Skip to main content
Normal View

Committee on Budgetary Oversight debate -
Wednesday, 14 Jun 2017

Corporation Tax Receipts: Department of Finance and Revenue Commissioners

I welcome from the Department of Finance, Mr. John McCarthy, chief economist; Mr. Rónán Hession, principal officer with responsibility for business tax policy; and Mr. John Palmer, budgetary policy-reporting, economic and budget division; and from the Revenue Commissioners, Mr. Gerry Howard, assistant secretary; Mr. Keith Walsh, principal officer; Ms Jeanette Doonan, principal officer; and Ms Aine Hollingsworth, principal officer. They are present for a review of corporation tax receipts for 2015 and an examination of the stability of the corporation tax base.

Before we begin, I remind witnesses and members to turn off their mobile phones as they interfere with the recording and broadcasting of the meeting. I bring to the attention of witnesses that they are protected by absolute privilege in respect of the evidence that they give to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to do so, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected to the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against either a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

I invite Mr. John McCarthy of the Department of Finance to make his opening submission.

Mr. John McCarthy

I am grateful for the opportunity to present the Department's views on the sustainability of corporate tax receipts. I am accompanied by John Palmer, the principal officer leading the fiscal team in the Department, and Rónán Hession, from the business tax team. By way of background, in 2015 corporate tax receipts rose by nearly €2.3 billion, a 50% increase. Figures from the national accounts - GDP, GNP and so forth - show an increase in the corporate tax base, that is, corporate profitability, of a similar magnitude that year. Even after allowing for depreciation, so-called net operating surplus rose by over 30% that year. On this basis, it would appear the increase in corporate tax receipts was a one-off level change or a step change in the level of receipts. In 2016, receipts rose by a more modest 7%.

As a result of these developments, corporate tax receipts in 2016 accounted for just under 16% of total receipts while the long run average is around 14%, which can be seen in figure 2. Figure 2 also shows that between 2007 and 2014 corporate tax receipts as a share of total tax revenue fell, in part as a result of SMEs carrying forward previously accumulated losses. In addition, parts of the domestic financial sector which had previously been large payers of corporation tax recorded significant losses during this period. One factor behind the large increase in receipts would appear to be the increased liability arising from the fact that losses accumulated during the crisis are now being exhausted. In 2015, for instance, there were nearly 8,000 companies paying corporate tax that had no corporate tax liability the previous year. Mr. Keith Walsh will go into more detail on this shortly. These firms accounted for around €200 million in additional revenue that year.

On the concentration ratio, which can be seen in figure 3, the concentration of corporate tax receipts in a relatively small number of sectors and firms is, as always, a concern. The dominance of the multinational sector in our national accounts has been well documented but figures produced by the Revenue Commissioners show the dominance of large firms in corporate tax receipts also. Last year, the top ten payers accounted for 30% of total corporate tax receipts. The Department has consistently highlighted this concentration as a risk in recent years.

In terms of the policy response, as the committee knows a key policy failure during the bubble period was to increase expenditure and reduce direct taxation on the basis of revenues that ultimately proved transitory. While it is probable that these corporation tax receipts are not transitory, it is prudent to adopt a cautious approach. In this regard, the role of the co-called expenditure benchmark, which is used in the fiscal rules, is crucial in that it reduces the probability that windfall tax receipts are used to finance expenditure. It is based on trend revenue growth over a ten year timeframe. Second, it is crucial that the medium-term objective of a balanced budget in structural terms is achieved next year. Finally, it is important to build up fiscal safety buffers. Targeting a debt to GDP ratio of 45% from the mid-part of the next decade, growth permitting, is an important part of this, as is the so-called rainy day fund which is to be established from 2019 on, that is, once the budget is balanced in structural terms. These policy issues are currently under review and updates will likely be provided in the forthcoming summer economic statement.

Finally, it is important from a policy perspective to have a greater understanding regarding the sustainability of corporate tax receipts. In this regard, the Minister for Finance, Deputy Noonan, has asked Mr. Seamus Coffey, chairman of the Irish Fiscal Advisory Council, to undertake a review of the sustainability of such receipts. The report is due to be submitted to the Minister at the end of this month.

I invite Mr. Howard to make his opening statement, after which Mr. Walsh will make a brief presentation to the committee.

Mr. Gerry Howard

I welcome the opportunity to meet the committee today and to provide it with whatever assistance we can on the topics covered in the committee's letter of invitation. I understand from that letter that the committee wishes to engage specifically on a review of corporation tax receipts for 2015 and an examination of the stability of the corporation tax base.

The committee will appreciate the role of the Revenue Commissioners in these matters. As the tax administration in the State, the Revenue Commissioners collect taxes and duties, including corporation tax. The Revenue Commissioners, therefore, have access to, and are able to provide, statistical information and analysis of corporation tax returns and receipts. Corporation tax receipts have been in focus over the past couple of years, particularly as a result of the 49% spike in net corporation tax receipts in 2015. In a bid to facilitate a better understanding of the increase, the Revenue Commissioners published a paper last year analysing receipts in 2014-15. That analysis was based on a review of available tax return and payment data.

Members will recall that when I appeared before the committee previously, members asked us to revert to it in respect of 2015 specifically. This year, at the time of the recent publication of its 2016 annual report, the Revenue Commissioners published a research paper containing an analysis of 2015 corporation tax returns and corporation tax payments made in 2016. The analysis for 2015 is based on a review of corporation tax returns for accounting periods ending in the calendar year 2015, the majority of which were filed towards the end of 2016. It provides some insights into the significant increase in corporation tax receipts in 2015. While returns for 2016 are not yet available, the paper contains an initial analysis of the trends in corporation tax payments for 2016. I understand that members of the committee may have seen a copy of this research paper. My colleague, Mr. Keith Walsh, who is a principal officer in the Revenue Commissioners economics and statistics branch, is here today and will shortly give members a presentation on the main findings from that research and analysis.

By way of brief introduction to the presentation, the Revenue Commissioners' review of corporation tax returns for accounting periods ending in 2015 revealed that a number of factors contributed to the significant increase in corporation tax receipts in 2015. The principal factor is an increase in trading profits across nearly all sectors. The paper also reveals that, although to a lesser extent than in 2015, a substantial portion of corporation tax receipts were concentrated in a relatively small number of large corporate taxpayers in 2016.

Some 37% of total corporation tax receipts were paid by the ten largest companies in 2016 as compared to 41% in 2015. More than 80% of total corporation tax receipts in 2016 came from large companies dealt with by Revenue’s large cases division.

In addition to Keith Walsh, I am also joined by Ms Jeanette Doonan and Ms Áine Hollingsworth, who are both principal officers dealing with business taxes policy and legislation within Revenue. Mr. Walsh will now make a presentation to the committee. We will be happy to address any questions the committee might have in regard to the presentation. While we will gladly provide whatever assistance we can to the committee in regard to its deliberations on this matter, members will appreciate that Revenue is constrained by law, specifically by section 851A of the Taxes Consolidation Act 1997, from discussing the tax affairs of any taxpayer on confidentiality grounds. This includes providing any information that might lead to the identification of any taxpayer.

Mr. Keith Walsh

I am grateful for the opportunity to appear before the committee. As Mr. Howard indicated, in the past two years, we published two papers on corporation tax receipts. My presentation will summarise these papers focusing on information from tax returns in 2015 and I will also highlight key trends from receipts in 2016.

Before proceeding, I will briefly outline the timing of tax returns and receipts to explain why we are focusing on 2015 in this presentation. The timing of a company's corporation tax payments depends on when its accounting period ends, and whether it is considered a large or a small company. A large company is one which had a corporation tax liability of €200,000 or more in the previous accounting period for these purposes. As shown in the chart, a large company with a 12-month accounting period ending on 31 December 2015 made its first preliminary tax payment in June 2015, that is, six months into its accounting period. The company made a second preliminary tax payment in November 2015, some 11 months into the accounting period. The CT1, which is the tax return for the accounting period, was then due to be filed in the ninth month after the end of the accounting period - September 2016 in this example. Along with this return, the company must also make a final corporation tax payment. This means that returns for 2015 were due to be filed by September 2016. With late returns and the time required for processing of data, comprehensive information from these returns is only available for our analysis from early 2017 onwards. We used this data in our report on 2015 returns in April 2017 and we are continuing to update and publish our statistics for 2015 across a range of other topics.

As indicated by both Mr. Palmer and Mr. Howard, net corporation tax receipts in 2015 were €6.87 billion, more than €2.2 billion higher than 2014. Net corporation tax receipts in 2016 were €7.4 billion, an increase of €500 million. Net receipts are after refunds or repayments. As shown in the chart, our analysis finds an increase in trading profits to be the largest factor underpinning the growth in corporation tax receipts in 2015. This increase is attributed to a combination of improved trading conditions and increases of productive capital stock in Ireland. The growth in trading profits between 2014 and 2015 returns is more than €46 billion or a 49% increase. Almost all economic sectors exhibit higher trading profits indicating a broad base for the increase. More than 90% of the trading profits, that is, €129 billion, are attributed to the largest five sectors as shown in the chart; the remaining 16 sectors account for the other 10%. The manufacturing sector is the largest sector accounting for two-fifths of the trading profits. The largest subsectors within manufacturing are pharmaceutical and medical device products. The €46 billion increase in profits in returns for 2015 is the primary factor behind the increase of €2.2 billion in corporation tax in 2015. It important to be aware, though, that a company may reduce its profits by claiming capital allowances in respect of certain expenditure. These allowances are the tax equivalent of the accounting depreciation of an asset.

