one must see what is coming down the track from the OECD and what the European Union will come up with. We must try to play a clever game in dealing with international bodies and other countries.

Deputy Michael McGrath

My final question concerns our corporation tax competitiveness as a country. While there is an important debate taking place in Ireland on the amount of tax multinationals pay and the role Ireland might play in multinationals reducing their corporation tax bills, it seems that our nearest neighbour and competitor, the United Kingdom, has significantly upped its game in terms of its corporation tax offering, with the patent box and the headline rate being reduced. What I am picking up from large companies and multinationals is that Ireland is beginning to lose out in investment decisions. It is no longer the destination of choice and our corporation tax rate is no longer giving us the critical edge that it used to do in the past. Can we hear Ms O'Brien's assessment and what she is picking up from her clients about what is happening?

Ms Cora O'Brien

That opinion concurs with what we are hearing everywhere. We were at a UK business conference a couple of weeks ago which was attended by various UK Government speakers. They had just come back from the west coast of the United States where they had been actively and proudly selling the United Kingdom's tax offering to bring projects to the United Kingdom. At the conference a report by Ernst & Young was quoted setting out details of 60 projects in the previous 18 months won by the United Kingdom on the back of its corporate tax strategy which it is driving in a very focused way. Those 60 projects are ones someone else did not win and it could have been us in the case of a number of them. We are in the same space to attract this business. It is an issue and the United Kingdom has a clear strategy, including the patent box. It has reduced its corporate tax rate to 20% and has a Treasury company rate of 5%. It changed the rules to exempt foreign dividends and there is an election to exempt foreign branch income. It is going very hard after this market.

Deputy Aodhán Ó Ríordáin

Ms O'Brien has said the majority of studies indicate the effective corporate tax rate here is generally very close to 12.5%, as there are few deductions and reliefs within our corporate tax regime. Why is there such a focus on Ireland's corporate tax rate internationally if the majority of studies show this?

Ms Cora O'Brien

There has been a spotlight on Ireland in the media. There has generally been a spotlight on corporate tax across the world and almost every day we see articles on tax in the newspapers in many jurisdictions. There have been such articles in Ireland, but there is also a focus on patent boxes and hybrid mismatches. Mr. Pascal Saint-Amans was recently in Australia as part of the G20 and had many strong messages for Australia and developing countries. We are feeling the heat because we see what is close to hand. That is not to say there is no such focus, but there is a focus on the issue everywhere. Our reputation is important to us and something we take seriously. We are involved in the BEPS process which has been designed to examine international rules and make sure they are up to date. As I said, these rules have become outdated and there is a view in the OECD and the G20 which makes policy and determines the rules under which we operate that they need to be looked at. Some 34 countries are examining them and there will be two years of reports, meetings and actions. There are thousands of pages on tax issues related to the BEPS and they are by no means all related to Ireland. There is a mixture of issues in the pot and sometimes Ireland is feeling the heat and not realising there is also heat in other places. That does not diminish the point made by the Deputy. We have issues, but so do lots of other countries.

Deputy Aodhán Ó Ríordáin

Perhaps Professor Stewart might also contribute on this point. The sense we get is that there is international pressure to give the impression that Ireland is a tax haven, yet when we asked that question of Pascal Saint-Amans when he made a presentation to us, he said Ireland was most definitely not a tax haven.

However, he could not actually point to any jurisdiction that technically was a tax haven, which did not help us in dispelling that myth. It appears that a geopolitical game is being played, with countries trying to tarnish the reputation of others to give the impression that there is something underhand or shadowy going on in order to gain an advantage for themselves in attracting jobs and inward investment. Would Ms O'Brien or Professor Stewart buy into that theory or they be in a position to even comment on it?

Ms Cora O'Brien

There has been a lot of media interest in Ireland's corporate tax regime which is focused mainly on the interaction of different tax systems. The Irish tax regime per se is not the issue. As the Department of Finance's study of most other taxation methodologies implies, the base is very broad and the rate for Irish activities is very close to the 12.5% standard rate. The difficulty is that tax policies are designed for domestic audiences, on which each country has focused in designing its tax policies, but during the years businesses have become more and more international. They are operating across borders and can achieve lower tax rates globally, not in a particular country, because of the differences between the tax policies of different countries. The policies are not designed to knit neatly together, which is why we need to undertake the Base Erosion and Profit Sharing, BEPS, project. I do not think anybody is looking at the Irish corporation tax regime and saying there is a problem with it per se. Pascal Saint-Amans of the OECD has acknowledged that our regime is one of the broadest and most transparent in operation. The issue is not with the Irish regime but with the way it interacts with other tax rules, particularly those of the United States of America because of the very high level of US foreign direct investment here. It is a global issue; it is not just an Irish tax issue. Equally, it is not an issue that Ireland will be able to resolve on its own.

Professor Jim Stewart

I agree that to some extent it is a global issue. Sometimes Ireland is included with Luxembourg, the Netherlands and Switzerland as being one of four OECD tax havens. In some ways, the Netherlands is a bigger tax haven than Ireland. As a proportion of GDP, holding company assets in Luxembourg are very large, while other aspects of the Luxembourg system would qualify as features of a tax haven. I argue that Ireland is not a tax haven, but it does have features of a tax haven. However, that is also true of other countries.

Deputy Aodhán Ó Ríordáin

I ask Professor Stewart to expand on that point a little more for the benefit of the committee. The term "tax haven" is a very dangerous one because it can mean different things to different people. When Professor Stewart says the Netherlands is a bigger tax haven than Ireland, that implies Ireland is a tax haven, if only to a degree. I ask him to clarify what he means by that comment.

