Section 8 lays down the scope of the charge to corporation tax in the case of non-resident companies. In order to be chargeable to corporation tax such a company has to be carrying on trade in the State through a branch or agency. In that event it would be chargeable not only on trading income arising directly or indirectly through the branch or agency but also on any other income arising from property or rights of the branch or agency and on any chargeable gains attributable to the branch or agency in respect of disposals on or after 6th April, 1976. Income tax deducted from income forming part of a non-resident company's income chargeable to corporation tax is to be set off against any corporation tax liability on that income, and accordingly the income tax so deducted will not be repayable until the corporation tax liability has been determined. Again, some examples have been circulated which might help to illustrate——
SECTION 8.
This would be like a rent accruing to a company——
Yes.
If income tax were deducted under the provision for annual payments, that is the sort of thing we are dealing with.
Yes.
Subsection 1, if you read it on its own—it may be qualified later—it would seem to indicate that if a foreign company has a branch here, not alone is it chargeable to whatever tax or whatever profits it makes here, but that it is chargeable to tax on all the profit it makes—" ... be chargeable to corporation tax on all its chargeable profits wherever arising". It may be qualified later. I had not time to read down this.
If you read sub-section (2)—
. . . the chargeable profits of a company not resident in the State but carrying on a trade there through a branch or agency shall be—
(a) any trading income arising directly or indirectly through or from the branch or agency and any income from property or rights used by or held by or for that branch or agency,
but it is confined to what is held by the branch or agency——
As I read it, corporations not resident in this country are only liable for profits arising here if there is a branch or agency of them here. I cannot off the top of my head visualise the sort of situation I have in mind, but surely it is possible for a company to have profits arising here even though it has no branch or agency here?
Yes, it could like an exporter to this country who has no business office here, just directly exporting to this country.
What is the situation? Must there be a branch or agency here?
Yes, where corporation tax is concerned, we are taxing profits of a branch or agency here. If it has no branch or agency the company could find itself liable to pay income tax on its profits here.
I am thinking in terms of a foreign resident company which carried out some transaction here, a perfectly normal, legitimate transaction, but it does not have an agency or a branch here to effect that transaction. An officer of the company could come into the country, carry out the transaction and go off again without any visible evidence of the corporation being in this country. In this case, is there a possibility that such profits might not attract any form of taxation?
Only income tax——
It would not exist.
The company that buys the goods would in that case be paying tax on the profit. For instance, if a person brings in 500,000 cases of Scotch whisky into Ireland, he is going to make the money on it not the English company. The person who buys it here is making that extra profit. Otherwise he would not buy it, he would buy it from an agent here.
Income tax would be payable by anyone who makes a profit, but one has to acknowledge that it is sometimes hard to trace whether or not profits were made on a particular transaction or not. Just as the non-resident can generate profits here and never have those recorded here, the same could happen in relation to an Irish resident making profit elsewhere; it is a similar operation.
I am on the Minister's side. Why is there this insistence on a branch or an agency? Could it not be simply stated: " Any non-resident company in so far as profits arise to it in this country "?
I can understand the problem that has been posed. At present in regard to the charge to corporation profits tax, the profits must be earned by the branch or agency of the non-resident company here before it becomes chargeable to corporation profits tax. A non-resident company is liable for income tax where non-trading income arises here not through a branch or agency—and this will remain so in future.
Is this not the distinction, that if you have a foreign company earning money in this country, it will be caught for income tax? On the calculations we did on section 2 or 3 the other day, the tax credit given in that will be charged as if it were corporation tax, will it not?
Yes. The Income arising here will be caught for income tax if it is not attributable to a branch or agency here. If the income includes dividends from Irish companies there will be no further liability on those dividends.
It is therefore a question of deciding when a transaction is subject to company taxation, when it is subject to income taxation? Is that not the problem? It is a question of the amount then.
My point is if the Minister is setting about here to have a straighforward situation, corporation profit tax and nothing else, is he not diverting from that principle here because if there is no branch or no agency and it has a nominal income which is not caught for corporation tax, it will be caught for income tax. To that extent the Minister is confusing his principles. It is a very laudable thing——
But the non-resident company except with a branch or agency here will not be caught for corporation tax.
My suggestion is that by this artificial incorporation, if you like, into the structure of the necessity for a branch or an agency, the Minister is forcing himself to rely on income tax to catch some income from profits which should properly be liable to corporation tax in accordance with his own laudable principles.
