Dáil Éireann díospóireacht -
Wednesday, 23 Mar 1994

Vol. 440 No. 5

Double Taxation Relief Order: Motion.

Minister for Finance (Mr. B. Ahern)

I move:

That Dáil Éireann approves the following Order in draft:—

Double Taxation Relief (Taxes on Income) (Adjustment of Profits of Associated Enterprises) (Member States of the European Community) Order, 1994,

a copy of which order in draft was laid before the Dáil on 25 February, 1994.

The creation of the internal market required that priority in the field of direct taxation be given to the removal of tax obstacles to cross-border activities of the European Community. On 23 July 1990 the Council of Ministers adopted a package of three Community acts in the field of direct taxation on parents — subsidiaries, mergers and an arbitration procedure. The arbitration procedure is a multilateral convention between the member states which provides for a mutual agreement procedure between tax authorities where double taxation has occurred. Where this procedure fails to resolve disputes, it provides for referral to an independent advisory commission. Although the convention was signed by all 12 member states on 23 July 1990 it does not come into force until approximately three months after it has been ratified by all 12 countries. To date, the convention has been ratified by nine countries, namely, Belgium, Denmark, France, Germany, Italy, Luxembourg, Spain, the United Kingdom and the Netherlands.

The double taxation referred to is that which might arise when the tax authorities of one member state adjusts for tax purposes the profits declared by an enterprise of that state where such profits result from transactions between that enterprise and an associated enterprise in another member state and these transactions were at prices which differ from those which would normally apply between independent enterprises. The adjustment of profits may result in an increased tax bill for one of the enterprises and double taxation would occur when the tax authorities of the member state in which the other enterprise is situated do not make a corresponding reduction in the taxable profits of that other enterprise.

The mutual agreement or arbitration procedure would apply in the cases described above. The taxes which are within the scope of the convention are specified and the tax authorities in the member states are identified. If a company considers that there is double taxation, it may present its case to its tax authority within three years of the event. If the tax authority considers the case to be well-founded and cannot resolve it, it is obliged to attempt to resolve it by mutual agreement with the tax authority of the other member state. If agreement cannot be reached within two years the tax authorities are required to seek from the advisory commission an opinion as to how the tax should be eliminated. If the two tax authorities do not agree on a resolution of the case within six months of receipt of the commission's opinion, they would be obliged to accept the opinion of the commission. The commission would be composed of representatives of the tax authorities involved, together with independent persons of standing nominated by the member states. The commission would be empowered to request information from the undertakings and from the tax authorities. Safeguards with regard to confidentiality and secrecy are provided.

The convention will become operative on the first day of the third month after the final instrument of ratification has been deposited with the Secretary-General of the Council of the European Communities and it will remain in force for a period of five years. The contracting states will meet six months prior to the expiry date to decide on its extension.

An order by the Government made under section 361 of the Income Tax Act, 1967 is required to give the convention the force of Irish law. Before such an order is made a draft of it must be laid before, and approved by, Dáil Éireann. The draft order was laid before the Dáil on 25 February 1994 and contains in its schedule the text of the convention. An explanatory memorandum outlining the effects of the convention has also been circulated.

I will now briefly outline the main features of the convention. Article 4 is an anti-violance provision authorising the reallocation of profits, on an arm's length basis, between connected enterprises in the two contracting states where the accounts do not reflect the taxable profits which might be expected to have arisen if the transactions between the enterprises had been subject to normal commercial terms. The Article also provide for a pro rata taxation of profits where an enterprise has a permanent establishment in another contracting state.

Article 5 provides for all parties to be advised of any adjustment in profits of an enterprise by one state. Where the adjustment is agreed, recourse to the mutual agreement and arbitration process provided for in Articles 6 and 7 will not be required.

Article 6 provides for consultation between the authorities of the states concerned with a view to eliminating, by mutual agreement, any double taxation which may have arisen in a case where an adjustment has been made to the profits of an enterprise. Where an agreement is reached between the competent authorities, it is to be implemented notwithstanding any time limits in the domestic laws for the contracting states concerned.

Article 7 provides for the setting up of an advisory commission where agreement has not been reached in accordance with Article 6 on the elimination of any double taxation that may have arisen following an adjustment of profits by one of the contracting states within a period of two years. It also secures that enterprises may separately have recourse to the remedies available to them under the domestic law of the contracting states concerned to prevent the double taxation.

The submission of a case to the advisory commission will not prevent a contracting state from initiating or continuing judicial proceedings or proceedings for administrative penalties in relation to the same matters.