Professor Jim Stewart

By "tax haven" I mean a very favourable tax jurisdiction for the corporate sector.

Deputy Aodhán Ó Ríordáin

It implies something illegal, shadowy, wrong or quasi-criminal.

Professor Jim Stewart

Tax havens cannot be illegal. I am not saying companies are not complying totally with tax law. Tax concessions such as the Patent Box in the United Kingdom, for example, and others about which we have been hearing are perfectly legal. The point is that tax havens have relatively favourable tax regimes for the corporate sector. Ireland has some features of a tax haven - a low corporation tax rate, a very favourable tax regime, offers ease of incorporation and considerable flexibility in the tax treatment of multinational companies in the annual Budget Statement. Some countries have even more favourable concessions; it is not a question, therefore, of Ireland being singled out. There are lots of issues at play. Media attention is also focused on other countries with tax haven-type features.

Deputy Aodhán Ó Ríordáin

The sub-committee is discussing this issue because a number of multinational companies located here have been the subject of international attention. Politically, we are trying to strike a balance between a corporation doing right by the country and paying its dues and, at the same time, providing employment here. Is the focus on Ireland unreasonable in a global context?

Professor Jim Stewart

There is no doubt that there has been considerable publicity relating to Ireland, but it is based on fact. It is based on the fact that if one looks at the accounts of some US multinational companies, two jurisdictions are identified - the United States of America and Ireland. The tax these companies pay in the United States is shown, as is the tax they pay outside it. One can see that even though most of their sales occur outside the United States, a tiny fraction of the tax is paid outside it. A lot of countries, for which I have some sympathy, are not happy with this state of affairs. They do not like the arrangement whereby companies can operate in a country and not pay any tax whatsoever. This is particularly the case in the digital economy and it has become a serious problem in that context. Part of the issue is actually determining where companies are located, where their sales take place and so forth. The growth of the digital economy has made it possible for some companies in the corporate sector to avoid paying both corporation tax and value added tax, but, as we all know, countries need to raise tax revenue.

There are also issues of unfair tax advantages at play. To give the Deputy an example, he can buy a book from a certain company which appears to be coming from Luxembourg where VAT rates are very low. In fact, we know that the book is being shipped from a warehouse in the United Kingdom. This particular bookseller has an unfair tax advantage vis-à-vis other booksellers. That is why the European Union is examining the issue. It is examining our tax regime in the context of tax competition. It is looking for evidence of unfair tax competition which gives an advantage to some firms, corporate entities and even some economies over others.

Deputy Pearse Doherty

Ms O'Brien spoke about transparency in the tax system. We had an announcement last week, after a year of investigations by the European Commission, that it had launched a formal investigation into one of the largest multinational companies incorporated in the State, based on a confidential tax ruling given by the Revenue Commissioners. Was Ms O'Brien surprised by this? I ask her to give her views on it because while the rate is set in legislation, the real issue is the potential for favourable treatment by officials of the Revenue Commissioners or others. Is that not what the Commission is investigating?

Ms Cora O'Brien

I know the case to which the Deputy refers. The issue which is the subject of the inquiry and the ruling given to the particular multinational seems, from media reports, to relate to transfer pricing. This goes to the heart of the issues we need to be discussing in terms of general principles. Transfer pricing is a way of setting a price between legal entities in the same group to make sure that where there is no market value for something, it is pinned as close as possible to what a market value would be. That is a huge part of what the BEPS project is about. In fact, five of the reports due next year on the BEPS will deal with transfer pricing issues, including intangibles, interest, risk and capital, transfer pricing documentation and so forth. There is certainly an issue around the rules of transfer pricing that need to be looked at.

Regarding advance opinions, as we refer to them in the profession, this is a situation where one has a set of circumstances and is seeking clarification from Revenue. This is an option open to any Irish taxpayer, large or small, corporate or private. One outlines one's circumstances to Revenue, sets out what one intends to do, how one intends to treat income and work out one's tax and asks Revenue whether it is in agreement.

To be clear, it is not a binding ruling. If for example, the taxpayer sets out a set of circumstances and then it turns out that he or she does not abide by the circumstances or something changes, the Revenue Commissioners are not bound by that ruling and are perfectly entitled if they wish to take it as a case and argue the point. We do have advance opinions but they are not the same as binding rulings. It is an administrative practice that arises in most countries and it is intended to try to bring certainty to somebody who wants genuinely to get something right and does not want to have an audit in a few years and a look back and find he has applied the wrong ratio or the wrong price. The Revenue Commissioners are trying to give a person some certainty that he is in the right ballpark and is doing things the right way.

Deputy Pearse Doherty

Obviously the Revenue Commissioners give out advance opinions, and about 120 of them are given out each year. I have no issue with advance opinions. As Ms O'Brien states every citizen can ask for an advance opinion from the arm of the State, the Revenue Commissioners. What is at issue is whether there is a cosier relationship or an open door for certain companies, while technically any individual can get that type of access? Through the freedom of information process, I looked at the interaction between the Secretary General of the Department of Finance with the head of Apple in the State and from the e-mails toing and froing I saw that the Secretary General suggested to Apple to contact -----

Vice Chairman

Deputy, No names.

Deputy Pearse Doherty

This is all on the public record.

Vice Chairman

Let me repeat again it is not to do with the public record, but with our own rules.

Deputy Pearse Doherty

I will not mention any official. The State would ask a company to sell their products. That type of relationship does not exist for the person who has to pay his household charge or water tax. Nobody would contact a bricklayer to advise him to contact the Department and sell the product to them. There is a different type of relationship with multinational companies.