The value of plant and machinery capital allowances claimed increased by €27 billion to almost €50 billion in 2015. Again, that is shown on the chart. Subject to certain conditions, capital allowances may be claimed on intangible assets. The most common examples of such assets that might qualify for allowances are patents, trademarks and copyrights. The increase in the value of intangible asset capital allowances was over €26 billion in 2015. This accounted for almost all of the increase of €27 billion. These intangible capital allowances are restricted so that they may only be offset against trading income generated from the use of those intangible assets.

Aside from increases in trade profits, other factors helped to bring about the increase in corporation tax receipts in 2015 and 2016. One of those factors was non-trading profits. As Deputies are probably aware, a higher corporation tax rate of 25% applies to non-trading profits. As shown in the chart, the value of non-trading profits reported in the 2015 returns was approximately 19% lower than the previous year. This equated to a decrease of €462 million. With the return to growth, the number of companies paying tax has increased. This is making a significant contribution to higher tax receipts. The number of companies paying corporation tax increased from 35,700 in 2014 to 39,900 in 2015 and 44,100 in 2016, representing increases of 12% and 11%, respectively, in those years. The corporation tax receipts from cases not previously paying tax were €470 million in 2015 and €345 million in 2016. Companies newly paying tax are generally new businesses, start-up businesses or businesses returning to a profit-making position.

The losses incurred by companies can be used to offset their corporation tax liabilities. During the recession, many companies accumulated large trading losses. If full effect cannot be given to the amount of a trading loss in a particular period, whether to the company itself or to other companies in the group through group relief provisions, it can be carried forward indefinitely. Approximately 26,900 companies did not pay, or reduced their tax due, for 2015 because of trading losses. The value of trading losses carried forward claimed on 2015 returns indicates that certain companies are returning to profitability, utilising legacy losses and paying corporation tax on their trading income once their losses have been exhausted. Furthermore, the aggregate value of losses has not increased as much as in previous years. As Mr. McCarthy noted, improved trading conditions have led to companies exhausting their losses forward. This can be seen in the 8,000 companies that carried losses into 2014 but indicated no losses carried into their 2015 returns. This indicates that companies which returned to profitability contributed approximately €203 million in corporation tax in 2015.

The total value of losses still being carried forward in 2015 was €209 billion. An examination of the companies carrying forward losses shows that approximately €40 billion of the losses carried forward into 2015 involved claims made by companies that were in liquidation or were otherwise unlikely to be in a position ever to use these losses. Most of these companies are in the financial services sector.

While capital gains is not a significant factor when explaining the increase in corporation tax receipts, it should be noted that capital gains on the disposal of assets increased receipts by approximately €110 million in 2015. Companies, like individuals, pay capital gains tax where a capital gain is realised on the disposal of an asset. In most instances, companies pay their capital gains liabilities as part of their corporation tax liabilities and this is classified as corporation tax in net receipts figures. The number of companies reporting capital gains increased by approximately 19% to 1,080 in 2015. The value of the gains reported by those companies increased by 57%.

Companies that engage in certain qualifying research and development activities are entitled to claim a tax credit on the expense incurred. The Exchequer cost of the research and development tax credit in 2015 was €708 million, which represented an increase of €155 million on the previous year. While the value of the claims increased, the number of companies claiming the credit decreased by approximately 2.5% from 1,570 in 2014 to 1,532 in 2015. This is indicated on the graph on the screen.

Revenue's large cases division is responsible for managing the tax affairs of the largest taxpayers in the State, including multinational companies. While net receipts from companies dealt with by the large cases division have grown, they have remained relatively stable as a percentage of total corporation tax receipts. The proportion of corporation tax receipts coming from such companies increased from 80% in 2014 to 80.5% in 2015 and 82.1% in 2016.

It is notable that in 2015 the €2.2 billion increase in corporation tax receipts is, as noted previously, roughly split 80:20 in favour of large-case division versus non-large-case division companies. As non-LCD companies contribute approximately 20% of corporation tax receipts, this is another indicator of the broad-based nature of the increase in receipts. However, it should be noted that in 2015 the increase in receipts is primarily from LCD companies.

Another measure that Revenue tracks and analyses - this was mentioned by my colleagues in their statements already - is the contribution of the top ten payers annually as an indicator of the concentration of corporation tax receipts. In the past decade, the top ten payers in any given year have paid somewhere between 16%, as was the case in 2007, and 41%, as in 2015, of total corporation tax. Mr. McCarthy and Mr. Howard have noted how the proportion of tax paid by the top ten companies in 2016 declined slightly by four percentage points to 37%.

Corporate entities also contribute to the Exchequer by collecting and remitting payroll taxation on behalf of their employees. Companies in a positive gross corporation tax position, that is to say, companies paying corporation tax, accounted for 1.2 million employments in the State in 2015. Over €11 billion is paid on behalf of those employees in respect of PAYE, USC and PRSI based on incomes earned over €31 billion. Let us consider foreign-owned companies separately. Foreign owned companies account for 28% of employments by companies, 39% of incomes earned by their employees and 45% of tax paid.

It is useful to look at corporation tax in an international context, as shown in the chart on the screen. Ireland's headline rate of 12.5% is still among the lowest of OECD countries. Notwithstanding this fact, the proportion of corporation tax receipts relative to GDP in Ireland was equal to the average of OECD countries at 2.7% in 2015. Although Ireland's corporation tax receipts increased in 2015 and 2016, the increase was not out of line with economic growth in the year. Indeed, the two are closely linked. As in the OECD comparison in the chart on the screen, the figures are within the range one might expect.

Revenue continues to work with the Department of Finance on forecasts of tax receipts for 2017 and future years. The June 2017 collection will be key to getting an indication of whether corporation tax receipts are likely to meet the target this year. Based on current information on performance to date in 2017 and indications picked up from the contacts of our large cases division with large companies, we expect corporation tax receipts to be broadly on target this year.

The first to contribute in the order of comments and questions will be Deputy Pearse Doherty. Then, we will have Deputy Tommy Broughan and he will be followed by Deputy Richard Boyd Barrett.

I welcome all our contributors and support staff to the committee. Cuirim fáilte mhór roimh chuile dhuine a tháinig anseo inniu.

I will begin with a question for Mr. McCarthy. Given the concentration of corporation tax receipts, the level of corporation tax receipts and the measures we have in place, does Mr. McCarthy believe that we are adopting a prudent position?

Mr. John McCarthy

I think the concentration of tax receipts is a wider issue. We have a massive concentration of economic activity in Ireland. Let me put some figures on that. A total of 50 firms account for something like four fifths of industrial turnover in Ireland. The top five firms account for something like 36% or 37% of total exports. What we have in Ireland is a small economy but a huge dominance by the multinational sector in terms of overall economic activity, exports and so on. The point I made in the presentation was that is now reflected in the concentration of corporation tax receipts. It is an exposure. That is not to say having these large firms is a bad thing. Obviously, they are big employers and so forth. Nonetheless, it is an exposure.

I believe we have to be prudent. This is why I drew the attention of the committee to the need to do the following: achieve a balanced budget by 2018, as is Government policy; establish a rainy day fund, which is the current policy; and go with a debt ratio that is below the requirement of the Stability and Growth Pact. Those measures will help to mitigate any adverse outcome that we might see from the concentration.

To answer the Deputy's question directly, we are being sufficiently prudent.

Have the three policy positions that have been outlined allowed Mr. McCarthy, as chief economist, to say we are being sufficiently prudent?

Mr. John McCarthy

Yes.

He may not have received the memorandum, but it seems as if the new Taoiseach is getting rid of two of the three policy positions which the chief economist believes allows him to state that we are acting prudently. I refer to the rainy day fund, which I understand is gone, and a reduction in the debt to GDP ratio to 55%.

Mr. John McCarthy

There has been no memorandum. I am working off current policy. In my opening statement I said these policy issues are currently under review and updates will be provided in the summer economic statement.

I appreciate that Mr. McCarthy has to deal with what is there and a new Minister for Finance will be appointed later today. We will see what his or her position will be on these matters. I have my own position on the rainy day fund. I thought it was never going to fly. The debt to GDP ratio is a debate that, in my view, is more about headlines. I do not think we will reach the 60% figure that is part of the EU rules until 2022 at the earliest. It is unlikely that any Taoiseach or Minister for Finance would be in a position during that time to decide whether the figure should be 55%, 45% or whatever. If two of the three policy positions were to go, would we still follow a prudent fiscal approach given the level of concentration of corporation tax receipts?