The Article also provides that its provisions shall not apply to a contracting state where a final decision of its judicial bodies has been made in a case and the domestic legislation of a contracting state does not permit the competent authority of that state to derogate from decisions of its judicial bodies. In Ireland, the Revenue Commissioners must abide by a court ruling that applies to a particular taxpayer. The two year time limit for the settlement of a case between the competent authorities may be waived by agreement between the competent authorities and the associated enterprises concerned.

Article 8 provides that initiation of the mutual agreement procedure or the setting up of the advisory commission need not be proceeded with where one of the enterprises concerned is liable or may be liable to a serious penalty. This is to ensure that entities involved in tax avoidance or evasion will not benefit from the provisions of the convention.

The list of serious penalties for each country is appended to the convention. In Ireland's case there is no specific body of legislation providing for penalties in the transfer pricing area. The penalties listed apply to all taxpayers and could be invoked in a transfer pricing case.

Article 9 deals with the personnel and organisation of the advisory commission. It provides, inter alia, that the independent persons of standing must be competent and independent and that the chairman of the commission, who shall be chosen from a list of such persons, must be qualified for appointment to the highest judicial office in his-her state or be a jurisconsult of recognised competence. Each country is required to nominate five competent, independent, persons for this purpose; these persons must be nationals of a contracting state and resident within the territory of the EU.

The commission is bound to keep secret any information which it obtains as a result of the proceedings and contracting states are at liberty to select their own penalties for breach of secrecy obligations.

Article 10 provides for the furnishing of relevant information to the advisory commission within the confines of domestic law, administrative practice and public policy in general.

Article 11 relates to the workings of the advisory commission and provides that the commission shall deliver its opinion within six months from the date on which the matter was referred to it. The costs of the advisory commission procedure, other than those incurred by the associate enterprises themselves, are to be shared between the contracting states concerned.

Article 12 provides for the elimination of double taxation concerned within six months of the date of the advisory commission's opinion either in accordance with the commission's opinion or by way of a common agreement between the competent authorities.

Article 13 allows recourse to the mutual agreement and arbitration procedures even where assessments have become final.

Article 14 details the methods for the elimination of double taxation. The profits are either to be taxable only in one of the two contracting states concerned or else they can be taxed in both countries but credit must be given in one country for the tax chargeable in the other country.

Article 17 provides that the convention must be ratified by the individual contracting states.

Article 18 provides that the convention shall enter into force on the first day of the third month after it has been ratified by the last of all the contracting states.

Article 20 provides that the convention will remain in force for an initial period of five years and that six months before its expiry the contracting states shall meet to discuss its extension.

I recommend that Dáil Éireann approve the draft order.

Mr. Yates

We support this draft order, but there are one or two matters I wish to comment on. It is interesting that a convention that was signed in July 1990 and which we were one of the last to sign should take four years to come before the House. It would be no harm if we were to move more rapidly on this kind of housekeeping.

This deals with transfer pricing and corporation profits tax. It deals with subsidiary companies of multinationals set up in Ireland that are repatriating their profits to their parent company. With regard to this Arbitration Commission I ask the Minister to be cautious in one respect. A critical part of our attraction for mobile investment is our 10 per cent profits tax. A level playing field in the context of industrial grants, incentives and taxes would leave precious little incentive for anyone in the multinational mobile investment business to invest in Ireland. We do not have cheaper labour costs, we have higher transport costs and are located peripherally and therefore we would lose. It is reckoned that there is a 10 per cent transport cost impediment to those producing here.

We need to realise that a level playing field is not in our interests. To totally equate corporation profits tax would cause difficulties for us. If companies pay the 10 per cent profits tax here, and when the money is repatriated they have to pay the full domestic corporation profits tax on the repatriated profits through double taxation, we will lose.

I ask the Minister to be very careful in selecting the nominees to this Arbitration Commission. We should not be apologetic, to use the phrase of another Minister in another context, for wearing the green jersey, because peripheral countries have special needs. My fear is that the golden triangle at the centre of Europe will develop and become stronger at the expense of peripheral regions. There is evidence that, notwithstanding the regional transfers of resources, the rich in the centre of Europe have got richer at the expense of the peripheral regions. Although we are all for fairness, we must realise that the key selling advantage for Ireland is the 10 per cent corporation tax. If that is undermined there will be no reinvestment here because we have no other advantage. I am told that the Scottish and Welsh agencies are giving more generous grants than the IDA to attract investment. With high unemployment in the centre of Europe, it is only a matter of time before they do likewise.