I wish to put some questions to Professor Stewart on his assessment of the effective tax rate, following on from Deputy McGrath's contribution. Do Professor Stewart's calculations include companies that are not tax resident in Ireland?

Professor Jim Stewart

Yes.

Deputy Pearse Doherty

Under the tax law, the effective tax rate is 2.2%. If we are trying to find out the effective tax rate of the multinational companies, then we could not say that it is 2.2% because legally they are not obliged to pay tax on some of those profits. Would it be correct to say that?

Professor Jim Stewart

My understanding of what an effective tax rate is that it is the tax rate paid on profits. The actual tax paid over. It is not the tax charge nor the tax one pays on taxable profits because taxable profits are those profits after all of the deductions and that should be, if people can work out the arithmetic properly, 12.5%. I am trying to look at a measure of the effective tax rate on their profits. Does that answer Deputy Doherty's question?

Deputy Pearse Doherty

It does. Are the companies paying tax on some of those profits in a different jurisdiction?

Professor Jim Stewart

No. The US Bureau of Economic Analysis data is consistent across countries and that is why I like to use it. It tries to work out all of these things so its data for Ireland relates to the tax paid in Ireland on the profits of the subsidiary incorporated in Ireland. Otherwise one would get double counting where the company had multiple subsidiaries.

Deputy Pearse Doherty

That is the point I want to tease out. Professor Stewart has provided in his own assessment report of 2004, that when we are looking at net income in Ireland, that these US companies had a net income of 143 billion----

Professor Jim Stewart

Yes, $143 billion.

Deputy Pearse Doherty

-----and the tax was 2.2%.

Professor Jim Stewart

Yes.

Deputy Pearse Doherty

Is Professor Stewart saying that of the $143 billion in income, that the US companies did not pay tax on that income in any other jurisdiction?

Professor Jim Stewart

Yes.

Deputy Pearse Doherty

Okay.

Professor Jim Stewart

As it has arrived in their subsidiary in Ireland.

Deputy Pearse Doherty

That is basically when he looks at the effective tax rate. When we look at US companies in terms of net income, above $1 in every $10 is resident here and they are paying 2.2% tax.

Professor Jim Stewart

May I make a comment on the $143 billion? The $143 billion includes quite a lot of dividend income. As I said in my introduction, I am a bit puzzled about the measure of profits arising in the IFSC in Ireland because the IFSC as we know has €2.1 trillion in assets and one would expect quite a lot of profits to arise from that. They do not seem to be captured in Irish data but they seem to be appearing in the US Bureau of Economic Analysis data. One can strip that out and I think the figure for 2011 is $86 billion in profits earned in Ireland. That is by the non-financial companies mostly.

Deputy Pearse Doherty

Will Professor Stewart explain to the committee how the effective tax rate could be so low, if no taxes are paid in any other jurisdiction? I think the line of questioning earlier on was that Professor Stewart was including companies that are paying tax in another jurisdiction, however, he has now clarified that this is the only jurisdiction in which they paid tax. How were the companies able to have the tax as low as that?

Professor Jim Stewart

It is quite likely, for example, that profits arise in jurisdictions where there is no corporation tax. I know of two cases in which the company is incorporated in Ireland but is tax resident in other jurisdictions and its profits were €22 billion. I think €40 billion would be an estimate of the profits for US companies incorporated in Ireland but located for tax purposes in another jurisdiction. That €40 billion is in the US data but is in not in the Irish data.

Deputy Pearse Doherty

Will Professor Stewart explain that further?

Professor Jim Stewart

The Revenue Commissioners say these companies that are incorporated in Ireland but are not tax resident in Ireland have nothing to do with Irish Revenue data. In the US data, it is stated that the companies are incorporated in Ireland, the profits that are earned by the subsidiary will be allocated to Ireland, because in the US where the company is incorporated determines where the company declares its profits.

Deputy Pearse Doherty

Is Professor Stewart saying that the €40 billion is stateless?

Professor Jim Stewart

No, it is not. The company says it is in Bermuda or in the Cayman Islands and the US authorities say that they will attribute that to the Irish subsidiary where it is incorporated. The Irish tax authorities say that it has nothing to do with them, that it is in the Cayman Islands or Bermuda. It is not stateless, that is a different case.

Deputy Pearse Doherty

I understand. Ms. O'Brien referred to the damage arising from the suggestion that companies could avail of an effective tax rate of 2% but that it is a misunderstanding of the legal entities. Will Ms O'Brien elaborate on what Professor Stewart said, or does she have a conflicting view? I do not want to start a row, but it comes to the fundamentals of what the committee is trying to figure out.

Ms Cora O'Brien

I do not have the same insight into the data that Professor Stewart has because I have not done the detailed analysis, but it is a matter of fact that these companies under Irish tax residence rules are not managed and controlled in Ireland and do not have income that is attributable to Ireland. Under the rules we have, whether they are right or wrong or whether one likes them or does not like them, the income is not attributable to us and is not our income to tax. It might be in a jurisdiction that does have any tax or has a very low amount of tax but it does not mean it is ours and we cannot tax income under our tax rules that does not belong to us and is not attributable to us. I think that is the difference. Is that clear to the Deputy?

Deputy Pearse Doherty

Is Professor Stewart agreeable to that?

