On 4 November 2003 the Dáil referred to the select committee the proposal that Dáil Éireann approve the following orders in draft: Double Taxation Relief (Taxes on Income) (Adjustment of Profits of Associated Enterprises) (European Communities) Order 2003 and Double Taxation Relief (Taxes on Income) (Adjustment of Profits of Associated Enterprises) (Republic of Austria, Republic of Finland and Kingdom of Sweden) Order 2003. The committee will consider the proposal and I invite the Minister of State at the Department of Finance, Deputy Parlon, to make an opening statement.
Double Taxation Relief (Taxes on Income) (Adjustment of Profits of Associated Enterprises) Orders 2003.
I introduce two draft orders relating to the arbitration convention and will provide whatever clarity I can in that regard. Before considering the two draft orders I wish to remind the committee of the purpose of the convention. It was signed on 23 July 1990 and came into force on 1 January 1995 following ratification by the then 12 member states of the European Union. It provides for a mutual agreement procedure between tax authorities where double taxation has occurred. The double taxation concerned is that which might arise when tax authorities adjust for tax purposes the profits declared by enterprises where such profits result from transactions between associated enterprises in different member states and these transactions were at prices which differ from those normally applying between independent enterprises. The adjustment of profits may result in an increased tax bill for one of the enterprises and double taxation would occur when the tax authorities of the member state in which the other enterprise is situated do not make a corresponding reduction in the taxable profits of that other enterprise.
Where this mutual agreement procedure fails to resolve a dispute, the arbitration convention provides for referral to an independent arbitration commission. The procedure is as follows: If a company considers that there is double taxation, it may present its case to its tax authority within three years of the event. If the tax authority considers the case be well founded and cannot resolve it, it is obliged to attempt to resolve it by mutual agreement with the tax authority of the other member state.
If agreement cannot be reached within two years the tax authorities are required to seek from the advisory commission an opinion as to how the double taxation should be eliminated. That commission is required to give its opinion within six months. If the two tax authorities do not agree on a resolution of the case within six months of receipt of the commission's opinion, they will be obliged to accept the opinion of the commission. The commission will be composed of representatives of the tax authorities involved, together with an even number of independent persons of standing nominated by mutual agreement. The commission will be empowered to request information from the undertakings and from the tax authorities. Safeguards with regard to confidentiality and secrecy are provided.
The convention on the accession of the Republic of Austria, the Republic of Finland and the Kingdom of Sweden to the original arbitration convention was signed by all 15 member states in 1995. The accession of these three member states is the subject matter of one of the draft orders for consideration by the committee. The convention to admit Austria, Finland and Sweden arose on their becoming member states. The arbitration convention became effective between those countries and any other member state three months after they and the other member states concerned had ratified it. Any delay in its ratification by other member states did not cause it to be generally inoperable.
The arbitration convention was originally to remain in existence for five years from 1 January 1995. However, ECOFIN decided the convention should be extended for a further period of five years and after that it should be automatically extended for a further period of five years at a time, providing that no contracting state objected to an extension at least six months before the expiry of any five year period.
A protocol provides for the extension of the life of the convention and it was signed by the member states on 25 May 1999. This protocol is the subject matter of the other draft order being considered today. The convention provided that it would remain in existence for five years from 1 January 1995. If it were not extended by the protocol by the end of 1999 it would have expired. However, the convention has ceased to be effective since the beginning of 2000 pending ratification of the protocol by all the member states. Once the protocol has been ratified by all the member states, the convention will have effect retrospectively from 1 January 2000. This will ensure there will be no gap in the ability of member states to eliminate double taxation.
The European Union joint transfer pricing forum was set up in 2002, among other things, to examine the practical problems relating to the implementation of the arbitration convention. The forum is in the process of finalising its first report, which includes best practice proposals on how various elements of the convention should work. This is designed to give a new impetus to the use of the convention and spells out how the mutual agreement and arbitration phases are to operate. The forum also called on member states to complete the ratification procedure.
At the forum's last meeting in September, ratification remained outstanding in four member states, Italy, Ireland, Portugal and Sweden. The completion by Ireland and the other outstanding member states of the ratification process, along with the clarification of the procedural issues by the joint transfer pricing forum, will facilitate the increased use of the arbitration convention in the EU.