Mr. John McCarthy

It is important to highlight the third element of the triangle, namely, achieving a balanced budget. That is still Government policy. I have not heard about a memorandum to change that. According to the stability programme, we will achieve that next year. That is important and is another element of the prudent approach.

Is one out of three good enough or do we need all three?

Mr. John McCarthy

I will have to wait and comment the next time I come before the committee, when I see what the new measures are or when they formally come across my desk.

I am speaking hypothetically. The new Minister and Taoiseach will discuss this in Cabinet. If we went with the balanced budget approach only, and given the level of concentration on corporation tax receipts and our dependency on them, does Mr. McCarthy think that would be a prudent fiscal approach?

Mr. John McCarthy

The Department published a report last week which Deputy Doherty may have seen. If he has not, I encourage him to read it. It is called the Annual Report on Public Debt in Ireland. It is a Department publication rather than a political publication, written by me and my colleagues. In it, we argue that 45% is an appropriate target, given the distortions in GDP. The Fiscal Advisory Council has said that 45% is not low enough and I am aware that some others have said it is too low. The Department is caught in the middle. We think green is the new black and so forth. We think a target of 45% is the equivalent of 60% for other countries, given the distortions in respect of GDP.

We referred to one figure in the report, which refers to a metric of which the Deputy will be aware, namely GNI*, which the CSO will publish in July in the national accounts. On our best estimates, debt to GNI* will probably exceed 100% when the figure is published.

I do not buy into the idea that just because the debt to GDP ratio is now down to 75% the debt issue has been resolved. Public debt should remain a priority. If we are looking at it on a GDP basis, which we are required to do under our legal obligations, the Department has said in the publication that 45% is the prudent target.

We will move on. I am sure we will have plenty of discussions between now and then. Given the fact that it will not start to have an impact for five years, we have plenty of time for discussions.

It is probably better to wait until we have the new definition of how we can measure our economy to start having these real discussions.

Mr. John McCarthy

Agreed.

I wish to ask Mr. Howard about revenue. A total of 82% of corporation tax receipts are coming from the companies within the large cases division managed by the Revenue Commissioners. How many companies are in the large cases division of the Revenue Commissioners?

Mr. Gerry Howard

I am not sure of the total number. It was 10,200 in 2015.

Those 10,200 are managed in the large cases division of the Revenue Commissioners. Ten of those 10,200 make up 32%-----

Mr. Gerry Howard

No, 37%.

-----sorry, 37%, which is just shy of €3 billion, of the taxes paid to the State. Those ten are ten companies as opposed to ten groups.

Mr. Gerry Howard

Ten companies.

Of the top ten companies, are any of them in the same group of companies?

Mr. Gerry Howard

I am not sure. I would want to be careful because, as I said, I do not want to be identifying companies. If the Deputy does not mind, I would be cautious about saying too much in that space. I believe I need to be cautious about that space, if that is okay.

I can appreciate that in terms of identifying companies but most of these larger companies, and Mr. Howard can correct me if I am wrong, would have separate companies. There would be at least two companies. Therefore, I cannot see how Mr. Howard would identify a company by saying that they are in the same group. As explosive as the figure is that 37% of our tax receipts, which is nearly €3 billion, is dependent on the decisions of ten chief executive officers, CEOs, the reality is that it could be five CEOs, for example, if two of these companies in the top ten were part of the same group, whether it be Mitsubishi, AIB, Bank of Ireland or Apple, it does not matter which they are.

Mr. Gerry Howard

We gave that information in a recent parliamentary question. Two of the top ten companies are in the same group, so we are talking about nine separate entities.

That is the parliamentary question I tabled but we have not had any replies to parliamentary questions for two weeks because of what has been taking place in the Dáil. I am waiting for that answer and I thank Mr. Howard for that information.

Mr. Gerry Howard

No problem.

Two of the top ten companies are in the same group.

Mr. Gerry Howard

Yes.

I take it there are eight individual companies and one other company, nine groups.

Mr. Gerry Howard

There are nine groups.

The concentration gets a bit more-----

Mr. Gerry Howard

Concentrated.

Yes, concentrated. Regarding the 82%, Mr. Howard gave me a figure of 10,200 but I presume some of those would be groups of companies, a large number of them.

Mr. Gerry Howard

Yes, most of those. Many of those would be in the same groups.

For the last year, for which Mr. Howard has data available for the top companies, what was the effective tax rate that the top ten companies paid?

Mr. Gerry Howard

I do not have that. I am not sure.

Mr. Keith Walsh

We can provide it afterwards. We do not have it with us.

It can be provided to the committee.

Mr. Gerry Howard

Yes.

I appreciate that.

A number of decisions were taken by Government in recent years regarding the double Irish tax mechanism and ending tax residency and stateless companies and a bit of a tail period was provided for companies that were incorporated here prior to 1 January 2015, where basically they were allowed to continue to operate as stateless companies up to 1 January 2021. Is Mr. Howard aware of any stateless companies operating within our jurisdiction at this point in time?

Mr. Gerry Howard

I would be careful about answering that one at this point in time. Perhaps I can come back to Deputy on that one, if that is okay.

Ms Jeanette Doonan

We introduced changes to the resident provisions which were effective from 1 January 2015, which would effectively eradicate statelessness. Those provisions whereby a company would be automatically regarded as resident on foot of being incorporated in Ireland are deferred for certain companies that were already in existence prior to 2015, so they will have up until 2020.

However, if one is not resident anywhere, one will be regarded as resident in Ireland from 2015.

Yes, but if one were incorporated prior to 1 January 2015 and not tax resident anywhere in the world, one still can be non-tax resident anywhere in the world until 1 January 2021 under the transitionary arrangements. Can Ms Doonan inform the committee that no such companies are availing of the transitionary arrangements, which means that they are here but not resident either here or anywhere in the world, to her knowledge?

Mr. Gerry Howard

Can we take that one and get back to the Deputy on it? I would be careful that-----

The answer speaks to itself. The fact that Mr. Howard cannot reassure us and say there is no such thing-----

Mr. Gerry Howard

I cannot because I do not know for a fact. I would just be cautious about it.

That is fair enough. I appreciate that and if the information can be provided, hopefully in plain English or Irish, we will accept it.

Ms Jeanette Doonan

I might clarify the position on statelessness, and we are to come back on this. What is happening in that transitionary arrangement is that the common law rules, which is by reference to central management and control, alone, will apply to those companies until 2020. However, if they are stateless they would be regarded as residents. We will clarify that and come back to the committee.

I appreciate that.

Does Ms Doonan have a timeline for that?

Mr. Gerry Howard

It will be quite quickly. I would say within two weeks.

This question is for Mr. McCarthy.

I am sorry to interrupt Deputy Doherty but the usher has just told us there is a lot of interference with the transmission from mobile phones. Again, if members and witnesses have not put them on airplane mode or switched them off, they should do so.

I come back to a parliamentary question I tabled, the answer to which I presume Mr. McCarthy had an input into. It flows from the national reform programme of the EU, which called for measures to be carried out, notably in 2017, to reach the goal. That was regarding the fact that the Commission is of the view that we are in breach, I presume, of the expenditure benchmark given the retrospective application of a policy position on which the Department is now in discussions with the Commission with a view to trying to resolve this matter. Can Mr. McCarthy confirm to me that discussions on that took place with the Commission before it published the report? The report calls for action to be taken in 2017, and I want Mr. McCarthy to explain to the committee what that means. Does that mean a mini-budget or an adjustment? I ask him to explain to us what is going on as clearly as possible and how the Commission has the view that we are now in a significant breach of the expenditure benchmark that would require us to carry out that type of adjustment this year.

Mr. John McCarthy

I can confirm that discussions had begun well in advance of the Commission coming out with its country specific recommendations, CSRs. We have been discussing some of the issues with the Commission for some time. The discussions mainly revolve around the treatment of one-offs within the expenditure benchmark. There has been a change in the way those are treated, with one-offs now essentially excluded. There is a strong economic logic for that in the same way that they are excluded from the structural balance. However, we have consistently argued, and I believe the law is on our side, that the rules cannot be changed retrospectively. There have been a number of one-offs, for instance, that have allowed us to calculate fiscal space and maybe increase it a little, the best example being the treatment of-----

Mr. John McCarthy

Exactly, which I believe was in December 2015. We dispute that with the Commission. The Commission has not said action is needed. All it has said is that there is a risk of a significant deviation and that we should take action to make sure that this risk does not materialise, so to speak.

Once one allows for one-offs, we believe we will win the argument considering that, on a multilateral basis with all member states, there is support for the Irish view on the treatment of one-offs. At the European semester discussions which took place last week and the week before, it was agreed that we would discuss the matter further with the Commission on a bilateral basis. As I believe there is support for us, I strongly suspect that we will win the argument.

I appreciate that. Mr. McCarthy has said the Commission has not made it clear that action has to be taken. In the report it published it called for measures to reach the goal, specifically and notably in 2017.

Mr. John McCarthy

That is if one accepts its view that a significant deviation has taken place.