Professor Jim Stewart

No, because it is not a matter of fact, it is a matter of opinion by the Revenue Commissioners. The Revenue Commissioners have looked at the facts and they have decided that the companies are not locating the subsidiaries for corporate tax purposes. Let us suppose that legislation is enacted, that the next Bill introduced in the Dáil will mean that a company is located in Ireland for corporate tax purposes, that means the €40 billion gets transferred into Ireland. We know that will not happen because companies will rearrange their corporate structure and it is likely - referring to the previous case I think companies had two years to organise their affairs - there will be a reallocation of the company structure and a reallocation of profits.

If one were to decide to end the current regime overnight, the profits in question would immediately transfer to Ireland.

Ms Cora O'Brien

If I may make one comment, the rules I have described are in the tax legislation and are not a matter of interpretation by the Revenue or a ruling by the Revenue. They are in the tax residence rules in the Taxes Consolidation Act.

Deputy Pearse Doherty

The point Professor Stewart made was that the definition of tax residency runs to approximately 85 pages. The devil is, therefore, in the detail. Professor Stewart stated that Ireland should probably not move unilaterally.

Yesterday, at a meeting with multinational companies and major employers, one of their representatives informed me that Apple was at one end of the spectrum and it was at the other. I share that view. On the basis of the number of companies that pay corporation tax, we have experienced reputational damage. Do the witnesses agree that we have suffered reputational damage?

Professor Stewart noted the opinion that base erosion and profit shifting, BEPS, action plan will move us in a certain direction. Previous witnesses made a similar suggestion. We heard also that the impact of the BEPS action plan could be negative and result in a loss in revenue from corporation tax of €1 billion, which is 25% of the total. If a company is tax resident as a result of incorporation and does not do anything, it should be possible to capture many other taxes.

The Government has been behind the curve on this issue. Developments in Washington, London and the European Commission have not been good for Ireland's reputation. Irrespective of whether we like what is happening, we should fix our problems or at least be ahead of the curve. On the BEPS project, how should Ireland try to stay ahead of the curve to ensure revenue from corporation tax does not collapse? We have already experienced a building boom and bust. With corporation tax accounting for approximately €4 billion of annual tax revenue, we do not want to lose one quarter of this amount as a result of changes made at European level. I would like revenue from corporation tax, as opposed to the rate, to increase. How can we stay ahead of the curve? What issues should the sub-committee address?

Vice Chairman

Deputy Doherty's time has concluded.

Deputy Pearse Doherty

That will be final contribution.

Ms Cora O'Brien

Deputy Doherty referred to the possibility of increasing corporation tax income if we were to move to an incorporation test if companies did nothing. The problem is that companies could do something. That is the real issue here. We are trying to strike a balance between our good reputation and good citizenship, on the one hand, and our competitive regime, on the other. The reason the BEPS process is multilateral in nature is that the issue is not about one country or company but about moving together. If countries move together, the process will have a much better chance of succeeding. Changing the rules internationally to the extent that there are mismatches has a much better chance of resolving such mismatches. The position is that, on the one hand, behind the scenes one has as a motivating factor a US tax policy that effectively allows for deferral of non-US income and, on the other hand, a BEPS project on which consensus has not yet been reached and which awaits full roll-out. If, in such circumstances, one decides to act unilaterally before either of these processes has been concluded, the question will be what will companies do. That is the great unknown.

There are mechanisms and offerings in so many other countries that if we take some action here and nobody else moves, companies may reorganise their structures and move elsewhere. The problem is that once one loses part of one's pipeline, it is very difficult to get it back. The ongoing consultation process is extremely important for this reason. For this reason, we and others need to contribute to process to ensure we have a proper, grown-up discussion on deciding where one draws a line between rate and reputation and the potential consequences. We also need to discuss how we can set ourselves up positively.

One of the great aspects of our corporation tax system is that the 12.5% rate is only available to companies that have substance. A company cannot avail of the 12.5% rate on trading income if it does not have substance. That is a condition of the rate. Pascal Saint-Amans has clearly stated that Ireland, with its broad, substance-based system, is well set to make the most of a world post-BEPS in which some of the current mismatches have been resolved.

Vice Chairman

Professor Stewart can respond when we have heard from Deputy Boyd Barrett.

Deputy Richard Boyd Barrett

I thank both witnesses for their attendance and highly illuminating submissions. Is Ms O'Brien's argument not that we are being held hostage by multinational companies and we have no choice but to submit to their blackmail? Is it reasonable or sustainable for an economy to operate in such a manner and that, out of fear that multinational companies will up sticks and leave, we must tread softly in terms of how we treat them as we seek to ensure they pay a reasonable contribution to the State and society that facilitate them in making so much profit? Is Ms O'Brien not stating in polite language that we must accept blackmail because multinational companies are essentially blackmailing us?

Ms Cora O'Brien

One part of tax policy and law, known as behavioural economics, is where one tries to foresee the reactions of people or companies to certain steps one may take. The reason is that changing the rules can and does have consequences. Four or five years ago, the United Kingdom raised its marginal income tax rate to 50 pence in the pound. National insurance contributions were not increased. After a year or two, it was noted that the estimates of how much the new rate would raise for the UK Exchequer had not been realised. This was the result of behavioural change by the people at which the increase has been targeted.

Deputy Richard Boyd Barrett

Ms O'Brien made that point very well already. If I were to translate the technical language she uses into layman's language, is she not stating that we are submitting to blackmail out of fear that companies will leg it if we try to force them to make a slightly greater contribution to the economy? Is that not really what is taking place? Is it not the case that if one submits in this way, one becomes part of a race to the bottom? Ms O'Brien has acknowledged the statement made by Deputy Michael McGrath, who, unlike me, is a great supporter of our corporate tax regime, that investment is already beginning to migrate elsewhere because other locations are joining the race to the bottom to generate revenue from corporations. Even if we bend our knees and submit to the multinational companies, as Ireland has done, these companies will still move elsewhere because everyone else will join the race and bend their knees even further. Is that not what is happening?