In conjunction with the EC Commission the Irish authorities freely determined which sectors would be subject to the 10 per cent corporation profits tax. The British have made strong representations that we should not have the 10 per cent corporation profits tax for mushroom cultivation and should switch to the standard rate which, in this country, is 40 per cent. This is because in recent years we have developed a successful mushroom growing industry, sending a fresh product into the UK market. In my own constituency and in Cavan-Monaghan and the west there has been a huge increase in satellite growers and thousands of jobs are involved. According to the answer to a Dáil question I had down yesterday it seems that the British representations are getting through and that the EC Commission concluded its investigations earlier this year and found the application of the 10 per cent rate to mushroom cultivation to be incompatible with the common market. I would like to see these matters which have been referred to the Arbitration Commission referred to here because it seems that small weak countries like Ireland are losing. Unless there is a 10 per cent corporation profits tax regime for the mushroom industry we can forget about it because the cost disadvantage of transporting fresh mushrooms from Ireland into Cardiff and London would be prohibitive. The British have all those advantages. The one advantage we have is the 10 per cent tax rate.

I should like to hear the Minister's comment about the statistics on transfer pricing. It seemes that every 18 months the Central Statistics Office revises the statistics relating to our gross domestic product. From speaking to international economists I gather the Irish statistics on the level of transfer pricing are questioned, that it is thought that they are not the most reliable. We need to get to grips with that so that our economic planning is based on real figures.

The Minister might also clarify the role of the International Financial Services Centre, a somewhat successful venture where there is substantial potential for growth. I would like his assurance that this convention and the concept of double taxation will not interfere with the future growth of the International Financial Services Centre. The German authorities and others in Europe have raised questions about their centre. They feel that the lateral movement of financial services from their country to Ireland is the result of loopholes in the tax law within the Community.

One would need to be senior counsel to go through all these conventions. It is not possible for us on the Opposition to do it, because of lack of resources. We need to be watchful lest these conventions become the vehicle by which business that has come to this country will move out. I ask the Minister to bear those comments in mind and to realise that peripheral States such as Ireland have precious few advantages and that the one area where national governments have some degree of flexibility is in the tax code. We need to be mindful of this in our approach to such conventions. However, we support this draft order setting up the Arbitration Commission and believe it should go through with the necessary speed to ensure that we are not the last to ratify this convention.

Mr. M. McDowell

When this matter arose at a meeting of the Whips, it occurred to me it is a matter which deserves discussion and not one which should be passed without debate as originally proposed. This convention may be fraught with potential dangers for us in terms of our taxation incentive packages and the means by which service industries, in particular, are attracted here. It is proposed to put in place at a European level a system of arbitration which will determine whether, and to what extent, adjustments can be made to taxation for companies deemed under national legislation to be engaged in tax avoidance by transferring prices or engaging in other transactions.

A number of issues arise in this regard. By adopting this measure we are putting in place a system of arbitration at a European level which may affect the liability to taxation of Irish enterprises. It may also affect enterprises in foreign countries, but we should be conscious that we are handing over to an arbitral commission the function of determining how much tax an Irish company pays here or elsewhere in certain circumstances. Is that necessary because of our membership of the European Union? I appreciate that the convention requires ratification by the national legislative bodies of each country, but is it a necessitated obligation which flows from European treaties? Is it constitutional that the amount of tax paid by Irish companies should be determined by a non-Irish competent authority such as the arbitral commission? I look forward to the Minister's response in that regard. In general, Irish business is entitled to have its tax liabilities determined by domestic law. I acknowledge that there is an international law dimension to every multilateral double taxation agreement but I am wary about agreeing on the nod to a proposition that a body other than an Irish court and Legislature can determine the tax liability of an Irish enterprise. Will the Minister confirm that the matter has been examined by the Attorney General, that, in turn, he has stated this is a necessitated obligation under the treaties of the European Union and that the implicit right which is being transferred to an international arbitral body to determine the tax liabilities of Irish companies is protected by the amendment to the Constitution made on our accession to the EC?

