Standing Order 103 Select Committee debate -
Wednesday, 4 May 2011

Scrutiny of New EU Legislative Proposal

Chairman

I remind members and all others present to ensure all mobile phones are switched off. This is important, as they cause serious issues for broadcasting, editorial and sound staff.

We are discussing COM (2011) 121, a European Commission proposal for a Council directive on a common consolidated corporate tax base, CCCTB. We are pleased to be having this discussion with officials from the Department of Finance and the Office of the Revenue Commissioners who I understand must leave by 3.30 p.m., as they are travelling to Brussels. I am sure members' contributions by way of questions will be to the point. We are considering the question of whether the Commission's proposal in respect of a CCCTB complies with the principle of subsidiarity. Members are reminded that the committee is dealing exclusively with the subsidiarity aspect of the proposal and that a more detailed scrutiny of the substance of the proposal will be undertaken later by the relevant committee.

On behalf of the committee, I formally welcome from the Department of Finance Mr. Gary Tobin, principal officer, and Mr. Finian Judge, assistant principal officer. I welcome from the Office of the Revenue Commissioners Mr. Eamonn O'Dea, assistant secretary, and Dr. Keith Walsh, economist. Following the usual format, I will ask Mr. Tobin to make a presentation, after which we will have a question and answer session.

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

Mr. Gary Tobin

I thank the Chairman and members of the committee for inviting us to discuss the proposal for a CCCTB in the context of the principle of subsidiarity. I will make a copy of my statement available to members. I apologise for the time constraints, the fault for which lies with me, in particular. We are due to attend a meeting in Brussels tomorrow on this issue. I will give a summarised version of my opening statement.

I will comment on what is involved in the proposal for a CCCTB before turning to deal with the specific issue of subsidiarity. Having a CCCTB would essentially introduce new common rules for calculating company taxation across the European Union and replace the universally used separate accounting with arm's length pricing method for allocating group profits across borders with a sharing mechanism under a system known as formulary apportionment. This new sharing mechanism is essentially a formula that proposes that the individual taxable profit or base of each company within an international group be aggregated or pooled to form a consolidated tax base which would be reattributed to these same companies based on their presence in a member state, that presence being measured by the scale of assets, employees' payroll and sales in a particular member state compared with the group as a whole. Each member state's share of the profits would then be taxed at national tax rates, thereby preserving national sovereignty over the rate of taxation.

The net impact on a member state's corporate income tax revenues, as well as the tax liabilities of specific groups of taxpayers, would be determined by three major differences between current law systems and the CCCTB. First, the CCCTB would change the definition of the tax base. Second, it would result in a reduced tax base for some taxpayers by allowing full offset of cross-border losses among group members. Third, it would redistribute the resulting tax base across member states based on the application of the formula referred to.

The Government's scepticism about the CCCTB is well known. Our key message is that we are totally opposed to tax harmonisation and, based on what we know about the CCCTB proposal, we are also highly sceptical of it. Nonetheless, we are willing to engage with the European Commission and other member states on the issue.

The limits of EU competence as governed by the principle of subsidiarity are set out in Article 5 of the Treaty on European Union. On the principle of subsidiarity, it states "the Union shall act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the member states, either at central level or at regional and local level but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level". The Commission has a right of initiative to produce legislative proposals and is required to justify all legislative proposals from the point of view of subsidiarity. In this respect, it argues in its proposal for a CCCTB that co-ordinated action is necessary at EU level to achieve the desired end and that the fundamental concepts of a CCCTB can only be implemented by adopting a common approach within the European Union. It is maintained that the proposal deals with combating tax obstacles presented by the disparities in national systems in computing the tax base between associated enterprises and that work undertaken by the Commission has identified that the best way to tackle these obstacles would be the achievement of a common framework to regulate the computation of the corporate tax base and cross-border consolidation.

The Department has given the committee its preliminary view on the question of subsidiarity; namely, to the extent that the CCCTB proposal represents a 28th optional system for companies to choose and given the fact that it seeks to address cross-border barriers to the growth of the Internal Market, it is arguable that it does not infringe the principle of subsidiarity but, of course, this view is open to argument on both sides. I stress that this is just a preliminary view because the requirement for a unanimous vote at the Council gives sceptical member states the possibility to discuss all of their concerns as the discussion on the proposal develops.

The CCCTB proposal which was only published on 16 March is very complex and represents a far-reaching draft legislative act that will require careful and thorough consideration. We understand the process will be aided by the establishment of a Council working group which will be tasked with the examination of the proposal, article by article, in a process that could take many months or even years to complete. We understand the Standing Order providing for the establishment of this committee allows for a discussion on the issue of subsidiarity but that an Oireachtas scrutiny committee will be given the opportunity to examine the proposal in greater detail at a later date. We look forward to full engagement with that committee as the discussion on the proposal develops.

I emphasise that the Department and the Revenue Commissioners are very willing and happy to aid the committee in its work in any way that they can.

Deputy Kieran O’Donnell

I welcome the officials from the Department of Finance and the Revenue Commissioners. We are discussing the issue of subsidiarity and there are a number of points to be considered. A report on a CCCTB was commissioned from Ernst & Young which I understand the Department should have received in January.

Mr. Gary Tobin

We published it in January but received it slightly before then.