The argument, I would say, has much to commend it. Again, to resort to what I have said on a number of these sections, there will be as few changes as possible, basically only pertaining to structure. The tax transactions Deputy Belton was talking about were more in the nature of an exporter from elsewhere taking profit as a result of trading with this country rather than in this country.
What would the position be in the case of the company which has no branch or agency here and is therefore liable on any profit to income tax? Would it be income tax at the standard rate?
It would be at the standard rate.
It would paint a picture of multi-national companies getting away with a great deal of murder here.
If such a branch or agency is trading in the country and is doing it on a routine basis, there will inevitably be some effective control here.
With modern systems of communication and so on it is quite possible for a non-resident outside company to carry on and conduct quite a number of profitable transactions here, isolated transactions or even fairly continuing transactions.
And it would look as though it was worth their while to do it too.
What has been the position heretofore in relation to this?
It is as described by Deputy Haughey and in the way in which we have been discussing it. That has been the position. The possibility is that the kind of situation which Deputy Haughey visualises is trading with this country rather than in it. I can accept what he says about modern technology giving greater control irrespective of the distance from which this control is exercised.
Backing up what Deputy Haughey said, would the position not be better to catch them with the corporation tax? Otherwise a company can sell goods here, pay tax at 35p in the £ and pay no surtax or anything else and then go off to Switzerland or somewhere else with the money.
Such a corporation would be liable to pay corporation tax in its own country. So where, in fact, would the net gain be in such a company unless the corporation tax of the other country was lower than here?
It might be in the Bahamas.
It might not be so easy to control trading operations in the Bahamas but let us take areas nearer. Let us take the British corporation tax rate of 52 per cent. A British-based company might find it advantageous to operate in Ireland and to pay corporation tax in Ireland, which would be a gain of 2 per cent.
Let us take a Swiss company which is only paying 6 per cent. It still pays it on its transaction here and only pays standard rate here plus whatever the minimum Swiss tax is rather than pay corporation tax.
They would be at a slight disadvantage in so far as they would have to deal with every case as a specific direct contract.
An interesting point has been raised here. I forget offhand whether this has been discussed in the White Paper; but I would suggest as this Bill is endeavouring to maintain the same structures as the old tax but presented in a better form, we might receive the Bill as it stands. I can certainly look at the situations which have been outlined here, but this is a reform measure which would have to be dealt with in the annual Finance Acts.
I can see there is a fair amount of implication in it.
There is an interesting aspect in relation to the Companies Act. It is only public companies that are required to enter into certain details here, to register certain particulars; it does not apply to private companies since the Companies Act was passed. I just noticed that today reading through it, and I was often wondering why that was so. That apparently is the position under the Companies Act. There must be some reason for it. The business might be on a smaller scale or something of that nature; I do not know. However, it is relevant to the question which has been raised and could possibly be looked at later on.
Would Deputy Haughey's point be met in part anyway by the deletion of the words " through branch or agencies ".
That might have a lot of implications.
It would. It would widen it indefinitely.
It certainly would. We discussed this issue in Chapter 9 of the 1974 White Paper which outlined the proposals in a form which is here now in the Bill. I would certainly examine further why the non-resident company seems to be treated differently. It probably arose from the fact that such a company in olden days might only be engaged in an occasional incident of trading in the country. Modern technology might make it possible to maintain more continuous trading positions and yet not have a branch or agency here.
There is another example in addition to that which was mentioned by Deputy Haughey which is mainly referable to trading activities here. What I have in mind is the arrival here for a week or a fortnight of a limited company in the form of a singer or a soccer player.
A " Dr. Singer "?
No. They spend, in the case of a singer, a week touring the country. They get, perhaps, £2,000 a night for their appearance. They make a very substantial profit here. In almost all cases they are a limited company. Are they liable to corporation tax or are they liable to any tax?
We would have to decide whether the singer was a branch or agency. Could we leave aside the theory for a moment? There are practical difficulties obviously in pinning a charge of tax on a non-resident company which has not got a presence here in the form of a branch or agency. The singer is the representative of the company and its agent when performing here. Unless his accounting period terminates during his presence here, we would not be in a position to assess what the profits would be before he goes. Deputy O'Malley is suggesting that one should consider the possibility of recovering some tax revenue from such corporations. I think it is the Swedish Government who have a special provision in their laws whereby they can recover income tax from the earnings of pop singers. How that is effected I am not certain, other than by refusing permission to such persons to leave the country until the income earned by them in the country is discharged.