Yes. That view can be parked because it is disputed by the Department and the Government. The point Mr. McCarthy has made here, however, is that the Commission did not call for an adjustment. It has called for one. Let us consider the outcome if the Department loses the argument, into which it entered before the Commission published the report. Obviously, the Commission believed it was on strong enough ground to make its statement, which is quite significant. It stated we were in breach of the fiscal rules but that the deviation was not significant enough. However, it is now sufficiently significant to demand that measures be taken in 2017. It is important, therefore, that the committee understand the magnitude of what could potentially be playing out. The transaction in 2015 benefited the Government in complying with the expenditure benchmark. If in late December it had not come in, we would have breached the rules that year, but it is now coming back to bite us quite hard. If the Department is unable to convince the Commission on how it is dealing with the one-offs and dealing with them retrospectively, what will it mean for the budgetary position in 2017 and the baseline against which we will measure budget 2018?

Mr. John McCarthy

To repeat, the Commission stated there was a risk of a significant deviation. It did not state there had been one. Based on our figures, we believe we are fine, even leaving aside the one-offs. There are other one-offs such as the EU budget contribution and so forth. We have a perennial discussion with the Commission about discretionary tax measures, essentially the non-indexation of tax bands and credits. Once we achieve the medium-term budgetary objective next year, we will have done what is required. Even if there is a deviation, it underlines the importance of getting there. On the basis of the Commission's numbers, we will achieve a structural deficit of minus 0.3% next year. Our own calculations indicate that it will be minus 0.5%. Therefore, there is significant headroom built into our numbers. In this context, it is important that we achieve the MTO next year.

To go into the actual legal text and so forth, if a member state is found to have deviated from the adjustment path towards the MTO, there are a number of legal steps that will take place. It will be required to produce a corrective action plan, for instance. That was launched for the first time last month - May - for Romania. Essentially, it involves taking additional measures to ensure it will get back on the adjustment path. If, however, we are at the MTO, we will not need to be on an adjustment path. That underlines the importance of getting there.

I will ask my final question and then let my colleagues in.

The point Mr. McCarthy is making is that the end justifies the means, as if to say: "Bugger the other rules and if we get to the point anyway, we will be okay and it does not matter that we have broken the rules on the way." I am not a big fan of the rules, but I just want to understand the position. For us, the expenditure benchmark, when it kicked in, became a baseline from which we worked in each budget afterwards. It became a building block.

Based on the ten-year growth, it allowed us to spend extra. I say that because there is no guarantee that the MTO will be reached, although hopefully it will. Is it the Government's position that it is forgetting about the expenditure benchmark, just going for the MTO and taking the view that it does not matter if we breach the rules? If we do not convince the Commission before budget 2018, the baseline for our expenditure benchmark will be recalculated back to a lower position which will impact on the fiscal space that is available in budget 2018. Is that correct? Perhaps that is an opportunity for the Department to clarify to the committee the net fiscal space that is there, especially after the latest pay deal which is going to absorb approximately €180 million of the €500 million to €550 million of available fiscal space.

Mr. John McCarthy

Before my colleague comes in, I note that what I am saying has never been tested legally because we are in a whole new space here. However, I point out that once one has the MTO, one can never be required to overachieve one's MTO. In other words, if one gets to 0.5% next year, one cannot be told to take an additional 0.2% because one had not done it the year before, which would bring one to 0.3%. It is crystal clear that one can never be required to do that. Mr. Palmer has a couple of points he wants to make in reply to the Deputy.

And Mr. McCarthy will come back on the fiscal space.

Mr. John Palmer

It is a question of timing. The Deputy is talking about budget 2018 but the regulation is very clear that one can only get a warning of a significant deviation if it is an observed significant deviation. That is why the warning issued to Romania in May relates to last year. If we were to be found to have significantly deviated in respect of 2017, the Commission could only do it next May when it has had the EDP returns at the end of March from the CSO and when it has had the stability programme update from ourselves at the end of April. In terms of timing, this would not be an issue for budget 2018 no matter what. If the Commission then finds we have a significantly observed deviation, we are into the process Mr. McCarthy outlined. We get a warning, a recommendation on the steps to take to correct it and then separately, under the Fiscal Responsibility Act, the Minister for Finance and the Government are required to prepare a corrective action plan and present it to the Dáil within two months of the warning. That plan has to take on board any recommendation from the Council. If we are on course to hit the MTO in 2018, the Commission cannot give us recommendations to overachieve it. It is slightly messy in terms of timing and so forth, but we have to proceed the way we do.

Mr. John McCarthy

Deputy Pearse has tabled many parliamentary questions on the fiscal space. We see it as still €1.8 billion in gross terms of which €600 million is already allocated for demographic factors, leaving a net €1.2 billion in fiscal space. There are then carryover effects and the ballpark is about €500 million on the expenditure side and just under €200 million on the Revenue side. There is a net €500 million. Deputy Doherty asked why we said it was €200 million at the presentation to the pay talks. That was on the current side. The €180 million that is then absorbed by the new pay deal will eat into that. We will produce new estimates of fiscal space in the summer economic statement either next week or the week after.

That will be considered by this committee.

I welcome our colleagues from Revenue and the Department of Finance. A key concern we have is the sustainability of corporation tax receipts in being able to frame upcoming budgets. I will focus on three points, namely, the 2015 figures, the issue of trading losses and the cost of research and development tax credits. On 2015 and Mr. Walsh's presentation, the huge jump in capital allowances claimed in 2015 relates to levels of profits as intellectual property was moved back into our State.

Is that the actual relationship? Is that what happened?

Mr. Gerry Howard

We might explain how IP works in general. Again, we are careful about what we say about these things. If we take a typical company that manufactures a high-end product in Ireland that uses IP - this is nothing uncommon because it goes on all over the world - we can see that the company can get its IP by either purchasing it, creating it or renting it through a royalty from somebody else. In 2015, if a company was renting it and paying a royalty for it, obviously, its profits would be smaller because it would have been coming out of its trading profit but if the company was claiming it as a capital allowance, its trading profits will be there and the company will be getting it from those trading profits. That is probably what the Deputy is seeing reflected in the 2015 accounts. In general, there are two ways a company can do it. It can either rent and pay a royalty for the IP from abroad or outside the company or it can purchase it and claim a capital allowance.

When we will know the figure for 2016? Will we have the net data in early 2018 so that Mr. Walsh could do a similar analysis? Must we wait until then to know what is happening in respect of the overall picture regarding capital allowances and so on?

Mr. Gerry Howard

Exactly. When I was here before the committee, I explained that there was a delay between when the taxes are paid, when the accounts for the company are prepared and when it submits its corporation tax computations to Revenue so we will start to get the details in the first three months of 2018. We would expect that the same trend would continue and that there will be capital allowances for IP going on into the future.

We had a discussion with Mr. McCarthy about the GNI* and whether this huge jump is sustainable from the point of view of fiscal policy.

Mr. Gerry Howard

Obviously, Revenue must be cautious in terms of predicting what happens in the future but there is no indication that what happened in 2015 was just a once-off situation. As Mr. Walsh has said, the receipts for this year are rolling on ahead so it would appear that this would be the position. This type of relationship with IP is a common regime throughout the world so there are many other jurisdictions such as France and the US where people either pay royalties or get capital allowances.

In respect of the carryover on trading losses and the 2015 figure highlighted by Mr. Walsh, many of us were again reminded of this recently with the sale of 25% of AIB - that this situation could exist so much into the future. What is the general trend here? It is an enormous figure relative to the actual take in corporation tax.

Mr. Gerry Howard

The loss regime in Ireland is similar to that which exists in many countries. If a company makes a loss in a year, it is entitled to set it sideways against its own profits - it might have deposit interest relating to trading loss - and claim group relief so that if there were other companies in the group that were profitable, it could set it off against those companies' profits in the particular year, or carry it forward and set it off against future profits. What we are seeing there in general are losses that are available for carrying forward. As my colleague said, we estimate that about €160 billion will be utilised over some period of time.

Fundamentally, we are talking about the financial sector.

Mr. Gerry Howard

It is not just in the financial sector. It is also in the construction sector. There is about €120 billion in the financial sector but there are also large losses in the construction sector. There are a few areas. The two major areas were the construction sector and the financial services sector.

Could Mr. McCarthy tell me whether the cost of the research and development tax credit in respect of the revenue tax is kept under review?

Is this the most expensive or one of the most expensive tax reliefs we have? It is €0.75 billion or whatever.

Mr. John McCarthy

It is €640 million or €650 million, but my colleague here is better placed to answer.

Mr. Rónán Hession

We have few reliefs in corporation tax. One is talking about the research and development tax credit, relief for losses and then a relatively minor relief in terms of three-year start-up relief, which, I understand, is approximately €40 million.

The research and development tax credit has been increasing. The chairman of the Revenue Commissioners has given a further, more recent figure, which is €708 million for 2015. At budget time, we published our review which looked at the increase in cost, trying to get an understanding of what was the profile of companies involved. It also looked at the bang for buck, that is, what extra research and development one is getting for this and to what extent it is additional or not. The results were that the so-called additionality is 60%. In other words, of the extra research and development, 60% would not have happened without the research and development tax credit and the bang for buck was 2.4, that is, every time one spent €1 on the research and development tax credit one gets €2.40 in extra research and development.