Deputy Kieran O’Donnell

I note that within the report, on page 5, one reference is made to the issue of subsidiarity. The competitiveness of the tax regimes in operation within the Single Market is questioned, with the idea that taxation policies within each member state are within its ethos. The report discusses how having a CCCTB would take away the flexibility of governments in dealing with aspects of the tax system that impede transactions. It is argued that the centralisation of control in the definition of the tax base, in contrast to the principle of subsidiarity seen elsewhere, would be likely to reduce the responsiveness of the tax system to changes in the external environment. The Department might give its view on this issue.

Is it fair to say what is proposed would mean the effective tax rate in Ireland would be changed? Is it correct to state that we would no longer have control over the rates of capital allowances we could give for plant, equipment, buildings, and research and development as they would be defined at the centre? Effectively, the apportionment of the rates for employment, capital investment, job numbers and sales by destination would change the effective rate of tax in the economy. What is the view on the impact this would have on the IMF and EU deal? The explanatory note indicates any effect of the directive on the revenues of member states would ultimately depend on the policy choices made with regard to possible changes to the combination of taxes levied or the rates of taxation applied. Could a CCCTB affect our capacity to meet the IMF and EU deal requirements? Would it reduce our tax base, as the Ernst & Young report indicates it would?

I note the Commission produced a report by Commissioner Mario Monti on the putting in place of a code of conduct group on business taxation. What is the view of the officials? Would it be a better way to proceed in considering difficulties in the taxation system rather than having a CCCTB?

Chairman

A number of questions were posed by Deputy Kieran O'Donnell, but in order to ensure everybody will have an opportunity to ask questions, two more Deputies may do so before I ask Mr. Tobin and his colleagues to reply.

Deputy Alex White

I thank the officials for their presentation. Although perhaps it is understandable that they would only give a preliminary view at this stage, there is a ticking clock relating to the giving of a yellow card. That is a parliamentary issue as much as anything else, but there is only a short period in which to make a decision on whether there is a basis for a reasoned opinion on the question of whether this proposal offends the principle of subsidiarity. While we can understand what the officials are saying, it is not of much help to say this is only a preliminary view, with the possibility of expressing a further view as time progresses. This issue will still be debated at the Council and everywhere else, but as I understand it, the yellow card can only be given once and cannot be retrieved afterwards.

What is the problem the European Commission is trying to address? There is a reference to fragmentation with regard to the taxation position of member states. Elsewhere it is stated disparities and the fragmented taxation systems present obstacles, although I am not sure to what they are obstacles. There is an argument that the European Union has been placed at a disadvantage vis-à-vis the United States and Japan in global trade. If we are asking if this proposal offends the principle of subsidiarity, we must ask if this can be done as well by individual member states. What is the problem that must be solved and is it a big deal that there is fragmentation? I am putting the question in broad terms rather than expressing a view. How big a problem does the fragmented system present across the Community? Why must it be solved and who is looking to have this proposal accepted? Is there a demand from the corporate sector or does the Commission, for historical reasons, believe this issue should be addressed? In some documentation it is suggested this proposal could offer a solution in search of a problem. What, therefore, is the problem to be solved? This gets to the nub of the subsidiarity question. The Department has identified the problem, but could it be addressed by individual member states? In many ways it might be true, if we were to accept fragmentation was the problem that had to be addressed, that it could not be solved other than by way of common action as stated by the Commission. The issue of subsidiarity could not conceivably arise because how could it be done in individual member states? By definition, the problem we are trying to solve could not be solved by individual member states. Will the Department address the issue of approaching this matter at member state level, as that would help to focus our minds?

On the narrower issue, we all have a view on the merits of whether having a common consolidated corporate tax base would offend the principle of subsidiarity.

Deputy Denis Naughten

I thank the officials for their presentation. The CCCTB has been structured in such a way that it would disproportionately hit countries such as Ireland based on the sort of economy it has which is services-based. In Ireland two out of three employees are involved in service industries. Ireland is the 11th highest exporter of services in the world. Such services account for a significant proportion of the economy. The structure proposed to be put in place for the calculation of tax payments would discriminate against countries which base their economies on services. The calculation would be based on the cost of employees, the number of employees, the assets of a company and sales by destination. I seek clarification of the term "sales by destination". Would the amount sold within a member state account for the most significant loading in this regard? As we know, the vast majority of our services are exported within the European Union. There would, therefore, be a far greater impact on Ireland than on most other member states.

What impact would this structure have, given that proportionately Ireland has a much greater number of European headquarters and research and development facilities? Would there be a significant loss of tax revenue to the coffers in Ireland and a direct impact on our GDP? If so, it would be even more difficult to meet the targets set by the IMF and the European Union. What would be the impact on investment and overall GDP? Based on the figures provided, Ireland's share of the EU tax base would shrink by 14%. That is a significant figure, irrespective of how one looks at it. In the current economic climate it is a far greater challenge to meet the commitments laid out in the EU-IMF agreement and our own taxation targets. Based on the European Commission documentation, member states would ultimately depend on policy choices to achieve the combination of taxes to be levied or the rates of taxation applied. That means the change being proposed would force member states to change their taxation structures. Does that not directly affect the principle of subsidiarity?

The argument is being made that we are talking about introducing a 28th taxation system. Does it not mean, however, that we would have to introduce a second taxation system in this jurisdiction and that, therefore, one would have 27 taxation systems multiplied by two rather than a 28th system? A company rather than the state would decide which option to choose, whether it be the member state taxation system or the EU-wide taxation system. We will lose that discretion if we go down this road.