Would the Minister not agree that it does on the face of it seem unfair that some individual who is celebrated for an activity of some description which may or may not be meritorious can come to Ireland and in a week make perhaps five times as much as an Irish citizen who is slogging away 40 or 50 hours a week, 52 weeks of the year, and who pays tax on what he makes? It is well known that there are more countries, apart from Sweden, which the Minister mentioned. If you want to challenge for the heavyweight championship of the world in the United States you nearly have to pay your taxes on what you are going to get before you arrive or they will not let you go home if you do not.
This may not have been the fashion in the past but this is the fashion now. A comedian, Dick Emery, appeared twice in one night in Limerick and, I believe, got £7,000. A man like that in three days makes four or five times more than the average Irish taxpayer. The Minister tells me that there does not seem to be any provision for charging him tax, whether he is a limited company or an individual.
Would the employer in that case not have to deduct tax?
Sections 433 and 434 of the income tax code might——
We are travelling outside the Corporation Tax Bill if we consider such a person under the income tax code. I share with members of the Committee the feeling that such profits ought to be brought within the income tax code but it is not an easy thing to do. It is very difficult so far as the corporation tax code is concerned. The probability would be that payment would be made to the headquarters of corporations and not to individual representatives on their arrival here.
To come back to the problem of the Corporation Tax Bill, this whole concept of a non-resident company not being charged to corporation tax unless it has a branch or agency in the country is an internationally accepted practice and it would complicate the completion of double taxation agreements between ourselves and other countries if we were to change from this idea of a branch or agency. I am not saying that there is a need for this but I want to examine it further. It would immediately create immense problems for this country on the basis of this Bill, if having made that arrangement we found that others were not disposed to reflect it in their double taxation agreements. We might end up being the loser.
The only way I could see out of this is if the paying party was asked to make an allowance in his account for a deduction. But that would be subject to what is in the double taxation agreements, and being agreeable to other countries to exercise the same method of collecting tax. I see the point raised by Deputy O'Malley that there might be some big fish escaping the net with a lot of money. It may be possible for the Minister to look at that in the light of double taxation agreements.
Yes.
How is interest affected? If a person has money invested in a merchant bank and he is drawing interest, has he to pay corporation profits tax or income tax?
A private individual?
Yes.
Tax will be payable by the particular entity generating the profit out of which the interest is paid. It will be paying corporation tax. If an individual was to receive the interest thereafter, he would have to pay income tax on it.
Four or five years ago a person could invest in a merchant bank and get paid in England. He got his money and paid nothing.
Such a person would under existing law, be under an obligation to return that——
If you catch him.
——and would be liable to the usual penalties. Perhaps the recently announced amnesty will encourage such a person to make a general confession and necessary correction.
On subsection (3), which deals with overseas life assurance companies, in view of the fact that money might be involved in such transactions, has the Minister anything to say that might help us understand that subsection?
Subsection (3) provides that, subject to section 45 (which makes special provisions for overseas life assurance companies) where income received under deduction of income tax by a non-resident company forms part of its income for corporation tax the income tax deducted is to be set off against any corporation tax liability on that income for the accounting period into which the payment falls. Accordingly, although such income by virtue of section 1 (2) (b) is not liable to income tax, the company cannot claim repayment of the income tax until the corporation tax liability has been determined.
Before we move from this section I would like to raise a question of tax on multi-national profits. So far as I can see this is the most relevant section on which that might be raised. I accept, of course, that this section is somewhat technical in relation to the chargeability of tax on profits as they arise. What is at least as important is the chargeability to tax on profits that arise out of operations in this country, but do not appear in the books or accounts of the Irish branch or subsidiary but appear in a subsidiary in the Cayman Islands or Liechtenstein or some other place of that nature. It is an important question of general policy, but it is one which the Minister should think about now that the activities of these companies are becoming annually, if not monthly, clearer than they were. You have a situation here where the best known multi-nationals—the oil companies, four of which operate here—do not show any significant profit at all. Occasionally, they actually show losses here. The result of their not showing any significant profit is that they do not pay any significant tax. Some of them might perhaps pay, £10,000, £15,000 or £20,000 tax a year. Their turnover was up to recently—it may be higher now as a result of the budget—about £400 million. Even allowing them the small return on their investments and on their turnover, they must between them make a profit in the region of £20 million a year in the Republic of Ireland. On that issue, they would be liable for 50 per cent corporation tax and we know that they pay virtually none. I know this is, perhaps, extending the section a bit but it is the only section which deals with a charge to tax of foreign based companies.