The figures show that the number of claimants has plateaued at approximately 1,500 for the past number of years. Bear in mind, the cost of the credit reflects the amount of research and development being done out there, one gets a 25% credit, and the amount of research and development in the system is, therefore, four times what the credit costs. The tax credit has real substance. It is defined by reference to international standards in research and development, but we watch it closely. We do not have that many reliefs. We have quite a small number of reliefs on the corporation tax side.

At budget time we published quite a detailed report which shows the profile. Some of the older, larger foreign companies still avail of it. That is not all that surprising when we look at the profile of companies engaged in research and development and the broader figures on the business expenditure on research and development, BERD.

It has increased and we watch it closely. We published a review in 2013 and last year's review was our second quite deep dive into that area. We have an approach to tax expenditures in the Department where everything is on a cycle of three years and we will look at issues sooner if we feel there is a policy reason to do so. One of the lessons from the 2000s was not to leave tax expenditures in the system without being fundamentally looked at on a periodic basis and we do that on a three-year cycle. We had a look at it last year, 2013 was the previous one and we will continue to watch it.

What is the figure for the gross manufacturing and non-manufacturing trading profits in 2015 or 2016? Amazingly, this document does not have it. It is inexplicable.

While they are searching for that, the Deputy may have a couple of other questions.

This, to me, is crucial. It is telling that we do not get that figure. How do we know whether a proper tax rate is being paid unless we are given that figure in their initial paper?

Do we have an answer for the Deputy?

I would point out, in terms of the availability of this information, that we find out this information two or three years late. Maybe they could give me the average. They give the increase in trading profits by sector in 2015, all of which, interestingly, are up significantly. There was an incredible increase in profits, of 5% in health and social work, 10% in transportation, and right up to 110% in manufacturing, if I read that correctly.

An extraordinary leap in profits is taking place, far in excess of, for example, what workers are getting in wage increases or increases in public spending. It is critically important that we know how much all of that is.

Dr. Keith Walsh

It is important to bear in mind what I said at the beginning of my presentation about timing of returns. We are only receiving returns for 2016 during the course of 2017. Those returns will not be available to us for analysis purposes in a complete and comprehensive form until early 2018. That is why, at the moment, the most recent year we have is 2015 data. We would like more recent information ourselves for analysis, but the tax returns simply are not due to be filed on a timing basis that would allow that.

On the information included in the paper versus what is not in the paper, it is important to bear in mind that we tried to bring this paper out as quickly as we could. We tried to do the analysis, in some cases on provisional data, and we published the paper in April. What we always do at this time of year is publish a series of more detailed data tables that provide much more information and more breakdowns of corporation tax, the breakdown of companies by the income earned, the reliefs, and the breakdown of different reliefs by income earned. We have much more information that is publicly available. It is on our website. We have no problem with providing the committee with links to where that can be found if there is a difficulty in accessing it.

With regard to the Deputy's particular comment on trading profits, he is correct in his interpretation. As he knows, table 2 in the paper shows the trading profits by sector in 2015 and 2014. The year 2015 is the most recent we have. It shows the percentage and absolute increases in trading profits between those two years. I am not sure if it is in the paper, but I think the Deputy mentioned non-trading profits as well. Non-trading profits in 2014 were €2.45 billion - €2.5 billion, basically.

Some €2.5 billion in non-trading profits.

Dr. Keith Walsh

In 2014, and in 2015, the figure was €2.1 billion.

What was the figure for total manufacturing and non-manufacturing trade profits for 2015 and 2016, if Dr. Walsh has it?

Dr. Keith Walsh

We do not have figures for 2016 and will not have that information until this time next year. Trading profits for 2015 were approximately €140 billion.

Some €140 billion?

Dr. Keith Walsh

A total of €142 billion to be precise, €55 billion of which was manufacturing.

A total of €55 billion was manufacturing.

Mr. Gerry Howard

I referenced at the start of my talk that we had included a more extensive report than Dr. Walsh showed there. These details are in that paper-----

Mr. Gerry Howard

-----and are publicly available. We can send on the report.

Does that answer the Deputy's question?

Yes. That is the opening gambit, as it were.

It was pretty comprehensively answered, I think.

Yes, but to me, it is telling that it is not shown here. I have difficulty getting these up-to-date figures.

However, they are going to supply them to the Deputy.

I appreciate that and thank the Chairman for his help. The figures were not presented initially, and to my mind the most important thing is how much profit is being made. Am I correct - to confirm for the public, who may be interested in these things - that profits are up considerably? Is that right? Yes, very considerably. Profits are up by percentages a good deal in excess of wages, for example.

Mr. John McCarthy

The Deputy is right-----

Dr. Keith Walsh

I would clarify that trading profits are up, but that non-trading profits are actually slightly down in 2015.

Non-trading profits, but the vast bulk of profits-----

Dr. Keith Walsh

Are trading profits.

-----are trading profits and they are very considerably up. It is an upward trend. The percentages of increases are well outstripping wage increases over that period. Would that be fair to say?

Mr. John McCarthy

With one caveat. I think what the Deputy is essentially talking about and where he is coming from is how GDP is allocated between profits, between the onus of capital and labour.

Mr. John McCarthy

Profitability is growing faster than compensation of employees, so the labour share of value added is falling, but it is not solely wages that need to be incorporated into the analysis. The compensation of employees is the wage bill.

Employment rose by 10% or 12% which will also feed into the wage bill. The number of employees is up as well as wages. The Deputy is absolutely right in his net point about 2015 but not so much about 2016 because trading or total profits were up by 7%. Compensation of employees was also reasonably strong last year. Employment growth was about 2.9% and wages about 2%, so 2015 was an anomaly. There was a big increase in the profit share relative to wages. In 2016, that gap was not as large.

There is still a gap.

Mr. John McCarthy

There is still a gap.

What I am trying to get at, because I think the public is owed this information, is that profits are going up very considerably and are consistently outstripping increases in remuneration for workers. That bears out what many of us see as a recovery for the few rather than a recovery benefiting the many. That is my point.

Mr. John McCarthy

There has been a substantial increase in the level of employment. For every ten jobs lost during the great recession, seven have been recovered.

No one could possibly dispute there has been increased employment, so we will take that as read.

On that figure of seven jobs having been recovered, at what wage level are they in comparison with the ten that were lost?

Mr. John McCarthy

It probably differs across different sectors. I do not have an aggregate figure. I could probably say the hiring wage has fallen a little bit. In other words, the people who are coming in are coming in at a slightly lower wage than they would have come in back at the height of the bubble. At the height of the bubble, people were getting €100 an hour and it was completely bubble territory.

Mr. McCarthy said the gap in 2016 was not as great. What was the figure he gave me for 2016?

Mr. John McCarthy

I am working off the top of my head. I said in my opening statement that profits were up by 7%. Employment rose by 2.9%. We do not have figures for earnings per capita yet. They will be published in the national accounts in July and will probably run at somewhere between 2% and 2.5%. Off the top of my head, the wage bill probably rose by between 5% and 5.5% and profits by 7%. There have been slightly stronger growth rates for profitability. The point the Deputy is making is correct. In 2015, profits rose much more.

It is not the wage bill I am concerned with. I am concerned with how profits are doing versus how wages are doing. That is what I am interested in. Even in 2016, when Mr. McCarthy is saying it is slightly less, the gap is between 2% for wages and 7% for profits.

Mr. John McCarthy

No.

That is what Mr. McCarthy just said.

Mr. John McCarthy

No, it is the wage bill that is important, not just wages per capita.

For workers it is the wage that is quite important.

Mr. John McCarthy

The same applies to a firm, because some firms will go out of business, some will not make any profits and some will make ginormous profits.

The companies making ginormous profits will definitely not be heading out of business any time soon. From the latest available figures, we have €142 billion and €7.4 billion paid in tax. What is the tax paid as a percentage of gross trading profits? It would be useful for us to have that figure.

Mr. Gerry Howard

We were to come back with the effective tax rate figures. We have not calculated them and I would prefer not to calculate them here because we have to make sure the figures are correct.

There are about five different calculations of effective tax rate. I could work it out myself but I think the figures should be provided for the tax paid versus the gross manufacturing and non-manufacturing profits and what one is as a proportion of the other.

Mr. Gerry Howard

We can let the Deputy have the figure. There is material on our website that would help the Deputy do that calculation. We only have it for 2015 because we do not know what the profits for 2016 are yet. We will only find that out at the end of this year and towards the start of next year for the reasons Dr. Keith Walsh went through.

Mr. Rónán Hession made the point that we do not have that many allowances. That is somewhat debatable. It is certainly the case that the amount of taxable income that can be written off by the allowances that do exist is pretty extraordinary. Mr. Howard seems to be saying, if I understand it correctly, that many of the companies that account for much of the profits and allowances have moved from writing down their taxable income via paying patent royalties to themselves or other subsidiaries of their group, that is, to themselves, to getting allowances on the basis they have intangible assets which benefit from the machinery and capital allowances. Is that correct?