Mr. Gary Tobin

I thank Deputies for their questions. While I appreciate this is the only opportunity members will have to comment, it is important to understand that the European Commission has published a proposal that is being referred to a Council working group. It is likely the proposal will be changed before it is brought before the Council for final agreement. That is normal practice. The Commission has come forward with a proposal that will be put through the mincer at the Council working group. The group will examine it line by line and member states will have an opportunity to give their views on it. It is difficult to know at this stage what proposal will emerge at the other end of the mincing machine once the proposal made has been finally considered by the group. That consideration could take months or years. The consideration of other proposals of similar size has taken many years to complete. That is the reason why we say this is a preliminary view. The proposal is in a state of flux.

What problem are we trying to address? The Commission states the interaction of the national corporate tax systems is creating distortions in the efficient operation of the Internal Market. Examples include the inconsistencies in cross-border loss consolidation; in other words, if one of two companies in a group is making a loss, it is not always possible for the group to realise or write off such losses against its taxable profits in another member state. The Commission also believes that significant complexity has developed around transfer pricing legislation within member states. If, for instance, two companies in a group are located in different member states, they are subject to highly complex transfer pricing legislation. This leads to a high compliance burden and cost for companies.

According to the Commission, under the current system, there are significant difficulties, including tax implications, associated with cross-border reorganisations where groups and companies are trying to reorganise. As a result, there are significant possibilities for double taxation. Some business groups at a European level, for example, Business Europe, the European version of IBEC, and American Chambers in Europe, have acknowledged that there are significant problems. Some of these groups have welcomed, to some extent, the publication of the proposal under discussion. That said, the position of the Government is clear. Ireland remains highly sceptical of the Commission's approach. As evidenced by our economic impact assessment, the Commission's proposed cure could be worse than the disease. However, when the issue is viewed purely from the narrow perspective of the principle of subsidiarity, while we may not like the proposal, the Commission has a right to make it. It would be difficult for individual member states to address some of the issues to which I referred.

Deputy Kieran O'Donnell referred to the Ernst & Young report commissioned by the Department. It is a highly detailed analysis of the potential economic and budgetary consequences of the introduction of a common consolidated corporate tax base. It is probably the most detailed analysis undertaken by any finance Ministry and the only one that has been made publicly available. It does not, however, touch in any great detail on the issue of subsidiarity and is very much an economic impact assessment. That said, what comes out clearly from it is that there would be significant winners and losers among member states in the adoption of a common consolidated corporate tax base. Some member states would win in terms of tax revenue, while others would lose. The Ernst & Young assessment states that, on balance, Ireland would tend to lose under the proposal, as drafted.

Deputy Kieran O’Donnell

What could be taken from the report? The problem for the public is that having a CCCTB is an abstract idea. Is it fair to say our 12.5% corporation tax rate is a pillar of the Irish economic platform?

Chairman

The Deputy may ask supplementary questions later. We are halfway through the meeting and six members are offering.

Deputy Kieran O’Donnell

Would a CCCTB impact on our effective rate of corporation tax?

Mr. Gary Tobin

Let me address the issue of the EU-IMF deal, the other important question raised by the Deputy. It is far too early to say what impact this proposal would ultimately have. When it falls to be discussed by the Council, one of the key issues will be that some member states would win, while others would lose. In that scenario why would any of the losers sign up to it? There is a very large and significant political issue for the Council to deal with. At this stage it is impossible to say what the implications would be for the EU-IMF deal.

On the Deputy's other question, I will ask my colleague, Mr. O'Dea, to comment on what the Ernst & Young reports states about the lack of flexibility that would result from the imposition of a common consolidated corporate tax base. Mr. O'Dea may also wish to comment on the issue of capital allowances.

Mr. Eamonn O’Dea

Certainly, there are detailed specific provisions set out in the proposal which runs to about 70 pages which would replace legislation in the various member states. In Ireland's case, direct tax legislation runs to over 3,000 pages; one can appreciate, therefore, that while there are specific provisions, not everything is dealt with. If this proposal is to become a reality, much more detail must be painted into the picture.

The EU proposal differs in some respects from the existing Irish tax base. In some respects the reliefs would be more generous, while in others, they would be less generous. Their impact would largely depend on the expenditure of the particular company involved. There is no doubt that in particular cases it would change the impact of the rate to be charged, which in Ireland's case is 12.5%. In that sense it would affect the effective rate of tax because of the different ground rules set for measuring the base in this new grand design.

Allowing for the overlap between the legislation of the different member states, it would be a mammoth task to translate the proposed draft directive set out in such high level and summary terms to a point where it could be given life in the operation of the tax systems of the member states. It would affect the effective tax rates of the countries involved. I think Deputy Denis Naughten made the point that, to the extent the tax base of different countries would be affected, to maintain the yield under a particular tax system, one would have to compensate by way of the rate charged. If the base were to be significantly reduced, for example, by 10%, to maintain the same yield, one would have to raise the rate by a compensatory amount.

Deputy Kieran O’Donnell

It would be hard to do that under the CCCTB proposal.

