Thank you Chairman for the invitation from the committee to discuss some issues relating to corporation tax.
Ireland's corporation tax regime is under almost constant scrutiny and a wide variety of issues related to it can be discussed. For the purposes of this statement I will make a few comments on effective rates and also issues relating to concentration and sustainability. I am sure other topics will arise during the course of the discussion and I hope to be able to offer some insight to members from my work in this area.
There is a wide variety of ways of measuring effective rates. In an overall sense they can be divided into effective rates by company and effective rates by country and within those there are numerous approaches that can be taken. Aggregate data can be used to estimate effective tax rates on profits in the tax base of a particular country. Both the Central Statistics Office, CSO, and the Revenue Commissioners provide aggregate data which provide different, though complementary, approaches to estimating effective corporate tax rates for Ireland. The institutional sector accounts from the CSO give the net operating surplus of non-financial companies. Using the corporation tax figures in the same accounts an effective tax rate on net operating surplus can be calculated. This has averaged 9.7% since 2000. The effective tax rate on net operating surplus peaked at 11.8% in 2006 and fell during the crisis. It has been below 8% since 2011 but reached 8.1% in 2016. Allowing for eligible interest costs would increase the rate and the increased use of losses carried forward likely explains the reduction in the effective rate in recent years. These losses can be trading losses or unused capital allowances.
The aggregate corporation tax statistics produced by the Revenue Commissioners give details of the taxable income of companies and the tax due on that amount. Taxable income is what is included in the tax base after all deductions have been allowed for, such as trade charges, group relief, losses carried forward and capital allowances. Recently published figures from the Revenue Commissioners show that for tax returns filed for years ending in 2016 tax due as a share of taxable income was 10%. The primary reasons this is less than the headline 12.5% rate is because of double tax relief granted for tax paid in other jurisdictions on foreign income included in Ireland's tax base and the existence of the research and development tax credit. In the absence of those two issues the effective tax rate would be close to the headline rate of 12.5%.
The Office of the Comptroller and Auditor General made an important contribution to this area when it published analysis of effective tax rates of the top 100 companies. The Comptroller and Auditor General looked at the top 100 ranked by tax due and taxable income. The analysis by taxable income showed that for most companies the effective rate is very close to the headline rate. Some 65 companies had effective rates of above 12% and a further 14 had effective rates above 10%. The analysis provides very strong support for the effectiveness of the 12.5% rate on the taxable income of companies and highlights that most attention should focus on how taxable income is determined. However, it was not surprising that significant attention was given to the 13 companies who had effective rates of 1% or less. The Comptroller and Auditor General made clear that the reasons for these low rates were double tax relief and the R&D tax credit. The Revenue Commissioners looked at these 13 companies and said that in the absence of double tax relief and the R&D credit the effective tax rate for all 13 of these companies would have been above 12%.
Double tax relief arises because of the worldwide nature of Ireland's corporation tax regime. It is likely that the inclusion of foreign profits in Ireland's corporate income tax base provides little revenue as the tax paid abroad will almost always exceed the tax due in Ireland, particularly with the pooling of foreign tax credits. It is highly unlikely that companies are paying tax in other jurisdictions to avoid tax in Ireland and it should be noted that the foreign tax paid is excluded from the effective tax rates calculated by the Comptroller and Auditor General which only looked at the tax due in Ireland.
The Review of Ireland's Corporation Tax Code published last year recommended that Ireland considers moving away from the current worldwide regime to a territorial regime in line with most other OECD countries. With effective controlled-foreign corporate, CFC, rules this would take previously-taxed foreign income out of Ireland's tax base and eliminate the need for foreign tax credits. The low effective tax rates reported by the Comptroller and Auditor General due to foreign income would no longer arise.
The R&D tax credit is a policy choice that grants a credit equal to 25% of qualifying expenditure. This means that companies can get tax relief of €37.5 for every €100 of qualifying expenditure they incur. Spending €100 to avoid €37.5 of tax would not be a viable tax avoidance strategy. The company will only incur the R&D cost if it feels it will add value and contribute to future profitability. Of course, the effectiveness and the level of the subsidy should be subject to scrutiny. If this is R&D spending that would have happened anyway then it is an unnecessary public subsidy. A previous study by the Department of Finance indicates that 60% of the R&D spending is due to the presence of the R&D tax credit. So while there is some deadweight loss linked to the R&D spending that would have happened anyway the analysis suggests the R&D credit is increasing activity.