Mr. Gerry Howard

I would not put it like that. There are still businesses that continue to pay royalties. There will also be some businesses that claim capital allowances. It depends on what decisions are made about whether to claim the costs of the intellectual property they use as a capital investment if they decide they will purchase it and use it as a capital asset or to continue to pay royalties. There will still be businesses that are paying that.

I do not understand why Mr. Howard is being so cautious about saying that. The graph provided shows there was an absolutely extraordinary jump from 2014 to 2015; the intangible assets benefiting from the plant and machinery capital allowances jumped from €2.6 billion to €28 billion in one year. To me, the extent of the allowance is absolutely mind-boggling.

Can Mr. Howard give even a general explanation for it?

Mr. Gerry Howard

I will be careful because I do not want to identify particular taxpayers. I need to be very cautious because we are talking about a relatively small number of taxpayers so I do not want to comment.

Will Mr. Howard give an indication of why something like this occurs?

Mr. Gerry Howard

There are two choices when a business is using intellectual property. Much of the research and development work is not done in Ireland. Much of it is done in other countries such as America and France. If a company wants to use it in its manufacturing process, it pays a royalty to the person who has developed the intellectual property. There will be real costs in terms of researching and developing a new product and in creating the intellectual property. Those real costs have to be paid for and they are a cost to the business. They are no different from any other cost of a business. The business can either pay the royalty or purchase the rights to that intellectual property outright and then claim a capital allowance against it.

I have to be honest and say I understand Mr. Howard is under some constraints but businesses did not develop a whole lot of new intellectual property overnight. What they actually did is an accountancy exercise where instead of paying themselves royalties they relocated the intellectual property here and instead of avoiding tax by getting the allowance on royalties, they now do not pay tax by getting the allowance on machinery and capital allowances on intangible assets. That is what they have done. Let us be absolutely honest. It is part of the aggressive tax avoidance of these companies. That is really what it is.

Mr. Rónán Hession

The Deputy referred to my earlier comments to Deputy Broughan. When I was talking about reliefs I was not talking about capital allowances.

The capital allowances we are talking about are the tax version of depreciation. Any asset one has will be depreciated in one's accounts according to accounting standards. The way tax calculations are done means that, rather than recognising this as a depreciation, it is provided as a capital allowance. Therefore, if one did not have capital allowances, one would effectively be treating the asset at an inflated value above and beyond what is in the accounts. To explain that point-----

When we are dealing with intangible assets, we are dealing with a whole new category - let us be clear about this - and a category that, in my opinion, these companies are exploiting to the nth degree. I believe that when a particular heading allows for allowances to jump by a factor of more than ten - from €2.6 billion to €28 billion - we need to know exactly what is going on.

Do the witnesses have an answer to the Deputy's question?

Precisely what is going on?

Mr. Rónán Hession

A precise answer would be company-specific and, as Mr. Howard has said, there is a limit to what we can say about that. In the general picture, if very large assets are coming into the country, that will be reflected in a very large figure for depreciation in the accounts before one even gets near tax, so-----

Can the witnesses even dispute what the Deputy is saying?

Mr. Gerry Howard

There are two aspects of this. First, if one purchases in this capital allowance, one's profits will also go up. There will be a matching increase in profitability because there is this new very valuable asset and, therefore, one will own the income from it. The income from it will no longer belong to the person who-----

I am probably out of time but-----

The Deputy is very definitely out of time. I have been very good to him.

I just wish to comment that all of these, particularly where there are jumps in the amount of taxable income that can be written down under this heading, need to be, by our committee specifically, examined forensically and we need to know more than we currently know about what is going on here. There is a real problem regarding our ability to scrutinise what is happening under these headings on the basis of the information we are getting.

Finally, can the witnesses say anything about what we can know or do not know about capital gains? What allowances or taxes are being lost or revenues forgone in the area of capital gains, given the whole movement in the property sector over the past year or two? What can the witnesses tell us about that?

Today is focused on corporation tax. I have given the Deputy a lot of latitude-----

Capital gains come under this, do they not?

Mr. Gerry Howard

I cannot comment on that, but there was one question the Deputy asked me about the effective rate of tax. I had not realised this, but the effective rate of tax is detailed in the full report we issued in our annual report. Our provisional calculation for the effective tax rate for 2015 is 9.8%, which is marginally up on the effective rate calculation we did for 2014 of 9.7%. This is in the full report that we will give to the committee.

That is not the figure I was looking for.

The witnesses will have to find a way to answer questions which cannot otherwise be answered because they may betray specific details about a specific company. What the Deputy raises is legitimate. The witnesses will need to find some way to provide the information to the committee without disclosing those details.

Mr. Gerry Howard

That is what we would like to do. We want to be of assistance to the committee in its deliberations. That is why I was trying to talk about the general position to explain what is going on. As I said, the allowances here for intellectual property are no different to the allowances in many other jurisdictions. What we are talking about here is a common process regarding these intellectual property assets. They are allowed normally for tax purposes, the same way any other expenditure will be.

I call Deputy Dara Calleary, who has been patient, and Deputy Burton.

The explanation for the surge in revenue in 2015 is still very light. This was part of a sequence of events that caused tremendous reputational damage to the country in terms of leprechaun economics and the witnesses have only really accounted for €200 million of the surge in the context of companies that were able to use losses previously, yet there was a €2.3 billion surge. Given the reputational damage done and the fact that the Department scrambled to give an explanation at the time, is there a better sense that the Department will be able to predict future surges?

We have had this discussion before. Surely lessons should have been learned from the middle part of the last decade when the Department was not able to predict surges then. Here we are in a growing economy, in terms of taxation receipts, and we have a very weak explanation for the surge and for the Department's inability to predict it was coming.

Mr. John McCarthy

I have been clear, as have my colleagues in Revenue, that the surge in corporate tax was due to a massive increase in profitability. My colleagues and I mentioned it in our opening statements. After we leave aside capital allowances, profitability is up by approximately €20 billion. If we take a 12.5% effective rate, it works out at €2.5 billion. If we take a 9.8% effective rate, it is close to €2 billion. It went up by €2.3 billion. I have been absolutely clear it is increased profitability. The increase in the corporate tax base, that is, corporate profitability, drove the increase in corporate tax in 2015.

I also stated it appeared to be a one-off level shift in profitability due to various factors. I cannot rule out that we could get a one-off or a repeat of that. This is due to a very small number of companies. The macroeconomic models which we use, and which are good models, work in normal times but no one can predict when we might have a small number of companies onshoring intellectual property. This is company-specific information. We did not even have it from the Central Statistics Office, through no fault of its own, in its provisional set of accounts. It is only when it went through the more granular detail, which it does once a year in June and July, that this became available. We can never predict this will not happen again. We can never predict it will not be offshored. The 26 could be -26 if the small number of firms were to bring this IP elsewhere. I have outlined the reasons for corporation tax.

Mr. McCarthy spoke about a small number of firms. The top ten payers account for 37% of corporate tax receipts. How many of them are US-based companies?

Mr. John McCarthy

I have no idea and I am not sure if my colleagues could give out that information.

Mr. Gerry Howard

A large portion of it is foreign direct investment.

In the context of that large proportion, has the Department done an exercise on the impact of President Trump's proposed corporation tax changes on that base and on those companies?

Mr. Rónán Hession

Speaking from the Department's point of view, we do not have company-specific information. We are looking at what would be the implications of the Trump proposals, such as they are. We did not get lot of detail in the announcement. It was four very brief bullet points on corporation tax reform, including indicating a move to 15%, and sentiment in the US is this would be hard to achieve; a move to a territorial system, and the devil will be in the detail there; and a once-off repatriation, which would not affect our base. The most significant thing about the Trump tax reform proposals was they did not mention a border adjustment tax. If this were introduced, it would be a significant re-engineering of the US tax system with implications for everyone. It was in the original House Republican proposal. There was speculation it would be included. Public comments by President Trump, such as they are, have been quite ambivalent about it. It was interpreted as quite a significant omission from the announcement.

We continue to do our own analysis. We have met various staffers and other players in the US. The Minister, Deputy Noonan, was there and met the outgoing Secretary of the Treasury, Jack Lew, and members of his team.

We will continue to do our analysis. There is a limit to how far we can go with that without seeing the detailed proposals. In broad terms, it seems unlikely that they would go to 15%. We think a tax rate cut is a possibility, and probably somewhere in the low 20s is more achievable. From an Irish point of view, we are not necessarily worried about a tax cut of that order. With regard to the once-off repatriation, these are US profits and do not affect our base. If anything, it would clear the air about there being massive profits sitting offshore on the part of American companies and which are awaiting repatriation to the US.

We have seen some interesting analysis from some of the academics. Professor Ron Davies at the ESRI, for example, has done some work to show that once-off repatriation or even a rate cut could boost FDI figures. There was a once-off repatriation in 2004 where the money was brought back at quite low rates, approximately 5.5% compared with the 8.7% or 10% that are talked about now. The FDI figures for Ireland increased afterwards. This is not that surprising if one thinks about it from a common sense point of view. All of a sudden these companies have all this money available to them, so they invest it more or less in the pattern in which they have invested it up to now, which would include an FDI component. We are alert and watchful then, and we are doing what analysis we can. When the announcement came out, everyone felt a little bit starved of detail, other than the omission of a border adjustment tax. We will watch what comes out. The legislation will be important.