Mr. Eamonn O’Dea

One would not be required to do so, but part of the analysis undertaken to date is that where a country's tax base was diminished - I am not for one moment suggesting this would be Ireland's response - to maintain the same yield one would have to increase the rate of tax which obviously would have an impact on such issues as foreign direct investment which, in turn, would have an impact on growth, employment levels and GDP. It is these potential impacts in a very complex situation that the Commission and the Department of Finance, through the study by Ernst & Young, have attempted to estimate.

There is significant cause for concern in the studies. Deputy Alex White put it very well in questioning the underlying objectives of the proposal in trying to address the difficulties created by the fact that there are 27 member states and that companies operate across borders. In an ideal world the difficulties created by cross-border transactions would be eliminated, but it is difficult to see how any proposal that deals with the operations of multinationals across borders could be implemented without some centralised system. The question is whether such a proposal would offend the principle of subsidiarity, which is to suggest objectives should be achieved autonomously at national level in contrast with central co-ordination by the European Union. I believe there is an element of simple legal correctness in the presentation of the proposal, which is a fundamentally different matter from discussing its merits: whether we ought to be doing this and whether it would ultimately be to the benefit of the Union or otherwise.

There is a time limit on the Oireachtas responding on the subsidiarity issue. It is important to address that aspect. I suggest the way the question is set out by the protocol to the treaty requires national parliaments to address specifically the issue of subsidiarity. It does not diminish the concerns or create inferences in relation to the concerns of a parliament about the merits or otherwise of a proposal in saying, "If this is the stated objective, clearly it will require some central co-ordination". That does not diminish, however, the entitlement to question the objectives. There is a loop or circle in that if the European Union is addressing cross-border difficulties, it will require some co-ordination by it, but if it were to ask individual member states to co-ordinate at national level, it seems that would be impossible. The Deputy has put his finger on that difficulty in terms of the question being asked in such a limited timeframe.

Mr. Gary Tobin

Deputy Naughten asked if the proposal would disproportionately hit certain countries more than others. As we stated, the economic impact assessment analysis clearly indicates there would be winners and losers. The answer, therefore, is probably yes.

It is probably important to mention that the sharing mechanism included within the proposal which is based on assets, payroll and sales is what might be termed an old economy model. It might have been appropriate in the 19th century but how appropriate would it be in the 21st century when there are intellectual property intangibles that represent a significant component of a company's profitability? In addition, certain financial service elements are excluded. There are many more knowledge economy type factors which seem to be ignored in the proposal.

On the sales by destination concept, a factor that would benefit countries with large markets, one could argue it would impact negatively on smaller, more peripheral, non-core European Union countries. To pick up on what Mr. O'Dea said, obviously we looked at the entire issue from a narrow subsidiarity perspective to try to be helpful to the committee. It is up to the committee to decide how it wants to approach the matter. I am aware the Dutch Parliament has looked at it and taken a broader, more political view. That is a matter for members to determine.

Deputy Denis Naughten

Is it not the case that a company would decide which taxation string to use?

Mr. Gary Tobin

Yes.

Deputy Denis Naughten

I refer to the issue of jurisdiction. At present it is for the Minister for Finance to declare which taxation system is working in this country. There would no longer be that option and a company which operates in more than one member state would decide whether it wished to go for the CCCTB option or use the member state's taxation system.

Mr. Gary Tobin

Yes, that is correct.

Chairman

I cannot allow supplementary questions, as Deputy Stanton will appreciate. There are 18 minutes left, with questions still to come from Deputies Mitchell, Mac Lochlainn, Costello, English, Twomey and Donnelly. I remind members that we are dealing exclusively with the matter of subsidiarity, the question being whether the European Union should be propose this measure in the first instance.

Deputy Olivia Mitchell

From the firm's point of view, I can see some value in reducing the cost of compliance across the European Union for companies operating in more than one country. However, from a purely selfish point of view, the economic impact assessment undertaken by the Commission shows that Ireland would not only suffer but would also suffer more than any other country, almost twice as much as the Netherlands which, as Mr. Tobin has pointed out, has decided to submit a reasoned opinion. For Ireland, the measure would result in a fall of 3% of GDP. Given that we know all this - I realise we are only discussing the issue of subsidiarity today - and although it is said this has nothing to do with our corporation tax rate, the reality is it would erode the value of our low corporation tax rate and in the longer run probably negate it entirely. I believe Mr. Tobin accepts this. By any other name, therefore - I am being utterly political - this is an attack on our corporation tax rate. The motives may be different, but that would be the end result as far as Ireland is concerned. Therefore, accepting this proposal would not be in our interests. We have an opportunity to make a political point by 18 May. Whether this proposal breaches the principle of subsidiarity is not a legal point but a matter of political judgment. Given this and because it would not be in our interests, would we not be mad to surrender our first line of defence without, at least, firing the first shots? That probably requires a political answer. However, is that not what we are really talking about today, namely, deciding whether we, as a country, should make a political statement on the matter?

Deputy Damien English

The Deputy has just done so.

Deputy Olivia Mitchell

I have.

Deputy Pádraig Mac Lochlainn

Before the meeting we were sent a copy of Mr. Tobin's initial deliberations on the matter. I note that in 2007 the Department's analysis of what was materialising in regard to a CCCTB was that the proposal cut across national sovereignty and the principle of subsidiarity. That is very strong. Therefore, Mr. Tobin linked sovereignty with subsidiarity back in 2007. Does the analysis, however preliminary, suggest something has changed dramatically in what was proposed in 2007 giving us what is now on the table or is the Department merely taking a different approach? We will need clarification as to why the approach - in a strong statement clearly linking subsidiarity with sovereignty - appears to have changed.