Ms Cora O'Brien

I understand what Deputy Boyd Barrett is saying. The best way to address the issue is through the framework of rules that is in place and ensuring these rules deal with the challenges. It is very hard to change behaviour. The best thing one can do is participate in efforts to ensure the rules, law and regime in place allocate profits to places where there is substance and activity taking place. If these are the requirements of international rules, the multinational companies will have to operate within them and there will be, if one likes, more of a level playing field. This rather than acting unilaterally is the way to tackle the issue.

That is probably the way to tackle it rather than try to tackle it alone.

Deputy Richard Boyd Barrett

To draw an analogy, is that not like the argument about nuclear disarmament: we are all in favour of it and will get involved in a long process of negotiating it but meanwhile we had better build as many nuclear weapons as we can? We are talking about getting a new international framework but there is a race to the bottom in respect of corporate tax, to the advantage of the multinationals.

Ms Cora O'Brien

This is an urgent project. It is not being pushed away into the future. There is a deadline of the end of next year which for something of that scale is unprecedented. Nothing this big has ever been done so quickly before. I understand what the Deputy says but this is urgent and the G8, the G20 and the OECD are dealing with it. It is probably better to deal with it systemically and put our effort into trying to fix it.

Deputy Richard Boyd Barrett

I am not as optimistic as Ms O'Brien. The G8 was dealing with global poverty and inequality ten or 15 years ago. We have not seen much movement on that front. I admire Ms O’Brien’s optimism.

I commend Professor Stewart on challenging the consensus in this area. What he has said today is very important. It runs counter to everything that is being asserted by mainstream commentators, the Government, and the political establishment. They say there is nothing to see here in the way of low effective rates. Professor Stewart says there is. Can he confirm that the general rule for allocating profits in Ireland and internationally is that if a company is incorporated in a particular place it pays tax in a particular place but this does not apply in Ireland in respect of multinationals? There is a more favourable regime for them. This is central to how they avoid paying tax.

Professor Jim Stewart

It is a different regime. It should not be more favourable but it is different. That is tax law. It is in the Revenue Commissioner guidelines, a company pays tax where it is incorporated.

To follow up on one of Ms O’Brien’s responses, one of the problems is that we have a tax-driven industrial policy. If there is a problem with our tax system we go to the tax experts to try to solve it. Some people regard these experts as members of a tax avoidance industry. How can we ensure they will come up with solutions to the tax problem that are in everybody’s interest, not just that of their clients? The people that the Department of Finance calls in, the big four accountancy firms, earned €25 billion in revenue from tax advice in 2011. They are not disinterested persons. They have a particular vested interest in the tax regime and in complexity and advising clients.

Deputy Richard Boyd Barrett

Is Professor Stewart saying that the people advising the Department of Finance in this area are people who have a vested interest in interpretation?

Professor Jim Stewart

Of course they are. When the Department launched its base erosion and profit shifting, BEPS, strategy it said it invited various people to contribute, including the Irish Taxation Institute, am I right?

Ms Cora O'Brien

It is a public consultation.

Professor Jim Stewart

It is a public consultation to which the institute and the big four are invited. It states:

This public consultation process is the next step in a process already underway by the Irish authorities with business groups organised through IBEC, the Irish Tax Institute, the American Chamber of Commerce and Chartered Accountants Ireland. Consultations have also taken place with civil society organisations.

The people best informed to shape this consultation process are of course the big accounting firms because they have the expertise. It is all very well for the Department of Finance or the Revenue Commissioners to say anybody can get one of these advance rulings. It recalls what people say about the law being like The Ritz - it is free to walk in but how can anybody else, without significant wealth, afford to get a tax ruling, a lobby and so on?

The problem is our tax-based industrial policy and we need to move away from that and emphasise indigenous firms. We need to focus on the things that really matter, new products, quality improvement, logistics, supply chain management and marketing. These are the things that will lead to long-run economic success. Tax policy will lead to tax-induced behaviour. If there is a tax concession there is an incentive to minimise tax to try to fit one activity into that. For example, when there was a manufacturing tax there was a constant struggle to widen the definition so that grain-drying, bagging coal and all sorts of activities became manufacturing. It is also a mindset. If there is a problem with innovation, or in some other area, the solution is to introduce a tax concession.

Deputy Richard Boyd Barrett

Three cheers for that perspective. I could not agree more with Professor Stewart. We make one law for domestic industries and another for multinationals in the area of tax liability. Does this also apply to the taxes registered in Ireland, for example, those on the Department’s tables which show a pre-tax profit of €70 billion and €4 billion paid in tax? There is some debate about how the effective rate applies to this as well. I would calculate tax paid as a proportion of gross profit, which shows an effective rate of 6.4% whereas others maintain it is much closer to 12.5% because there are deductions and allowances and so on. How would Professor Stewart compare that with the treatment of the ordinary PAYE taxpayer? Is the effective rate calculated in a much more favourable way for companies than for the ordinary taxpayer who does not get a lot of allowances, reductions and write-offs before the tax liability is decided?