Draft Government orders confirming and giving force of law to the conventions were laid before Dáil Éireann on 26 March 2003, in accordance with the provisions of section 826 of the Taxes Consolidation Act 1997. A resolution by Dáil Éireann approving the draft orders is required before the Government can make the orders. The proposal that Dáil Éireann approve the orders has been referred to the Select Committee on Finance and the Public Service for its consideration. Following this, the select committee will report back to the Dáil, as set out under the relevant Standing Orders. Having attempted to explain the background to the two draft orders, I am now happy to answer questions.
How many cases were taken under the arbitration clauses by all European Union member states, including Ireland, and what are their financial implications? In other words, how much money was disputed by the authorities of the various jurisdictions with regard to the double taxation agreements? I am particularly interested in obtaining this information in respect of Austria, as there has been a fair amount of discussion, particularly in the German press, of the process of transfer pricing and tax shedding between Austria and Germany. I also seek information on cases which concerned Ireland, the amount of tax involved and whether a resolution has been found.
Will the Minister of State outline the position adopted by Ireland on the EU joint transfer pricing forum? What are the forum's implications for Ireland, especially in the area of taxation, with regard to the ongoing discussions on the new EU draft constitution? Is the material to which I have referred available to Deputies in an accessible format?
It is difficult to establish the number of occasions on which the convention was used. The Commission estimated that 126 transfer pricing cases were referred to mutual agreement under tax treaties between member states, or to the arbitration convention procedures between 1995 and 1999. Only one case, a recent case involving France, went to the arbitration phases under the convention.
Will the Minister of State indicate, perhaps with the assistance of his officials, the areas affected by the 126 cases he cited? Were they sample cases as is so often the case under arbitration agreements? We had a similar case last week during the budget debate when the question of the procedures governing VAT for builders arose. Will he also give the amounts of money involved for each of the jurisdictions? Given that these are difficult questions, I would be satisfied to receive the information inwriting.
The information the Deputy requests has just been published in a report and has not yet been broken down. I am sure we will be able to find information on the individual cases and provide her with it in writing.
Will the Minister of State also indicate the amount of tax involved in each case? As I stated, I am particularly interested in Austria, given the considerable publicity surrounding the transfer pricing relationship between it and Germany, which is, in some respect, similar to our position? What impact have these cases had on Ireland?
I am informed that information on the sums involved and the individual cases is not in the report, which we can provide to the Deputy. With regard to her question on the number of cases involving Ireland, the arbitration convention has been invoked only once here as a backstop to a request under the mutual agreement procedures. Effectively, therefore, it has not been used here at any stage.
Which EU country is most affected?
The most recent case to come under the arbitration phase was between France and Italy.
I am referring to the 126 cases.
If this information is in the report, we will obtain it for the Deputy. The only information we have is the recent report published by the Commission.
I also requested a summary of our position on the joint transfer pricing forum.
In 2002, the European Commission published a study on company tax in the Single Market. It included commentary on transfer pricing issues and highlighted the shortcomings of the arbitration convention. The Commission issued a communication, Towards a Single Market without Tax Obstacles, which included a call for the establishment of an EU joint transfer pricing forum. The forum was set up early in 2002 and consists of a representative of each of the member states along with ten members from business. An independent person from the business sector chairs the body.
The role of the forum is to examine the practical problems relating to the application of transfer pricing rules in the internal market, particularly those related to the implementation of the arbitration convention. It was asked to identify possible non-legislative improvements and focus on documentation requirements and how the transfer pricing compliance burden on companies could be eased. In the case of the arbitration convention, it was asked to produce pragmatic solutions to improve its practical functioning. This relates to the issue identified in the study.
The main work done by the forum to date has focused on the arbitration convention. It is currently finalising its first report, which will contain a best practice proposal on the practical functioning of the convention. If adopted, it should make the arbitration convention a more attractive vehicle for the resolution of disputes.
What is the Irish position with regard to the forum and who represents Ireland on it?