As Mr. Tobin mentioned, the Dutch Parliament has issued a reasoned view, namely, that not only does this proposal not comply with the principle of subsidiarity, but there is an issue in regard to proportionality. It has come at the issue from two perspectives. I shall not read all of the points made by the Dutch Parliament because I am sure Mr. Tobin has seen them and many of the issues have been recited at this committee. The Dutch Parliament states the proposal does not adequately justify the position that action at EU level would be preferable to the current arrangement, whereby member states act individually. It refers to the core arguments, one by one. As I read through them in detail, like I am sure every member present, I could not help feeling they were the arguments we would make in this country. In a sense, the case has been made for us by the Dutch. Does the Department believe the arguments made by the Dutch Parliament are applicable to Ireland?

Deputy Joe Costello

I return to the issue of the underlying objectives of the proposal for a CCCTB. Is there is another way of going about it and what demands have been made from the business sector in Ireland arising from problems encountered in cross-border trade? What has been the response from the small business sector, IBEC or the larger business sector? Does Mr. Tobin agree this is a narrow version of a CCCTB in that the original proposal was to facilitate cross-border trade not only in terms of how the tax base would be aggregated but also in terms of start-up businesses? The issue is more about how we can facilitate small and medium businesses in operating and trading throughout the 27 member states rather than how one arrives at a shared mechanism to deal with taxable income. That aspect is missing from the proposal and as such, it does not fulfil the original purpose. The only reason it is framed in this manner is to suit the larger countries that have been proposing this measure to the Commission for a long period. That is why Ireland, a small country, would come out of it much worse than some of the larger countries, in particular, the French-German alliance now developing to the detriment of smaller countries in the European Union.

There is a serious political issue involved in the proposal to which consideration has not yet been given. If profits were to be aggregated and taxed and the shared mechanism were to operate in the context of where profits were earned, that would have a detrimental effect and an adverse impact on our corporate tax base. One cannot claim this would be direct tax neutral - the case would very much be the reverse. I strongly believe, therefore, that the proposal infringes the principle of subsidiarity.

I would like to refer to two opinions of the Department outlined at the end of Mr. Tobin's presentation. He suggests the proposal represents an "optional [corporate tax] system for companies to choose" and referred to "the fact that it seeks to address cross-border barriers". Does the fact that it would be an optional mechanism have any bearing on subsidiarity? If the proposal is contrary to the principle of subsidiarity, possibly it could be done better by means of another mechanism. It might be used in a disproportionate fashion and might not address cross-border barriers to growth in the essential way it is required to do. It is required to address the obstacles to trade, as distinct from the profit mechanism.

Deputy Damien English

It is important for Mr. Tobin to clarify the difference between the Department's opinion in 2007 and today. The impression has been given that there is nothing wrong with letting the European Commission to kick the football, start the game and talk about it for a couple of years. I do not necessarily buy into this for two reasons. Businesses decide years in advance where they will locate and how they will do their business. They are watching this process which has been ongoing for years. If we think it will end in three or four years' time, why start it at all? I have to ask that question. When we consider these issues, as a principle, we should reflect on whether they have a chance of succeeding. If they do not, there is not much point in starting them. I would like to hear the officials' opinion. As a result of what is going on, businesses might decide to locate outside Europe because they do not know what will happen. My view is that the cross-border aspect of business is a fact of life. Businesses are based all over the world now. They are not based in Europe only. Is this measure really necessary? That is the big question we have to ask.

Deputy Alex White spoke about obstacles. I do not think the Commission is very clear in this regard. It refers to factors that are preventing the growth of the Internal Market. Does the Department agree that growth is being restricted in Europe because of the lack of legislation of this nature? That is the bottom line. I do not believe it is being restricted in such a manner. The answer to that question will determine whether this measure is necessary. The officials have not really commented on whether it is necessary. I am sure some of these problems can be addressed without EU involvement. The issue of allowing losses to be offset across countries could be addressed in a far simpler manner than that being proposed. I would like to hear the officials' view.

The three aims of the proposal are to allow the tax base figures to be computed, consolidated and shared. I suggest each of us has a major problem or concern with the third aim. The first aim has some logic. Matters are confused slightly by the second aim, which involves consolidating the tax base. While it is logical to standardise the means by which figures are assessed and compiled across Europe, it should stop at that because that is enough for businesses. Has that aspect of the matter been discussed? We have enough accounting rules to deal with the rest of it. I would like to hear some comments on this point. Once more, it is a question of whether this measure is necessary. If a number of countries decide they have an opportunity to proceed with enhanced co-operation on their own and succeed in doing so, how will that affect us?

Chairman

As the clock is against us, I will allow two Deputies to ask some final questions. They will probably not have an opportunity to get in again. I ask them, therefore, to confine their contributions to questions at this stage.