Professor Jim Stewart

One problem in our tax system is its complexity. If one is in business one has to pay for tax advice. If one hires experts, who charge a lot, one will be able to use allowances in ways that one would not be able to do without that expertise, which is perfectly legal. The tax one pays becomes partly a function of the tax advice. In some cases there is no wiggle room, one has to pay the tax. In other cases there may be considerable wiggle room in what one can do to get a favourable ruling on what is acceptable and what is not. It is in the interests of the tax advisers to think about these things and to put a great deal of effort into working out how to minimise tax payments. They are very innovative and there are considerable incentives for tax advisers to behave in this way.

Deputy Richard Boyd Barrett

If one can afford, which few can, to hire high-powered accountants and tax experts to minimise one’s tax liability, one can do very well.

Professor Jim Stewart

There is a better probability of minimising one’s tax liability than if one does not do that. That is for sure.

Deputy Richard Boyd Barrett

There is an important cross-over between what is declared and what is not liable for tax because it is not resident here, in the money paid as administrative expenses to shelf companies for the use of patents and software and so on. Can Professor Stewart give us his opinion on how to tackle that? Professor Stewart says the law is very straightforward most of the time, in that if a company is incorporated here it is liable here and all the money would be allocated here but without legislation could the Revenue Commissioners view the rules differently? Any reasonable person looking at the companies we are talking about would say this money is not being made in the Bahamas or the Cayman Islands, if it is to be allocated anywhere it should be here.

Within the existing rules they should be allocating those profits to Ireland. Is that what any reasonable person would presume?

Professor Jim Stewart

One possible solution would be to introduce a withholding tax. The Deputy may be familiar with the strategy called the Dutch sandwich, whereby profits were routed to a Netherlands-based company. The strategy was designed to get around that withholding tax royalty payments from Ireland. Subsequently the Revenue issued a directive that royalty payments did not have to be withheld from payments from Ireland. However, withholding taxes can create their own difficulties and tax treaties may make it very difficult to introduce withholding taxes. It is an area that could be examined as a means of raising tax revenue and perhaps it might be an option.

Deputy Richard Boyd Barrett

To cut a long story short, there has been a very heated debate on the issue of the effective rate. In Professor Stewart's opinion as an expert in this area, the effective rate more reasonably calculated and studied is closer to the 2% that has been alleged than the 11.9% being claimed by the Government.

Professor Jim Stewart

I certainly think so for US companies but as I said in my introductory remarks, if we look at a distribution of tax statistics we would find very varying amounts with some companies paying quite a lot of tax - there are companies which pay 12.5% in actual cash tax payments. There is quite a spectrum but I would say it is reasonable because the aggregate data is dominated by the very big firms, one of which had a rate of tax of 0.5%. That is a huge whack of multinational companies' profits in Ireland and they are paying 0.5% and other companies are paying a bit over their 3% or 4% which will average out to about 2%.

Deputy Richard Boyd Barrett

That is quite a different view from that articulated by Ms O'Brien. A reasonable assessment of the effective rate would actually put it closer because the normal rule is if a company is incorporated in a place, it is taxed there. While it can be interpreted as that is what the Government and the Department of Finance are doing, if one is being consistent

Ms Cora O'Brien

I am just applying the law as it stands and the law as it stands says that if one is not resident one cannot be taxed on profits that are not attributable to Ireland.

Deputy Richard Boyd Barrett

In Ms O'Brien's view is the way we are defining residency reasonable?

Ms Cora O'Brien

I think it is the way that residence is defined right across the world. The US is exceptional in that it has an incorporation test which basically says that if a company is incorporated in the United States, its world-wide income is taxed and there are tax deferral rules. However, the general consensus among all countries and the OECD is that management and control is the test which determines residency.

Deputy Richard Boyd Barrett

Does Ms O'Brien seriously believe that these companies we are discussing are managed and controlled from the Cayman Islands?

Ms Cora O'Brien

That is a question of fact, the facts and circumstances in individual cases-----

Deputy Richard Boyd Barrett

In the case of one of the companies at the centre of much discussion at the weekend it was discovered it does not even have offices in the alleged place. However, Ms O'Brien thinks it is a reasonable proposition to suggest that a company that does not have offices in a place is actually managed and controlled from that place.

Ms Cora O'Brien

It does not really matter what I believe; that is the case law and that is the legislation in place.

Vice Chairman

I have a few questions to satisfy my curiosity. I refer to the current debate on this subject in the United States. Why is there such a focus on Ireland when little or nothing has been said about decisions made in places such as the Cayman Islands, Bermuda or Barbados? It is quite clear that significant profits attributed to Ireland and which are therefore reducing the effective tax rate have nothing to do with Ireland but have a significant lot to do with zero corporation tax in these smaller countries which have much more secretive regimes as to how transfer pricing operates yet we are the ones being beaten with the stick. Why is there not more commentary from Wall Street or The Financial Times? Some of these countries are under the effective jurisdiction of the United Kingdom and the United States. Why is there not stronger commentary that this problem is not solely Ireland's problem but it is also to do with international tax treaties and how tax treaties specifically deal with countries such as these?

Professor Jim Stewart

It is realised that there is a problem with the Cayman Islands and Bermuda and other places. The US has passed legislation dealing with inversion and the Cayman Islands. One issue is that these profits are seen as actually arising in Ireland and hence, they should be taxed here, but apparently they are not being taxed. It is a problem of the Irish tax regime. We feel the heat in Ireland but the Deputy can rest assured that in Luxembourg, the Netherlands and other countries with very favourable tax regimes - the Swiss banks have been subject to significant fines in the US because of their assistance with tax avoidance and evasion - it is not just Ireland because there is a general move from certain countries to crack down on tax haven type activities.