To what extent will this House be reported to on the workings of the arbitral commission as it affects Irish taxation? Will the Department of Finance report on the manner in which arbitrations made by the commission affect the liability and viability of Irish enterprises and Government policy in terms of attracting companies here by way of tax incentives? It appears that when this order is passed that will be the last this House will hear of it. We will hear nothing from the arbitrators and the Minister for Finance will not be statutorily obliged to tell us how the arbitrators are operating, their effects, whether Irish industry is benefiting or losing or whether our industrial policy is being advanced or retarded. Effectively, those matters will be cast adrift when this House surrenders the functions contemplated in this order to an international arbitral body. This measure should be implemented as part of the Finance Bill and the subject of domestic legislative provisions in respect of which a clear domestic function for the Minister would remain. An annual report should be submitted to this House stating how the arbitral commission's activities are affecting Irish policy and taxpayers, but allowing for the right to confidentiality of taxpayers. It would be unacceptable that a company who is the subject of an arbitral decision should have its affairs discussed in this House. When the House agrees this order it will not be informed of the policy principles adopted by the arbitral commission.

It is obvious that other countries, particularly America and Japan, are becoming very wary about the notion of transfer pricing, its effect on domestic tax buoyancy and the capacity of countries to use tax regimes, such as ours, to avoid taxation by artificial transactions. In that context it is expected that countries will retaliate by putting in place implied arm's length provisions such as those contained in this order. If a company locates 10 per cent of its activities here, maximises the amount of its activities across Europe on the basis of locating as much of its profit as possible in Ireland and concludes agreements with the Irish manufacturing arm of a multi-locational enterprise which are advantageous to the Irish enterprise and less advantageous to the others, will every country in the European Union be entitled to investigate the affairs of such companies and set aside for taxation purposes transactions which appear to be motivated by a desire to avoid tax in one country and take advantage of our 10 per cent tax rate? Have we received sufficient information about this Convention. I would like to know the consequences of the 10 per cent manufacturing rate. I note what Deputy Yates said about the mushroom industry, but that is only one of a number of possible instances where there will be pressure from competitors in European countries to investigate companies which have a manufacturing arm in Ireland to bring the Revenue authorities of other countries down on them with a view to ascertaining if they can prove an element of transfer pricing.

What is the statutory basis for appointment by our Government of the panel of arbitrators? It appears that the positions must be filled by a judge of the High Court, a person eligible for appointment to the highest judicial office in the relevant country. We should introduce a measure in the Finance Bill for the appointment of such people. Will they be appointed on a permanent basis or given independence if they are appointed on a short term basis? What type of people will be appointed to those positions? Within our regime no qualifications are required by appeal commissioners dealing with income tax matters. While I do not have any principle objection to the convention some aspects of it should be clarified.

Mr. Rabbitte

This matter is not merely about a multilateral convention to provide relief in cases where double taxation arises, it is also an instrument of industrial policy. For that reason it is important this draft order was not nodded through the House. To some extent we are all taking it at face value, that there are good and sensible reasons why we ought to give effect to it without having the capacity for different reasons to look behind the articles and comment on their efficacy and so on. If the convention was introduced in the form of legislation we would have had that ability. People are interested in the legislation but public attention has not been drawn to it nor have we received submissions in respect of it.

I do not agree with Deputy Yates' argument that the 10 per cent tax regime is the key plank of our industrial policy. Down the years that may have appeared to be the case but I, nor the representatives of multinational companies, would agree that is correct. The 10 per cent tax regime is not the only factor that has attracted multinationals here in the past but it has been an important one. Access to the European Union, the availability of a skilled English speaking workforce and other considerations are listed in multinational studies as being important in attacting such investment here. When I dealt with multinationals I rarely if ever met a representative from a multi-national subsidiary company here who claimed that wage competitiveness was a major issue and that is still the case. In cases where comparisons are made with Pacific rim countries the parameters of the debate changes and a wage competitiveness argument becomes important but it does not apply here. As Deputy Yates stated, this measure is important in the context of the 10 per cent tax regime recently extended.

From our view point the issue of transfer pricing is the nub of the matter. I do not recall which NESC report dealt with that issue. The frank conclusions of that report indicated that is an important issue for our economy. Deputy Yates referred to the reliability of statistics. Officials of the CSO admitted a few years ago that there was a blip in the accounting system but I understand from my membership of the Committee of Public Accounts that matter has been rectified. The CSO would argue that its methodology is as reliable as any other, but transfer pricing is taking place and is a major factor. As Deputy McDowell stated, it is such a major factor that the United States is so alarmed that it piloted legislation through Capitol Hill recently in this regard. If that legislation had been passed in its original form it could have seriously impacted on our economy.

The United States Government is concerned about the loss of revenue to its Exchequer as a result of parent companies located in the United States taking advantage of low tax regimes in countries such as Ireland. I do not understand how this draft order affects transactions between member countries of the European Union and third countries such as the United States or Japan. What are the implications? What is to prevent a company domiciled in the United States, Japan or wherever with various subsidiaries in member countries of the European Union with access to the expertise that has facilitated this ruse in the first instance using that facility to minimise the tax advantage here?