Deputy Stephen Donnelly

I will ask two quick questions. It seems the issues being addressed are cost complexity, alleged market distortions - I am not convinced there are - and the offsetting of losses. I appreciate the reason it is being argued that they should be addressed at EU level, rather than by individual member states. I understand it is a question of multiple views. Have other solutions been examined? Has the proposal to provide for a common consolidated corporate tax base been deemed to be the best of all possible solutions? If so, what metrics were used? Was the metric of total public value used, for example? Reference has been made to market distortions, but if we were to adopt a common consolidated corporate tax base, we would end up with an extraordinarily distorted market. We would heavily prejudice export-led economies. That seems nuts. If I understand it correctly, essentially it would be the equivalent of asking Germany not to receive taxes on profits from the sale of BMWs in America. The BMWs would be bought in America and, therefore, the American Government would take the taxes. If that is correct, it seems like a huge market distortion. I wonder whether there are less distortive ways of addressing the very real problems identified.

I am not sure if it was Mr. O'Dea or Mr. Tobin who said that in respect of the common consolidated corporate tax base, if our base were to shrink, the corporate tax rate would have to increase to maintain the yield of corporation tax. If the tax base was to shrink, one would have to raise the rate in order to raise the same amount of corporation tax. A higher rate is needed for a smaller base. If we assume there is a static model and ignore all of the dynamic impacts, do we know what the new rate would be? The current rate is 12.5%, but what would the new rate be under a static model?

Deputy Liam Twomey

I would like to speak about the issue of subsidiarity. The Department's view has changed since 2007. It was against this proposal, but it now seems to be supportive of it. Perhaps the officials might give us a document that sets out the pros and cons of the Department's viewpoint. In what ways can this proposal be said to support the principle of subsidiarity and in what ways can it be said to be against it? The officials do not have to answer that question now. Perhaps they might send the committee a briefing note on how the Department reached its decision, with reference to the arguments for and against the proposal. If it is accepted, we will end up with two taxation systems in each jurisdiction - an EU taxation system and a member state taxation system for corporations. Such an approach is not taken in any other part of the life of the State. Food production companies, for example, cannot decide to apply EU standards as opposed to State standards. Similarly, we do not have two sets of labour laws. One cannot decide to use EU law or State law whenever it suits. It has been pointed out that one cannot approach accountancy and auditing regulations in such a manner. One has to apply what is in place in the State and nothing else. We are talking about introducing two options in this area, which could only lead to confusion.

This country could make the argument that taxation policy is often used to offset other disadvantages, including geographical isolation or a lack of infrastructure. It seems a common consolidated corporate tax base has been proposed because big economies are unhappy about small economies taking advantage of economic union. Taking action on that basis would not be in accordance with the principles that applied when economic union was set up in the first instance. Perhaps we should examine those jurisdictions where the basis of the justification of this proposal lies. Individual states within the United States, a federal country, can apply different corporate taxation laws. Such differences are allowed within what is considered to be a unified country. The variations between states are allowed for local reasons of geography, infrastructure and availability of labour, etc. The argument I have mentioned should be made. I would like the Department to give us a position paper on these concerns in order that we can use them.

Mr. Gary Tobin

I will start by responding to Deputy Joe Costello's question. He asked for the view of Irish business on this matter. The Irish Business and Employers Confederation strongly opposes the establishment of a common consolidated corporate tax base which it thinks would be bad for Irish and European business. It has suggested this approach would increase, rather than decrease, compliance costs for businesses. It also believes it would make Europe less competitive. It seems to us that the proposal is geared more towards the needs of very large companies, rather than small companies, which is an issue of concern that was raised.

Deputy Pádraig Mac Lochlainn

Did Mr. Tobin say "companies" or "countries"?

Mr. Gary Tobin

Companies.

Chairman

Perhaps the same applies to countries.

Mr. Gary Tobin

It could be said of core countries.

In response to the points made by Deputy Pádraig Mac Lochlainn, it is important to emphasise that the Government and the Department of Finance remain sceptical of the merits of the proposal. As we said, we are concerned that the cure could be worse than the disease. That is not to say, however, there is not a problem - just that we are not sure this is the solution.

The Deputy has referred to what we said on our website in 2007. One of the differences between then and now is that the proposal has now been published. We now know what the European Commission actually wants us to discuss. We are dealing with a highly technical, legal question of subsidiarity. This is the issue with which we are trying to help the select committee. The comments made in 2007 were less legalistic and more general. We did not have sight of the Commission proposal at the time.

Deputy Kieran O’Donnell

If a common consolidated corporate tax base, CCCTB, were to become mandatory, would it breach the principle of subsidiarity? Deputy Joe Costello asked the same question.

Mr. Gary Tobin

There would certainly be a much larger question around the whole proposal if it were a mandatory system. While the Commission has put forward a proposal for a voluntary system, it is possible that some member states could not agree with a voluntary proposal and we will end up with a mandatory system. This is the reason the impact assessment we commissioned examined the implications of a mandatory system. Such a system would raise greater concerns in terms of subsidiarity.

Deputy Pádraig Mac Lochlainn

I asked a question concerning the Dutch Parliament.

Mr. Gary Tobin

Having read the conclusions of the Dutch Parliament, I do not oppose anything in them. As I stated previously, the Dutch have taken a broader view of the subsidiarity issue. In my view, it is a more political view, a determination along the lines suggested by Deputy Olivia Mitchell. Clearly, the Dutch Parliament is entitled to do this, as is the Oireachtas. This is slightly different from taking a purely narrow view of the issue of subsidiarity. That is a political choice which the select committee must make.