My colleague, Mr. Michael McGrath, is a member of the forum. I am informed that our position is similar to that of other countries on the question of simplifying procedure. From what I can gather, seeking a resolution through the arbitration process is a complicated procedure. Our position, therefore, is basically to simplify the forum and make it more efficient in delivering a judgment for member states which have a difficulty.
It is not, therefore, dealing with the views a number of member states have forcefully expressed on transfer pricing practices into Ireland.
The select committee went into private session at 5 p.m. and resumed in public session at 5.02 p.m.
The arbitration in which most people are interested is on the two versions of how decentralisation was determined.
We will not be going into that today.
We heard from the Minister for Finance that the Minister of State was having a sarsaparilla in some bar when he happened upon this treasure map, but I do not know whether the Minister of State can shed any light on this.
That topic is not on the agenda today.
The Minister for Finance underestimated the influence of the Tánaiste in the proceedings.
The Minister fell into a bar; usually people fall out of bars.
It was obviously not the first one he was in.
The Minister is all-knowing.
What are the principles in transfer pricing that the Minister upholds? There is always the belief that companies will seek to price artificially in order to locate their profits in low-tax countries. Traditionally that has been Ireland, but in the future it seems there will be a number of zero-tax countries within the EU. Could the Minister of State shed some light on the basis on which different revenue authorities can seek arbitration on transfer pricing issues? Are there principles such as insistence on economic pricing of certain transactions? Is there any proposal to alter those principles?
There is a group working on best practice. Could the Minister of State clarify the status of the forum group's proposals? The Minister and his colleagues have been anxious to defend Ireland's autonomy in taxation against EU joint agreements, even where they are allegedly designed for better enforcement. Is this a case in which the forum can effectively set best practice proposals that might change our tax provisions for transfer pricing? If so, what are the implications for Ireland's practices?
The arbitration convention lapsed at the beginning of 2000. It is now four years later and we are talking about reviving it. Why has it been lapsed for four years and why is it worth reviving if, as seems to be the case, no one is especially exercised about it? Were we exercising a sort of quasi-veto in trying to stall its re-implementation? What exactly is the Irish position? In the future there will be members of the EU offering zero tax rates. There will be considerable incentive, through transfer pricing profits, to relocate in countries such as these. How will the convention handle these issues?
The ratification of the convention and the protocol has not been of as high a priority as other issues with which we have had t deal. This is partly because the non-ratification by Ireland of the convention admitting Austria, Finland and Sweden has not had any negative impact on the application of the arbitration convention to cases involving those and other countries. Ratification of the protocol was, until recently, outstanding in the case of six other countries. Four member states, including Ireland, had not completed the process. It might not be a great excuse, but there were four other countries like Ireland and it was not high on our list of priorities. It did not cause us any grief and nobody lost out as a result. We did not have a veto.
I appreciate the Deputy's concerns about artificially low prices and the implications of zero tax rates of one of the proposed new member states, Estonia. Transfer pricing is an inexact science, which takes into account a range of factors to determine an appropriate price in accordance with OECD transfer pricing guidelines. Among these are the functions, assets and risks related to the income concerned. In addition, a number of methods can be used to determine transfer prices. Another issue for companies is that there may be difficulty in identifying the appropriate comparable transaction in an arm's-length situation. Consequently, it is possible for enterprises that want to use the correct transfer pricing to fall foul of the rules and be subject to examination. The key issue under the arbitration convention is to eliminate any double taxation that may arise following a transfer pricing adjustment in any member state. Any double taxation will severely impede community trade. This is a mechanism to avoid this and allow people to resolve their difficulties.
Is the United States a member of the convention?
No, it applies solely to EU member states.
We have no issues with most EU countries.
No. We would be obliged to work them out on a mutual basis with any country outside the EU.
Is there any talk of a similar convention incorporating the United States?
There is an international treaty on double taxation between Ireland and the US.
I will not ask the Minister of State to revisit all the detail, but could he explain again why, at the end of 2003, we are considering ratification of an accession arrangement that was first approved in 1995? Ireland, as a member state not only of the original 12 but of the expanded 15, signed up almost nine years ago. Why is Ireland and some of the other member states so late in progressing the proposition? Is it the case that the benefit can only accrue on transactions between entities of the same enterprise located in different member states? Can we have an assessment of the extent of that where it applies between Ireland and the other member states and Ireland and the three new member states, Austria, Finland and Sweden? They are member states now but it should be easy to compute the extent of companies' bilocation between Ireland and one or more of them. We should be able to quantify or explain that. Can we have some sense or idea of the potential take-up of this following our ratification?