I have always supported multinational investment here. I have argued that we failed to develop comparable indigenous companies. However, if multinationals had not invested here, provided employment, training facilities and development potential for our people the position would have been unthinkable. Until recently the corporation profits tax yield here was insignificant. The position was visible until recent years. I accepted during the debate on last year's Finance Bill that that position has begun to change during the past few years, but there should not be a legitimate diminution in the tax take. The debate tonight will deal with the transfer of tax from income earned to property and so on, but if the corporate sector does not make a fair contribution there is no possibility of tax reform in the broad sense.

Article 14 refers to the position where profits are to be taxable in one or other of the contracting states and states that they could be taxed in both states but credit would be given in one. Are we vulnerable in that we may be the poor relation of such an arrangement? What ties retain those companies here rather than in Scotland, France or wherever the lion's share of whatever contribution made is contributed. That probably relates to Deputy McDowell's point about the competence of the arbitrators. That complex area does not merely require a knowledge of the law but of commerce, business and the expertise multinationals have at their fingertips if rational arbitrations are to be made on some potentially difficult cases.

Without adequate back-up and without putting the measure through a committee of the House, it is very difficult to comment on the detail of a draft order such as this. I am not competent to comment on the efficacy of the anti-avoidance and anti-evasion measures which the Minister says are provided for in Article 8, perhaps that will not come to light until it is too late. Our experience of multinationals is that it was heresy down the years ever to raise a question about their performance in this economy. When outside consultants were brought in they told us what many people suspected. Will it take a further ten years to bring in consultants to tell us that revenue is leaking from this economy? There are no accountability measures in this order and that is not ideal.

Minister for Finance (Mr. B. Ahern)

I will briefly answer some of the questions raised. On the 10 per cent regime that caused the increase in the number of cases referred to by Deputy Yates, we have concluded double taxation conventions with eight of the European Union member states. All these conventions contain provisions allowing a Treaty partner country to increase the profits of an enterprise in that country where it is considered that transfer pricing involving an Irish company has occurred. We are not aware of cases where other countries have taken this step. The difficulties with some of our Treaty partner countries in recent years because of certain schemes in the International Financial Services Sector, which involved the avoidance of tax, have been well documented. The authorities here have unilaterally eliminated a number of these abuses in the overall interests of the IFSC. We have agreed safeguards with the Danish and Swedish conventions to prevent a recurrence of these abuses. In the case of both these conventions, there was no question of refusal on the part of Sweden and Denmark to continue their Treaty recognition of the 10 per cent rate. The only concern expressed by those countries was to prevent abuses of the concession. The Revenue Commissioners are in constant contact with the taxation authorities in other countries who have expressed concern and work to prevent abuses of the 10 per cent rate while protecting the concessions granted under the Treaties. We have managed to keep ahead of those difficulties.

On the issue of the 10 per cent as it relates to mushrooms, I answered questions on that matter yesterday. I have been involved with the Deputy's county, in Cavan-Monaghan and in the west to find ways to assist companies. The Deputy is familiar with what is necessary to deal with these cases.

This convention is strongly supported by businesses. They do not see it as creating difficulties for them. While difficulties may arise, there is some recourse to deal with them, which was not previously the case. The Attorney General has given his assent to all the issues involved. On the question of difficulties with other countries, powers and rights already exist under various Treaties and domestic laws and there are procedures to be followed. On Deputy Rabbitte's point as to whether this affects third countries, the answer is no. Deputy McDowell asked about the procedure. The convention will be renewed after five years and at that stage we will have a report of what has happened in that period. There is considerable data which I can give to spokespersons — if I had time I would put it on the record.

Mr. Yates

Who are the five people whom it is intended to appoint?

Mr. B. Ahern

Under Article 9.4 each contracting State may nominate five persons. We have made no decision to date on the nominees — only two countries have submitted their list of nominees, Denmark and Italy. To be chosen as chairman of an advisory commission a nominee must possess the qualifications required for appointment to the highest judicial office or be a jurisconsult of recognised competence. This is a matter on which we have consulted with the Attorney General. Other independent persons can be drawn from a large pool of persons provided they are independent and competent, such as accountants, lawyers and lecturers.

This is a technical convention which contains many articles. I have considerable data on this matter if it is required by Deputies and if they have questions on it I can provide the information for them.

Question put and agreed to.