Are we wise, from a national point of view, from an economic point of view in times of great stringency, to allow these companies to operate here quite freely in a way that they can make huge profits and pay virtually no tax? Should we not, either in this Bill or in some other legislation, or in another section if this is not the most appropriate one, make some sort of provision—which, I readily admit, would be beyond me to draft, but nonetheless I should like to see it—whereby it will be obligatory on multi-national companies of this kind if they are going to operate here, to pay at least a reasonable amount of tax on the profits which must inevitably accrue to them as a result of their operations here?
At the moment it is enough for them to say, but it should not be enough for them to say, that they are Irish subsidiaries, be it Texaco (Ireland) Limited, Irish Shell Limited, Esso Teoranta or whatever, and only make £50,000 a year. We know that on their audited accounts these companies only make these tiny profits, because the multi-national head office forces its Cayman Islands subsidiary to sell petrol or oil to the Irish subsidiary at a price which will enable the Irish subsidiary only barely to cover its distribution and operating costs here. Therefore, they show virtually no profit here while, in a tax free country such as the Cayman Islands or the Bahamas, the whole element of profit, including what I call the Irish element of profit, is allowed to arise.
Another example we had recently in another set of multi-nationals was in the drug firms, most of which are based in Switzerland, where the profits on valium and such drugs are literally enormous. The British Government carried out an investigation, and found profits were intolerably high, running into many hundreds per cent on the sale of these drugs, and forced the head offices in Switzerland of some of these multinationals to repay the British national health service many millions of pounds in partial repayment of the excess profits which were made by these companies, which operate in much the same way here, in other words, selling their goods from a Swiss company, where the tax is very low, to a British company at an artifically high price so that the profit in Britain was comparatively small, although the overall profit to the multi-national as a whole was huge.
This is a matter of general political, perhaps as much as economic or taxation policy but it is one on which very few of us in this Committee would be in disagreement when we realise that an Irish company or individual trading here is taxed to the hilt and has no opportunity to get away with very much on their trading activities, whereas a multi-national can make huge profits out of the Irish consumer and still pay little or no tax. In the context of this section, or perhaps another section, would the Minister consider this? If he accepts the validity of my point, would he consider endeavouring to cover that kind of situation in this Bill? It is more appropriate to this Bill than to an Income Tax or Finance Act because all these companies of their very nature are corporations. The problem would not arise with individuals. It is not an income tax problem; it is purely a corporation tax problem.
It might be an income tax problem also because it is a consortium method by which these people go about their business. I understand the British revenue authorities, about two years ago, introduced some measure to check on this matter resulting from the North Sea oil/gas operations in a budget. I am sorry for interrupting here.
I agree with Deputy O'Malley but I do not know how far you can go back on them. If the oil companies suddenly decide to have an argument, or even a row, with the Minister tomorrow morning, they could say that they will not give him anything. They can put their money in England and upset the Government, or vice versa. I am not arguing for either country. As Deputy O’Malley said, there is nothing to stop them saying they only made a profit here of £30,000 or £40,000. We are not in it for that. Usually we go to them and say they must make 10 per cent. Lately they have been producing a lower percentage, so they must be getting preferential treatment somewhere else. Of course, if they get away with it, more luck to them, but it does not suit the country. They are competing against Irish companies and can out-bid them all the time because they get preferential treatment. Over the years this is what the multi-nationals have done. The oil companies were mentioned, but there are many other multi-nationals like them. But, as I said, I do not know what can be done about it.
It is basically the artificial structuring of the profit margin for tax purposes. Can anything be done about this?
It is very difficult. I find this discussion very interesting because on my last visit to the United States I went one morning to Congress and sat in on the Finance Committee of the Senate where a similar debate was going on about similar practices in relation to profits generated in the United States by foreigners and by United States companies in other countries. I can give the analysis I was given there that morning because it is a true one. Until there is international agreement of a solid and substantial kind, we will not be able to close off any of these loopholes. Some of the places mentioned by Deputy O'Malley are notorious for the particular régimes which can be operated from there to generate tax free profits nominally in those areas, made at the expense of other communities.