It is also worth noting that the level of the credit was set when the federal corporate income tax rate in the United States was 35%.
Ireland would have been competing for research and development activity that would otherwise have happened in the US, with a deduction at 12.5% versus a deduction in the US at a minimum of 35%. The 25% credit significantly improved Ireland's competitiveness in such an environment. Recent changes mean that the federal rate is no longer 35% and it may be worth assessing the level of Ireland's research and development credit in light of these changes. The Comptroller and Auditor General should be encouraged to repeat the analysis undertaken for its 2017 report. Ideally, this would be done every year but at a minimum it would be useful to see it every two years. This company-level analysis is an important complement to the aggregate level statistics provided by the Revenue Commissioners and the Central Statistics Office, CSO. If the analysis was done on an annual basis, it may be possible to provide some insight into how company effective tax rates vary through time. It would also be helpful if an aggregate calculation that combined all the data for the top 100 companies was included in the analysis. The CSO has recently published a set of accounts for what it considers the top 50 companies in its statistics. The type of analysis undertaken by the Comptroller and Auditor General would also be useful if changes to Ireland's corporation tax regime are introduced, such as the move to a territorial system or adjustments to the research and development tax credit.
Over the past few years the Revenue Commissioners have published staff reports that have provided important insights into the concentrated nature of Ireland's corporate income tax base. The Revenue Commissioners are to be commended on the willingness to devote resources to allow this work to be undertaken and on facilitating its publication. The analysis shows that since 2013, the top ten payers account for around 38% of corporation tax receipts each year. Although the level of concentration has remained relatively stable, there has been significant volatility within the figures. For example, receipts from the largest ten payers in 2015 came to €2.8 billion. In 2017, these same ten companies paid €2.25 billion of corporation tax. The top ten payers in 2017 paid €3.2 billion compared to the €2.3 billion these ten companies paid in 2015. Even though the proportion of payments coming from the top ten in 2015 and 2017 are very close, the top ten from 2015 paid €0.5 billion less in corporation tax in 2017, and the top ten in 2017 paid almost €1 billion more than they did in 2015. At first glance, the aggregates might be relatively stable but there is significant volatility taking place under the bonnet.
The level of concentration by country of ownership should also be noted. In 2017, the top 100 payers made €5.9 billion of corporation tax payments, equal to 71.5% of the total. Within this top 100, 51 US companies paid €4.25 billion, UK companies €128 million, Irish companies €370 million, with €1.1 billion coming from companies owned outside these three countries. It is clear that our receipts are also highly concentrated among US-owned companies. The Review of Ireland's Corporation Tax Code published last year concluded that: "Although it is impossible to be definitive and the volatility in receipts will remain the level-shift increase in Corporation Tax receipts seen in 2015 can be expected to be sustainable over the medium term to 2020." Nothing has happened in the interim, either at EU, US or Organisation for Economic Co-operation and Development, OECD, levels, that would alter that conclusion. However, it should be noted that the conclusion was made in the context of the 2016 outturn for corporation tax of €7.3 billion. It was not known that 2017 receipts would exceed €8 billion and that forecasts would include projections showing receipts reaching €10 billion by 2021.
The concentration and volatility of corporation tax receipts mean that a year when they fall is inevitable. We should not be surprised, or taken by surprise, when this happens. In the near term, the reason for the fall is likely to be the inherent volatility which is a feature of our corporation tax receipts, rather than any structural shift or change. The Review of Ireland's Corporation Tax Code also stated: "Given this uncertainty we can never be sure of the sources and permanency of such revenues and it would be wise that policy should be suitably cautious in terms of introducing increases in spending or permanent reductions in taxation." I trust that the careful deliberations of this committee on this matter will ensure that the value for such caution will be impressed by the members here on their colleagues in both Houses of the Oireachtas. I thank the committee for the invitation to attend here today. I look forward to our discussions and hope I can assist with any questions members have.