One of the biggest hits to our corporation tax preparation last year was the decision in the Apple case. Where are we at with that at the moment? Has the money been put into the holding account or are there negotiations under way on that?

Mr. Rónán Hession

The discussions are still ongoing with the company. It is very complex. While the Commissioner has spoken about this publicly, the Commission appreciates that this is complex. This is still ongoing with regard to the details because it involves a very large sum of money. Ireland is obliged to collect the money in the meantime, however, and that will happen. The company is co-operating and we are also getting good co-operation from the Commission. That is ongoing. After that, it will be into the court process and we will be working to a court timetable. It is likely to take several years, however, before this court case is resolved.

The money has not been handed over yet?

Mr. Rónán Hession

No.

Will it be this year or next year?

Mr. Rónán Hession

I am not in a position to say. I am not directly involved in negotiations. My understanding is that they are proceeding apace but the matter is complex.

How does the co-operation of the company that Mr. Hession mentions manifest itself?

Mr. Rónán Hession

There is regular contact with the senior executives of the two Apple companies concerned. There is also close engagement with the legal teams when it comes to thrashing out the details of any contracts or legal formalities. This is unprecedented in state aid terms. This is by several magnitudes far bigger than anything else that has ever been done. There are also some unusual features to the Commission decision, for example, regarding the ability of other countries to make claims. This complicates matters. Everything is progressing and it is an absolute priority for everyone concerned. There is complexity but also close co-operation. It has not been slowed down by difficulty in relationships, if that helps answer the Deputy's question.

I thank the witnesses for the information today. I would like to make a comment about the layout and display of the information. I do not know if it is because this committee is new that the witnesses have invented this presentation especially for it. I would like to make a suggestion, however, and I also say this to the Acting Chairman and to the secretariat. It is very unusual to get financial information, certainly even in the public sector, without getting the preceding year's figures for at least one but very often between three and five years beforehand in order that one can see the trends with the current year's outcomes clearly highlighted. Given that this is the public service, there are also profiles done of the expectations for the current year. I appreciate Dr. Walsh's point that those figures will not be available until 2018-19.

It would be very helpful to have last year's figures and a summary of three to five years before that. With current year figures, we could have the percentage increase or decrease that is represented. Perhaps a section would need to be in a different colour so as to differentiate the profiles of the various sections. That would allow us to be a little more grounded, particularly somebody like me. I find it difficult to follow some of the figures. The document looks like a Mondrian painting and I congratulate the Revenue Commissioners and whoever drew it up on its attractiveness. It is very nice.

It is the one on page four.

A review was specifically requested on the corporation tax receipts of 2015 so I do not know if we can blame the officials.

I know that but it is very hard to judge 2015-----

-----unless there are comparisons and different considerations. This is very advanced compared with the Central Statistics Office, CSO, and the Survey on Income and Living Conditions, SILC, which are pretty much in the dark ages. It is a survey of 6,000 people one and a half to two and a-half years in arrears. It means all the data on poverty in Ireland are a minimum of two to three years old at a time when we are coming out of recession. The witnesses are much better than the CSO, to be honest. It is a problem for everybody as we are trying to ground where we are. Perhaps the witnesses might help us in that regard.

Will the officials do that now?

Dr. Keith Walsh

Perhaps it is the same point as I mentioned to a Deputy earlier. For today's presentation, we were asked to focus on 2015, as was pointed out, and the paper we published in April of this year had the main purpose of focusing on increases in 2016 compared with 2015, so there is a bit more information there. The paper the previous year was also a year-on-year comparison. We also publish a significant amount of information on our website. Over the past number of years we have done much work and the Deputy may know we used to produce what was called the Revenue's statistical report. As the name suggests, this was a paper report that became a PDF report. It was kind of a once-off document that we published once per year when we had all the data together. It was a static document.

In the past few years we have moved the report online, where all the data are interactive and more dynamic and we update it more regularly. What we have online includes much of what the Deputy is seeking, including spreadsheets and PDF documents with trading results, credits information and the cost of various measures to the Exchequer. It is there over multiple years and for most of our information it is there over a period of five years or so. Data from earlier years are available.

We have put much effort into trying to put our data out there and making it more open and accessible, as we are encouraged to by the Government's Open Data initiative. In the past few months we have set up a mailing list so if someone is having difficulty finding our sources, we can subscribe that person to a mailing list and at the end of every month or quarter we send a email indicating we have just published or updated information, with a link to particular tables etc. We would be happy to add anyone to that.

The members of the committee might be included.

Dr. Keith Walsh

If anybody wishes to be included, they can email statistics@revenue.ie and we will include him or her on the mailing list.

It would be terrific if the secretariat could be included as well.

With due respect, the witness is spending a very valuable afternoon of his time here. I know the Revenue Commissioners are pressed for time. I am just detailing what would be helpful and perhaps we could have it two or three days beforehand. We are not resourced on this committee and it is brand new. The amount of information we can get is less than what has been my experience in other committees. As the committee is in a start-up stage, I am trying to be helpful.

Mr. Howard spoke about the effective rate being close to 10%, if I understood him correctly. I appreciate this is probably all available.

The data on page 7 of 8 are about the contributions to employment and employment taxes. While I have stated to Mr. Howard previously that these data are important and useful, could we have that in comparative tabular form? Corporation tax is a critical area, and I will comment on that, but the employment content, the investment content and the PAYE, universal social charge, USC, and PRSI contributions, which are €11 billion, are very significant and some comparatives would give us a sense of volume growth or decrease. However, that is very helpful in understanding the figures.

When Mr. Howard was before the committee previously, we had a discussion about losses being carried forward. In various elements of the report there are indications of very significant losses being carried forward. If I read the report correctly, approximately €2.16 billion of corporation tax was forgone in the year in question as a consequence of the utilisation of losses carried froward. Mr. Howard told me last year, and I do see an update, that in terms of the value of the losses as opposed to the gross losses, there were accumulated losses of €15 billion, over €9 billion of which was in the financial services sector and approximately €400 million in the construction industry. I do not have the same comparative figures for today but I would like to see them.

To deal with the €9 billion in the financial services area, which I believe is under the heading Financial and Insurance Activities - the pink area on the chart on page 3 of 8, I find it odd that the actual contribution in terms of the financial services sector is relatively small. These are just the trading profits. I would like to see comparative figures. I do not know whether the manufacturing is down to construction and so on taking such a great leap forward. I find it hard to read that particular chart.

To revert to Mr. McCarthy's earlier comment, we now have a huge number of banking companies coming into enormous profitability. From those statistics, the two so-called pillar banks, which I believe are each earning profits of over €1 billion a year, have carried forward many losses, therefore, they can choose when they will make any contribution to corporation tax. In terms of Mr. McCarthy's comments about stability, would it not make much more sense to do a copy of the minimum effective income tax in respect of higher income earners regarding corporations whose profits go above, say, €100 million? Once they go above that, they would have to pay a minimum effective tax rate, notwithstanding the fact that in Irish law and the law of most other countries it is possible and understandable that people can carry losses forward for various reasons such as to start out again.

Mr. McCarthy spoke about stability and the debt ratio, that is another way of approaching stability. I argued for the introduction of the minimum effective income tax rate for higher earners, and that has been quite successful. It is one of the reasons that for higher earners other than higher earners who are non-resident for tax purposes in Ireland, their contribution is no longer 0%, 1% or 3% and has started to normalise. Has any modelling been done on implementing such a minimum rate? I understand the reason stability, correctly, is an objective.

Given that the banks are moving into significant profitability, a huge amount of tax will be forgone and postponed over a long period.

Who will take those questions?

Mr. Rónán Hession

I will make some general comments and if any Revenue colleagues have anything to add, they might speak after me.

This is an issue that has been raised previously in the context of the Finance Bill and the discussions about the use of losses. With a significant amount of losses, we do not have a provision for a minimum payment. In terms of the treatment of losses and their being carried forward, we are in line with international practice.

In terms of the financial sector, the Deputy will be aware of the changes made for the pillar banks a number of years ago whereby they were limited in their use of losses. They are also subject to the bank levy to ensure there is a-----

Let us be honest, that was when they were still on their knees, to so speak, and it was meant to be a stimulus. I am asking about now, not then.

Mr. Rónán Hession

It is a policy question for Government as to whether there is a preference for losses to be worked through as part of the business cycle. Corporation tax is not an income tax; it is a profit tax. It is different in that respect.

I do not agree. It is a stream of income which is identified legally in a particular way. In that sense, it is a different type of stream of income, just as a farmer or a landlord has a stream of income. The principle underlying it in taxation terms is that it is a stream of income and, as such, it is possible to address potential changes. From the point of view of this committee, we are looking at the budget going forward. Mr. McCarthy made a trenchant statement about the debt ratios the Department prefers. Politically, I am extraordinarily conscious of the fact that this country does not have a proper public transport system. We have not finished the roads infrastructure. We need to invest in capital expenditure. I understand what Mr. Hession is saying about stability and avoiding the risk of another crash. However, this committee has to give information and opinion on the budgetary process and getting the information cuts to the heart of it so we can then make an observation on it.