I have no idea what the Deputy is asking me.
On the basis that the transactions applicable under the terms of the arbitration convention are between entities of the same enterprise and not between competing companies.
Is the Deputy referring to a multinational trading in two countries?
Surely it is possible to ascertain the extent of such bilocation situations, whether between Ireland and Austria, Ireland and Finland, Ireland and Sweden, and reach conclusion on the potential uptake of the opportunities provided. The Minister of State indicated that these are very limited in terms of Ireland's experience generally but is there an assessment of the potential take-up in this area involving the three countries in the current proposition, and between Ireland and the other member states generally?
This arises only where there is a dispute with regard to solving a difficulty where a company or, as the Deputy refers to it, an entity claims that it has been taxed on the double by two member states. Before utilising the arbitration convention other available procedures would need to be exhausted. In many cases I assume people have been satisfied with whatever negotiations they have done. This is the belt and braces approach. When all else fails one goes to the arbitration convention. Ireland has not used it. That it has been invoked only 126 times by the other 12 or 15 members means it takes several years before qualifying for arbitration. This provides multinationals in dispute with an incentive to solve it in other ways before use is made of the convention. If large sums of money are involved the convention provides a facility in which disputes can be resolved.
When the Minister of State refers to cases invoked against or involving Ireland, did Ireland initiate the issue or was the case taken against the Irish assessment? There was one case initiated involving Ireland. What was the result? Could the Minister of State respond to my first question and provide a brief explanation as to why, almost nine years later, we are only now addressing this matter in terms of formal verification?
Is the Deputy inquiring about the single Irish case?
Yes.
It was invoked as a backdrop to a request under the mutual agreement procedure, under the tax treaty. There was a mutual agreement procedure which the companies invoked and which enabled them to arrive at a solution but they invoked the arbitration convention in case such a solution was not possible. In that instance they would have applied to the arbitration convention, but they arrived at some kind of conclusion under the tax treaty.
It was settled on the steps of the court.
Most likely, as most of them do.
What about my earlier question on the time delay?
First, it was not a priority. Second, the non-ratification by Ireland of the convention admitting Austria and Sweden did not have any negative impact on the application of the arbitration convention to cases involving those or the other countries. Ratification of the protocol was, until recently, outstanding in six other countries and four, including Ireland, have not completed ratification. A new urgency has entered the ratification process following developments concerning the arbitration convention in the EU joint transfer of pricing forum. This was set up in 2002 to examine the practical problems relating to the implementation of the arbitration convention, among other things. The forum is finalising its first report, which includes a best practice proposal on how various elements of the convention should work. This is designed to give a new impetus to the use of the convention and spells out how the mutual agreement and arbitration phases are to operate.
The forum also called on member states to complete the ratification procedure. At the first meeting of the forum ratification was outstanding in six member states in the case of the protocol and with regard to the admission of Austria Sweden and Finland. At the last meeting of the forum in September, ratification remained outstanding in four member states. Hopefully, if we can conclude our business here this evening and pass it on to the Dáil, there will be only three left.
Like the Minister of State, I am lost in the intricacies of this matter. Do we not have a bilateral arrangement on taxation with those countries since before their accession to the EU, and, if so, does that not mean having an arrangement whereby they become aware of an individual's tax status in one country? How would this convention override those bilateral agreements?
As Deputy Richard Bruton said, it may arise where companies seek to exploit a zero or very low tax rate in one country. This is a belt and braces approach. It is an arbitration procedure to be invoked after all negotiations and attempts to seek a solution have failed. It is the final arbitration convention in terms of deciding in favour of one side or the other.
If there is a zero rate in one country and the rate is higher in another country can a company operating in that country opt for the zero rate?
Companies will seek the best advantage. If there is a zero rate in one country and a 25% rate in another, there would be no double taxation.