Ms Cora O'Brien

It is a matter of US policy that since the 1950s it has had a policy of trying to encourage its multinationals to expand abroad. The US tax policy has followed that economic policy. US tax policy is driving multinationals to structure in certain ways and if the US Government really wanted to change this it could change its own laws and it could change the tax deferral rules in the US. If that were done then there would be no advantage to multinationals in having income that is not repatriated to the US. There is some heat being applied but the US has the power within its own control to change the regime fundamentally that would change not just what multinationals are doing in Ireland but also throughout the world. That US tax reform does not seem to be happening for whatever reasons which may be political - others are more expert in that field than me. There needs to be some focus in that direction as well.

Vice Chairman

Ms O'Brien's view is that much of this seems to be hot air from US politicians rather than dealing with the issue.

Ms Cora O'Brien

They have the tools to deal with it.

Vice Chairman

One could make the same charge against some of the other G9 countries who are being investigated by the European Commission on how they deal with their patent boxes.

Ms Cora O'Brien

Yes, nine countries are currently undergoing an examination of their patent boxes.

Vice Chairman

By the European Commission.

Ms Cora O'Brien

By the European Commission's code of conduct group.

Vice Chairman

Those cases relate to changes to their laws on the transfer pricing issue and significantly sooner than an investigation into what we are doing.

Ms Cora O'Brien

That is correct. The review of the UK's patent box is taking place but none the less, the UK Government is still selling the patent box as an attractive offering to bring investment to the UK. There are a lot of different angles to what is happening.

Vice Chairman

Is it the case that this is important for Ireland's competitiveness?

Ms Cora O'Brien

This is crucial. I completely agree with Professor Stewart about the importance of indigenous business. The institute's budget submission last year was all about having a tax regime that supports indigenous business, small business and entrepreneurs. However, as Professor Stewart said, we have had a strategy going back 30 to 40 years of building up the business environment for foreign direct investment. One particular multinational shows on its website that it has 700 Irish suppliers dealing with it.

For every multinational we have, there is a range of small spin-off Irish businesses. There is a critical strategic decision to be made in seeking to position ourselves on this issue and there are consequences to that decision. In the United Kingdom businesses collect 30% of the total tax going to the British Exchequer. These jobs and the PAYE, VAT and corporation tax that go with them are a vital part of a country's economy. That is why there is such fierce competition to attract them.

Vice Chairman

I have a final question for both delegates. Let us say we decide to take a holier than thou attitude on all the issues around corporation tax and tax reliefs and become, as it were, the poster boy or altar boy in this regard. Would that not make Ireland incredibly unattractive for many multinationals and thereby impact greatly on inward investment? Would it turn some of our industrial areas into wastelands? On the basis of what we have heard, that so much of our policy up to this point has been built around taxation matters, if we were to jump out of sequence with all other countries discussing this issue at the OECD, would we not do ourselves huge financial damage, whatever about being seen to be the best boy in the class?

Professor Jim Stewart

My point is that our industrial policies are tax-based. However, it is very difficult to work out exactly what are the effects of these tax policies. For example, we might want to help indigenous industry by providing tax concessions, but the reality is that most small firms do not pay tax because they are not making a profit. Giving a low tax rate is irrelevant to them. Capital grants are very important, as are access to credit and a range of other issues.

There is a difficulty in trying to work out how multinational companies respond to tax incentives. Are they here because of linkages with the country? While some multinational companies have extensive linkages and are embedded in the economy, others, unfortunately, do not have strong linkages. The problem is that if we set up a very attractive tax regime, we will attract firms for which tax is very important and these are likely to be the very firms which have low linkages and are not well embedded in the economy. In short, they are here because of the tax system. If there is a change in tax regimes abroad - a change in the European Union, the United States or elsewhere, which has nothing to do with us - they may move on. That makes it a risky industrial strategy.

Ms Cora O'Brien

I am sure the committee has heard from other contributors that the one aspect which is critical for businesses is the need for certainty. If we act to change the rules on the back of such a long period of having policies around the 12.5% rate which has served us very well, we must be very careful about how we do it and communicate it. There must be in-depth research and an understanding of what the consequences would be. The reality, of course, is that the base erosion and profit shifting, BEPS, process is under way and will bring changes for everybody.

Senator Thomas Byrne

Professor Stewart mentioned the Swiss banks and what had happened in the United States, which involved the taking of a criminal case. Does he see that type of outcome as a possibility in respect of the taxation regimes we are discussing here?

Professor Jim Stewart

No. I would be surprised, for example, if the EU investigation into transfer pricing actually discovered any criminality.

Senator Thomas Byrne

Yes, I understand that. However, Professor Stewart mentioned how the Swiss Banks had a problem of criminality in the United States in terms of tax evasion, money being hidden and so on.

Professor Jim Stewart

My understanding is that there was a criminal problem, but the US authorities then stated they would investigate further potential criminal issues. It was because of this threat of criminal investigation that the Swiss banks handed over a lot of tax statistics. In many instances, no criminal intent was proved. The message that was sent was that an investigation would take place if the institutions in question did not comply with the requirements to provide extra data and so on.

Deputy Pearse Doherty

This has been an interesting debate, but we are probably not much further along on the question of defining an effective rate of tax. In the case of Apple, one of the major multinationals with operations in this country which we want to keep here, its chief executive officer gave written evidence to the United States Senate hearings that its effective tax rate was calculated by the Irish authorities at 2%. He gave this evidence voluntarily to a committee that was examining tax rates. He put these words on paper, although, after being contacted by the Department, he withdrew the claim. It is the age old issue of a particular company using one method to calculate its effective tax rate and the Department using another. There seems to be little prospect at this time of figuring out a universal way of doing it that would be acceptable to all parties.