Deputy Pádraig Mac Lochlainn

In 2007 there was a clear link between sovereignty and subsidiarity as it applied to member states. Does Mr. Tobin share the view that there is a clear link and hence we had the response of the Dutch Parliament which views the proposal as a threat to its mandate as a parliament to make taxation decisions for its citizens?

Mr. Gary Tobin

On the recent opinion of the Dutch Parliament, it has made a decision based on a broad interpretation of the subsidiarity issue. It considered the broad economic implications for the Netherlands. On that basis, it has come to a view that the proposal runs contrary to subsidiarity. If the select committee decides that it wishes to examine the broad implications of the economic impact for Ireland - the Department has provided members with a detailed economic impact assessment - it may arrive at the same view as the Dutch Parliament. This will depend on how the select committee wishes to interpret the issue of subsidiarity.

Mr. Eamonn O’Dea

The Dutch House of Representatives appears to have made little effort to disguise its broad remit in that it refers to proportionality and legal basis. It has not felt constrained to answer the question asked, which is fine. Deputy Olivia Mitchell asked why Ireland should lose this opportunity to intervene and Deputy English stated that the earlier we did so, the better it would be. As officials, we were attempting, in as far as possible, to examine the relevant article of the treaty and the articles of the protocol.

It is noteworthy that the Commission is tasked in the protocol with ensuring that any proposal it brings forward is justified by reference to both subsidiarity and proportionality. Within the space of a few lines, national parliaments are then mandated to consider proposals by reference to subsidiarity only. Distinctions are being made, therefore, but clearly the Dutch Parliament has not felt constrained by this.

Deputy Pádraig Mac Lochlainn

We, too, should not feel constrained.

Mr. Gary Tobin

To respond to Deputy English's question on whether a common consolidated corporate tax base is necessary, our view is that the cure may be worse than the disease. For this reason, we are sceptical and believe there could have been more targeted approaches. The CCCTB is one approach but one could argue that it amounts to taking a sledgehammer to crack a nut, although that is a matter of opinion.

On the Deputy's question as to how Ireland would be treated in the event of enhanced co-operation, essentially we would be treated as any other third country would be treated, namely, in the same manner as the United States or Australia, as we would not be in the CCCTB group. However, it would not be in the interests of the European Union to have a small group of countries march ahead with enhanced co-operation because the benefits of the whole system would be largely lost, especially if the group proceeding with enhanced co-operation were small. While I am not sure there will be a rush to enhanced co-operation, I could be wrong.

To the extent that Ireland remains engaged in the debate, as are all member states, it is less likely that enhanced co-operation will take place. If, for example, Ireland or another member state decided to disengage from the debate on the basis that it would not under any circumstances proceed with a CCCTB, the Commission could feel obligated to initiate enhanced co-operation. In such circumstances, it could inform the Council that the relevant country had decided not to join the CCCTB under any circumstances and it wished to move ahead under enhanced co-operation. This approach is supposed to be an option of last resort.

The Minister for Finance took a clear position on 23 March during a Dáil debate on the 12.5% corporation tax rate. He stated:

The European Commission has the right of initiation in terms of bringing forward legislative proposals for member states to consider and there is nothing to be gained from pretending that this did not happen or from refusing to actively engage on the issue. In fact, the opposite is the case. It would be a gross diminution of our responsibilities not to engage actively and constructively on the issue of the CCCTB. Only in this way can we be absolutely sure that all of the arguments are brought to the table.

Obviously, I share the Minister's view as he is my boss.

Deputy Damien English

Is evidence available to show that growth in Europe has been affected? This is a major issue because it is an argument that is made.

Mr. Gary Tobin

Dr. Keith Walsh, our economist, has been the lead economist on the impact assessment. Perhaps he will discuss the issue of growth and whether the impact assessments referred to positive impacts.

Dr. Keith Walsh

A good few impact assessments have been done. The Department of Finance hired Ernst & Young while the European Commission has hired multiple, different groups of economists to consider different aspects. Many different scenarios have been examined and the impact of a CCCTB or a variant thereof on growth, GDP, investment and employment in the European Union as a whole has been found to be negative across the vast majority of these scenarios. While the overall effects are quite small in GDP terms, less than 1% in most cases, this figure hides the fact that there are big winners and losers.

Deputy Stephen Donnelly

To clarify, is it the case that assessments have shown that the implementation of a CCCTB would have a negative impact on growth?

Dr. Keith Walsh

Yes.

Deputy Damien English

Do the Commission's assessments come to that conclusion? The Commission argues a CCCTB would create growth.

Dr. Keith Walsh

I believe eight of the 12 scenarios or options for CCCTB tried out in the European Commission's impact assessment have a negative impact on GDP.

Deputy Damien English

Eight out of 12 predictions show a negative impact on growth.

Dr. Keith Walsh

While the overall effects are small, there are obviously winners and losers among the member states.

Deputy Kieran O’Donnell

A common consolidated corporate tax base was first mooted in 2000 and many of the relevant issues have been addressed in the meantime. For example, the problems of double taxation and transfer pricing have been overcome. This is akin to buying a model of a car that is ten years out of date. Is that a fair comment?

Mr. Gary Tobin

Yes.

Chairman

We have exceeded the time provided for the meeting without adequately addressing Deputy Donnelly's questions. I ask Deputy Stanton to make a brief contribution, after which Mr. Tobin should wrap up in five or six minutes.