Could a company transfer from one country to another to avail of the zero rate?
One has to use arm's length pricing in the transactions. A multinational could find itself being taxed in both member states or could find that one member state did not take account of the tax that was paid in the other member state.
What happens if it has an activity in the country where it is availing of the concession on the taxation rates? In other words, if I were operating in the UK, Austria and Ireland, could I opt into one of those countries to avail of the lower rate of tax?
No. The company would pay the tax in the country in which it operates on the basis of the tax rate in that country. The question arises where there are transactions between the two countries. I am not sure what is involved here, but if a company was doing business in Austria and the UK and it was taxed on that transaction in both countries, that would be deemed to be double tax. Eventually, when all the other procedures for arriving at a mutual agreement failed, it could go to the arbitration convention.
I am disappointed with the amount of information the Minister of State has made available to the committee. Has his Department made an assessment of the risk to Ireland in the very aggressive low tax measures proposed by several of the accession states? The phenomenon of tax shopping involving competition to the lowest level of tax incidence has, in the long run, potentially profound implications for the Irish economy. It is reasonable of the members here to ask and to be told whether the Department and the Revenue Commissioners have undertaken an assessment of the likely impact on Ireland. In the medium to long-term, the use of transfer pricing to very low or no-tax destinations could become a threat to the safeguarding of our tax base. For example, with regard to Deputy O'Keeffe's area of activity, agricultural products and the like, it must be borne in mind that transfer pricing is not rocket science. If a series of countries charge zero rates of tax, it is not too difficult to create a transfer pricing structure whereby the bulk of the profit is transferred to the no-tax location.
I return to my original question to the Minister of State. Has the Government taken a point of view on this issue, now that we are, in effect, being competed against? We know the Tánaiste has talked about low taxes in Ireland, but some of the accession states are competing on a no-tax basis, and we have a strategic economic interest. Has the Tánaiste's Department done a risk analysis of what the medium-term outcome is likely to be for this economy, and will she share such an analysis with the committee?
I am delighted Deputy Burton has at last become a convert to low tax.
I did not say that. I said we have——
I heard the Deputy earlier in the House expressing concern about the matter.
Somebody earning €30,000 and paying 42% marginal tax on overtime, along with that person's employer paying a further 10.75% in PRSI contributions does not amount to low tax. That is the Progressive Democrats robbing people on average incomes.
During the term of the last rainbow coalition, people paid 50% of their overtime earnings in tax.
Deputy Parlon's farmer friends are paying little or nothing.
That is an outrageous statement and totally out of order.
The ordinary worker is paying a lot of tax.
Deputy Burton knows that every person is taxed on his or her income.
The Minister of State should look at the incidence of tax among farming families.
It is totally related to income.
The Minister of State has the floor and must be allowed to reply to that final question uninterrupted. Otherwise I will take it that the Deputy does not want the answer.
The Deputy has cast a slur on the farming community.
She did so, a slur which I entirely reject.
The Deputy should withdraw her remark. It was totally out of order. I am very offended by it.
I expect there will be an appropriate press release to which we will ask DeputyPenrose and other Deputies to respond.
The Deputy should meet the IFA and the Progressive Democrats together.
There is general concern across Europe about Ireland's low tax rates. The Minister for Finance, Deputy McCreevy, has defended the right of Ireland and of all EU member states to fix their own tax rates. That is something over which we firmly stand. This issue is not about individual countries. Currently, every country can set its tax rates as it wishes. The issue is about harmful tax competition and practices that can be invoked to undermine a situation.
The Minister of State acknowledges there could be problems.
There could be, but in discussing the arbitration convention we are talking of situations whereby companies which are double-taxed - which, according to the number of times the arbitration convention has been invoked, seldom arise - are given a facility to apply for arbitration and to correct what would be an injustice in terms of double taxation.
At this stage we will conclude the discussion. I thank the Minister of State, Deputy Parlon, and his officials, for attending and assisting our consideration of the proposal. I also thank the Department of Finance for providing the briefing material in advance for circulation to the committee members. I acknowledge that the Minister of State has stated he will send a copy of the report to which he referred the Clerk of the committee for distribution to members as soon as possible.