We ran out of time earlier before Professor Stewart could answer my question about the BEPS process, which will push us and every other jurisdiction in a certain direction. His view seems to be that where firms are incorporated is where they will pay tax. I understand the United States is the only jurisdiction in which that arrangement currently applies; therefore, it will be a radical shift. If we are going to be manoeuvred down a certain path in agreeing collectively to this at a global level, how do we stay ahead of the curve? It is not just about what the BEPS decides. Professor Stewart is saying we should focus on industrial policy, with which I am in complete agreement. There is a concern, however, about the fragility of our tax base and our reliance on some €4.2 billion in corporation tax which could be taken away from us through the BEPS process, albeit there is a possibility that it could be enhanced. Even if the BEPS does not take us down the road of incorporation, we could choose to change our own tax law if we so wished, with all of the risks that would entail. If the position is that a firm is incorporated here if it is tax resident, there will be a consequence. As we have discussed, the US companies in question are bringing in some $100 billion and paying an effective tax rate of 2.2%. If they were all tax resident, as a result of being incorporated here, the entirety of their earnings would be taxable here. In that context, we could apply an effective tax rate across all companies - that is, every single company registered in Ireland - of, say, 4%, and still take in more in corporation tax than we currently are. In other words, we would be better off.

Professor Jim Stewart

One of the problems is that we are seeking certainty where we cannot have it. It is all very well saying industry wants a certain tax environment, but that is not in our gift. To attain certainty where there is uncertainty is very difficult and I have no real answer to it. Regarding the potential to raise additional tax revenues, we can say for sure that we would not, in fact, raise that level of revenue because we would see tax strategies changed. The large accounting firms already have six strategies up their sleeves to cope with this eventuality. One of the questions to consider is whether our tax base would fall even more or if we might receive a little more in tax. Certainly, there is no way we would get anything like 5% of the $100 billion to which the Deputy referred. I would like to be able to answer his questions in greater detail, but I am unable to do so.

Ms Cora O'Brien

I agree with Professor Stewart. I do not believe the $100 billion about which we are talking would automatically come to Ireland if we were to change the rules. The way to stay ahead of the curve is to decide now how we can be attractive to these companies in a post-BEPS environment, taking account of the reputational aspects we wish to protect.

I go back to this idea that it is the rate and the regime. How are we going to structure our regime - just as other countries are structuring their regimes - to be an attractive place in order that if multinationals restructure in the aftermath of the base erosion and profit shifting, BEPS, exercise, the benefit of some of those activities and some of that substance will come to Ireland and not go somewhere else? The United Kingdom changed its rules on incorporation and specifically introduced a patent box because it was not getting any of this business and the authorities there could see it was very valuable business. In itself, that measure has issues because, as I stated, the European Commission is examining patent boxes. There is not an easy answer to it but we must be focused on trying to be competitive and it must be substance-based. This will be the environment that will exist when BEPS is over. We are in a good place because we have the fundamental principles for a substance-based environment. We simply need to make sure that our offering, particularly around intellectual property and digital companies, is competitive. Multinationals like this.

Deputy Pearse Doherty

May I ask one brief final question on BEPS? The argument has been made by a witness who came before the committee previously that BEPS has the potential to reduce our corporate tax base. It is not simply about opportunities as there also are risks for Ireland here, regardless of whether one believes these are morally right things that should happen. There is a danger here and the point I am trying to get is whether a potential collapse could be coming down the line in respect of Ireland's corporation tax take. Is this possible, given the direction in which the witnesses believe BEPS will go and the possible reaction? I acknowledge there are many possibilities here but do they believe such a threat exists to Ireland's overall corporation tax take?

Ms Cora O'Brien

While one can never say never, that is not the vibe we are hearing from businesses. What we are hearing is that if BEPS means changes for everybody, then Ireland is a good place to be. They are highly positive about what the outcome is going to be.

Professor Jim Stewart

I do not agree with that because one change that BEPS could make is to decide that sales and profits arose where the cash was generated. In the case of the Internet-based companies, that is not in Ireland. If one is making profits in another country such as France or wherever, it then would make sense to move costs to that location. Consequently, it would make sense to hire people in France, on foot of which one could offset those costs against the profits. There could be implications for employment, PRSI and for the profits of the companies here, as well as value-added tax and other issues. Particularly in the digital age, many of these companies with the Europe, Middle East and Africa, EMEA, type of structure are vulnerable to relocating their activities, depending on what might come out of BEPS.

Ms Cora O'Brien

It is far from clear what will happen at the end of the BEPS process. There are hugely varying views and countries have very different concerns. As Professor Stewart has stated, there are countries with big consumer markets and they believe they need more because they have more consumers. It is not clear, when the BEPS process is complete, whether issues around tax that is attributable to consumer markets will be dealt with through indirect taxes and VAT and whether that is the right way to deal with consumer taxes. As for the issue of where value is added, where products are developed, where research and development takes place and whether that will be the right basis for corporation tax, it is unclear as to where that debate will end up. There are arguments both ways but there is a big school of thought to the effect that corporation tax based on consumer markets is not the right basis for that particular type of tax.

Vice Chairman

That is good. I thank Professor Stewart and Ms O'Brien for their contributions, which have been very good. I also thank members of the sub-committee for contributing. As proceedings went on for a little longer than expected, we will conclude on that point.

The joint sub-committee adjourned at 3.55 p.m. sine die.