Deputy David Stanton

I will be brief. I am aware of the compliance costs and advantages arising in that respect. Mr. Tobin gave a practical example of a company being able to offset losses in one member state against taxes in another member state. Is it not possible to achieve this outcome through a bilateral agreement? Does the European Union have to be involved? Surely the principle of subsidiarity could come into play there, if states can do this bilaterally, rather than the whole Union being involved, because companies would not be established in every state. The states in which companies are established could co-operate in that regard. Is there more scope for bilateral co-operation between states rather than the whole Union being involved, using a sledgehammer to crack a nut?

Mr. Eamonn O’Dea

The objective is to enable a group of companies established in the European Union to effectively have their aggregate position, whether profitability in one country, losses in another, or whatever, taxed as one net sum in order that, whether the group was profitable in, say, three or four countries, or had losses in another two, all of those amounts would be aggregated into one net amount which would then be subject to division back to the various countries and charged at the rates applicable in those countries, including the 12.5% rate in Ireland. I hasten to add, regardless of any studies, there is no implication in any of those studies that we would adjust our rate in any way in response to a proposal of this sort, even-----

Deputy Olivia Mitchell

Even if effective-----

Mr. Eamonn O’Dea

-----if that proposal were to come into-----

Deputy Stephen Donnelly

I was asking a different question, which is, were we to maintain our tax take what would we have to get up to?

Mr. Eamonn O’Dea

That is a hypothetical scenario. Certainly, without any caveat, that is not one we are contemplating or working out. An alternative rate is not part of our approach to this issue. I just want to ensure there is no perception created by my remarks that we are contemplating any such change - far from it.

Deputy Olivia Mitchell

I was not suggesting that.

Deputy Stephen Donnelly

I would love to know what we would be required to do to maintain our corporate tax rate, even under-----

Mr. Eamonn O’Dea

My apologies for digressing from the answer. On the losses, individual countries can make provision for, say, the losses of a branch of a company operating in another country to be taken into account in the home country of the head office, which is what Ireland does. If all countries are not doing that, one does not have that assurance for operations of a multinational in Europe. It comes back to Deputy Alex White's point and the narrow construction of subsidiarity that, if there is something that can only be achieved, regardless of one's views of the merits of the objective, through some kind of central co-ordination, or Union action, then, almost by definition, subsidiarity is satisfied. We might say that we do not agree with that objective. The question of necessity was raised by Deputy Damien English. We may say it is not necessary to do that, but having posited that as being our objective, we can say that the only way we can do that is through co-ordination, ergo, the subsidiarity principle is satisfied. To ensure uniform treatment of losses across Europe - no difference from country to country - one has to centralise. I agree with the Deputy that individual countries could make arrangements to provide generous treatment of losses, but to ensure a standardised or uniform treatment of losses there must be central co-ordination and that satisfies the subsidiarity principle.

On the broader point, the European Commission impact study acknowledged that, by virtue of greater access to the likes of loss relief and the effect that would have on the base, to maintain a constant tax yield, the adjustment would need to come in tax rates - this is in terms of the European Union's analysis of the overall EU situation. It also acknowledged that if there were to be a compensatory adjustment, this could take the form of an increase in rates, that would surely feed into the attractiveness of the Union as a zone for inward investment in a global environment. To the extent that they are available, OECD studies show that each 1% increase in the rate of corporate tax can have a reduction of nearly 4% in inward investment. Clearly, even the 2% increase mentioned in the EU studies for the Union as a whole would have an impact on inward investment into the Union as a region and would affect GDP, employment and so on in the region. That is why, notwithstanding the significant compliance cost gains or reductions for companies that are posited by the proposal, they have to acknowledge that, by virtue of the shrinkage of the base by more generous access to loss relief and so on and the compensatory changes in rate related to that effect on the base, there are these very tenuous gains or slight possible gains, if any, overall in terms of European welfare.

Chairman

I will have to bring matters to a conclusion. We have already gone 15 minutes over time.

Deputy Stephen Donnelly

It would be incredibly useful to get the figure that would have to be arrived at in order that the people can understand. There is confusion. The rate is staying the same, therefore people think everything is fine, whereas, in fact, it is not. It would be very useful to be able to say this would be the equivalent of doubling our corporate tax rate or whatever and would help people to understand.

Chairman

I am very conscious of the team's need to be at the airport to travel. Mr. Tobin, in view of the fact that some questions have not been answered, in the course of your travel this evening, will you take a note of and send me an e-mail with particular reference to the question raised by Deputies Stephen Donnelly, Damien English and Liam Twomey? This is an important issue. We are very much against the clock in terms of this committee's remit and reporting to the Dáil. I would be obliged if he could do this in the next 24 hours.

Deputy Denis Naughten

It is essential to send the e-mail when they land.

Deputy Damien English

It is important that we receive an analysis from Dr. Walsh on the growth predictions.

Mr. Gary Tobin

We are very happy to help the committee in any way we can. I am not sure we will be able to answer all the questions because I am not sure the data are available, but to the extent that we can answer the questions, we will be happy to provide the material.

Chairman

I thank Mr. Tobin, Mr. Judge, Mr. O'Dea and Dr. Walsh for attending. I look forward to hearing from them, as agreed.

The select committee went into private session at 3.50 p.m. and adjourned at 4.45 p.m. until 2.30 p.m. on Wednesday, 11 May 2011.