Within the EEC at the moment there is a great deal of work being done to try to secure a common approach to these problems within the EEC. If agreement was reached on this, it would close off some of the areas which are now open to the people with fertile minds in generating schemes in this area. We know there are some areas, even on the European Continent, which would still be available to these people.
Many countries are becoming more and more aware of the fact that the really rich can avoid the payment of tax by international associations. As a result, the whole community is losing out on it. Tax rates would probably be lower generally if those who are escaping liability to tax were to be brought within the tax net. We are constrained in the same way as many other countries by lack of international agreement. So far as there is international agreement it has to be of such kind that it will be reflected in double taxation agreements; otherwise it would be unfair to many people who are legitimately trading here. Like many other practices it operates in two ways. Deputy O'Malley very properly drew attention to companies who generate profits here and then siphon them into entities in tax free zones. On the other hand, a cause for complaint from other Governments is that some companies who operate here in the export field attribute much higher profits to their exports from Ireland than might objectively be the true position. It means that the country in which these corporations have their base is denied what it considers would be their legitimate profits, whereas we do not subject those profits to income tax at all. It is no gain to us. Certainly we would be anxious to stop any of those loopholes. The Revenue Commissioners in practice examine very carefully all accounts of corporations which are liable to tax, particularly large ones which have a multi-national scope. They do not take at their face value accounts that seem to indicate that prices are charged which are significantly out of line with market prices or quoted prices. They challenge such accounts when they are furnished to them. Not infrequently there are adjustments to bring them more in line with reality. Deputy O'Malley may be assured that I have a passion for eliminating all types of avoidance——
I noticed that.
He knows he is pushing an open door.
May I raise one point here? A company not resident in the State, a company trading in the State, how does that impinge on the Continental Shelf and the fishing limits? A lot of companies, I am sure, are earning about three-quarters of their income in those areas. They are not resident in the State but are operating in what is regarded as an economic zone that is within the jurisdiction to a limited extent. Is this being considered from the point of view of double taxation agreements? I know there is a lot of trouble now about the law of the sea, but in relation to double taxation agreements, are any reciprocal arrangements with other countries being contemplated?
In my Finance Act, 1973, there is a provision which brings within the liability to tax profits from exploration activities on the Continental Shelf.
In relation to fishing?
I am not talking ex cathedra at the moment, but the problem of fishing presumably would be related to the nationality of the vessel and the people operating it. If fish is caught within the territorial waters by ships of other countries, it may be illegally caught but——
No. There are certain countries which have traditional rights to fish within the six- to 12- mile zone. This is where they are making their big killing at the moment. I am wondering what is the arrangement in that regard.
Wherever it is landed.
I shall have a look at it and perhaps change it later.
Could I say before we leave this subject that I agree with most of what the Minister has said? I appreciate there are difficulties to be got over. It was suggested to the Minister in Washington or New York that these could not be dealt with until there was satisfactory international agreement. I would suggest that there will never be satisfactory international agreement because the sort of countries which benefit most from this type of operation will never agree. The fact that, say, the big countries like USA, Canada and so on, may agree is of little value if the tiny little States, which ultimately benefit from this kind of arrangement, are not prepared to agree. Therefore, both this country and the various other countries which are affected by this will have to devise some method whereby they can take action on their own. The ultimate sanction I would suggest this or any Government have in relation to this kind of difficulty is to say to the multi-national companies concerned, whether it be oil or drugs: " If you do not show us returns which are reasonably realistic and which show the sort of profit that one would normally expect from a turnover of this kind, then we will not let you trade there." If you got a lot of the economically more advanced countries together to take that attitude, then you would very quickly catch the multi-nationals. If, for example, the whole nine EEC States said together to the multi-nationals——
The budget of the multinationals is much larger than that of the specific country.
That may be. But if an oil company or companies were to be told by a united EEC that they could not sell their products to the 250 million people in western Europe then they would be seriously perturbed about it. There is apparently now, as a result of price rises, an over-production of oil. Some companies apparently have some difficulty in getting rid of it. The Minister's well-known drive against tax evasion would very much more profitably nowadays be directed against foreign enterprises of that kind which are trading here and not paying tax which amounts to literally millions of pounds every year rather than against individual Irish citizens whose non-payment of tax may amount only to hundreds or thousands of pounds in each individual case and which is only "buttons" compared with what is not being paid by the multi-national corporations.
You can be sure that Don Quixote will continue his battle against tax avoidance.