Mr. Rónán Hession

To some extent, the Deputy is drawing me into a policy question so I will be delicate about how I handle it. My point about it being a profit tax is that it reflects the business cycle. If we tax the profits, we do not tax the losses. The losses are offset. From a stability point of view, it is something companies would expect in the context of their long-term planning. If they make losses in a given year, they would need certainty that these would be offset against future profits. Otherwise, we are just taking a point-in-time view of the tax as opposed to recognising that there will be a business cycle. From the point of view of certainty, that is what companies in Ireland or internationally expect to see.

When there are very large losses in the system, particularly recovering from a financial crisis, it is completely legitimate to have a policy debate about how that should be handled. It is a policy choice whether the right thing for the country is to let those losses be claimed over a longer period and collect some tax in the meantime or to give companies the ability to use those, as Mr. Howard said, within a group or whatever. That is a legitimate policy debate.

From my point of view, the use of losses in this way is typical in our comparative jurisdictions. It reflects the business cycle. In terms of the international reforms, whether we see them at OECD or EU level, there is no strong preference coming from countries at that table to handle losses differently or to try to push that as an issue. That is not to say it cannot be discussed in Ireland or that it may not be the right issue for Ireland. If I were asked about it by the new Minister, my sense would be that there is an orthodoxy to the way we approach it currently which provides certainty to business. That is a very valuable message in terms of ensuring they know where they stand across the business cycle. I am not sure if my Revenue colleagues have anything to add.

With due respect to Mr. Hession, I am talking about two particular classes of business. I am referring to banks and financial institutions, once they start to become reasonably profitable again, producing some taxes in terms of corporation profits tax.

Mr. Howard might tell us the scale of the build-up of losses and the value of the build-up. It is enormous.

Mr. Gerry Howard

We supplied the committee with figures last year. We have figures for this year also and I will go through them. As at 2015, with regard to financial and insurance activities, there were losses of €119 billion. As my colleague, Mr. Walsh said, we estimate that approximately €40 million will never actually be utilised. The other figures are: administrative and supportive service activities, approximately €36 billion; information and communication, approximately €10 billion in forward losses; construction, about €9 billion; manufacturing, about €8 billion; transport, about €8 billion; wholesale and retail trade, including the repair of motor vehicles and motorcycles, €7 billion; and all others, about €10.5 billion. This gives a total of €280 billion in forward losses as at 31 December 2015. Of this, we were estimating that at least €40 billion was unlikely to be used.

Elsewhere in Mr. Howard's notes he says the losses were such that I believe over €2 billion was availed of in 2015.

Mr. Gerry Howard

Was availed of.

I presume 2015 was possibly the first year in which the banks had returned to major profitability.

Mr. Gerry Howard

We probably would not comment on that, but-----

From what we read in the newspapers. It would be helpful to us if we could examine the policy options for the budget, bearing in mind Mr. McCarthy's remarks about stability which are very important. The implication of his remarks is that we will actually be starved of capital investment, unless there is significant development of PPPs off balance sheet, about which EUROSTAT seems to be becoming very doubtful. It is considering it all again with a Germanic eye.

Mr. Gerry Howard

I believe we gave members figures last year for the losses that had been utilised in 2014. We can give the same figures for 2015. Obviously, we will not identify individual taxpayers, but we will give the Deputy whatever else she wants.

Mr. John McCarthy

To address the last point, the Deputy is absolutely correct in that clearly there are infrastructural shortages in the economy. My concern, however, is about what would arise if we were to try to address them through deficit-financed expenditure which would have been satisfactory when the debt ratio was 25% of GDP, as it was in 2007. When the debt ratio on a GNI* basis is probably in excess of 100% of GDP, it is appropriate and cautious not to finance capital expenditure through deficit-financed expenditure. This begs the question as to how it might be addressed. There is some scope, more within the remit of the Minister for Public Expenditure and Reform, to shift between current and capital expenditure or to pay up-front through higher taxation, which would be a policy choice. It would be a bad idea, however, given the existing level of public indebtedness, to try to address it through deficit-financed expenditure. There are other mechanisms, including through the EIB, as mentioned by the Deputy. That is certainly a possibility, but I refer to keeping the expenditure off balance sheet.

Mr. McCarthy's observations are very important because it is a very tight definition. We will not finish too many roads to Sligo and other places around the country. Perhaps the delegates might describe what the implications will be in the run-up to the budget. The fact of the matter which is part of a wider argument in the European Union is that countries can borrow, effectively, at a rate of 1%. PPP rates, although they have come down, are a lot higher.

We have a growing population and multinationals have an appetite to invest in Ireland but we have really serious capital constraints. The delegation might expand on how we can get out of this bind as we approach the budget.

I would like it if Mr. McCarthy came to another meeting to address the views concerning infrastructure. We are actually reviewing the capital plan.

We are talking about that also. We are also listening to the chambers of commerce and practically the whole country. Understandably, they have one mantra, which is about infrastructure.

They refer to housing, broadband and other non-luxuries for which we cannot wait. It might be useful for the Acting Chairman to allow this to be thrashed out again in the context of our work on the capital plan.

Can I ask another question, also on future information? Obviously, all of this could be even more severely impacted by the risk factors associated with Brexit outcomes. I am sure the delegates have been having conversations in this regard in detail. It would be helpful if they outlined their thoughts on this, alongside their more detailed thoughts on capital expenditure.

The committee will be issuing its report, overview and recommendations on the budgetary process before the budget.

Mr. John McCarthy

I accept what both Deputies have said. I did say at the outset that this is not within the remit of the Department of Finance. The capital plan, which Deputy Calleary mentioned, is being undertaken by the Department of Public Expenditure and Reform. The only way in which the Department of Finance is involved is in respect of the question of how this is financed and what it means for the debt ratio, the deficit and so forth. That is where I am coming from in overall terms. We need to ensure-----

Mr. McCarthy might not have his own Department by 7 p.m.

Mr. John McCarthy

Again, I have not got that memo.

There are many memos coming Mr. McCarthy's way.

I have a brief statistical question. It was stated there were over 10,000 companies covered by the large cases division. Could I have a breakdown of their effective corporation tax rates? I acknowledge there may be a difficulty given that specific companies cannot be identified. When the story broke about Apple, the point was that its effective tax rate, irrespective of how it was calculated, was pretty low by anybody's calculation. What is the position on the large cases division companies, which account for a lot of the activity? Presumably they are likely to have more tax strategies than many other companies. Could we have a breakdown of the effective tax rates of companies of different sizes covered by the large cases division?

I request that the delegates, in providing us with the figures on the effective rate, give us the figures for the various calculations. The delegates know precisely what I mean. There is the implicit rate, the aggregated version and all the other versions, which vary radically. Mr. Howard stated there was an effective rate of 9% in 2015. I calculate €6.8 billion paid as a percentage of €142 billion amounts to approximately 5.5%. I have not done the exact calculation. The delegates know that certain calculations would result in this figure as opposed to 9%, which involved a different means of calculation.

That is my first request and I ask the witnesses to confirm that it can be done.

Mr. Gerry Howard

We will explain how we worked out our-----

I do not want an explanation of how it was done. I want the different calculations provided.

Dr. Keith Walsh

What we have published, which we can send on again if there are difficulties identifying it on the website, is a corporation tax calculation. That breaks down all the different types of profit, trading results and all of the items that are netted off it. One can make one's own calculation, based on whichever effective-----

That is actually not what I want. The Department of Finance prepared a paper on the corporation tax rate. It is a very good paper which explained that there are at least four different ways of calculating the effective rate. That paper showed that one can get, for the very same year on the basis of the same figures, a variation in the effective tax rate. The rate can be around 6% if it is the implicit rate calculated in the way that the European Commission does such calculations. The rate can be around 11.9%, if the Department of Finance does its calculations. There was even an amazing calculation which had the rate higher than the nominal rate of 12.5%, which was a pretty extraordinary feat but nonetheless, somebody managed that one. What I would like, for all of the relevant years and particularly for 2015, is the different calculations so that we have the range of calculations of the effective rate. Is that possible?

Mr. Gerry Howard

We will try to satisfy the Deputy but-----

Dr. Keith Walsh

I am fully aware of the paper to which the Deputy refers. It was prepared by Kate Levey and Seamus Coffey. We have calculated our effective rate of 9.8% based on the method recommended by them after they reviewed all of the different methodologies. We are not able to reproduce all of those different methodologies because they do not all use Revenue data. Some use data from the CSO and the Bureau of Economic Analysis. From Revenue's perspective, we are only in a position to calculate effective tax rates based on our own data.

I just want to point out to the Acting Chairman and the committee that this is a real problem. We have a paper produced by the Department of Finance that shows that there are at least four different ways of legitimately calculating the effective rate. The figures produced vary very significantly. One can have what is considered a legitimate method of calculating the effective corporation tax rate which puts it at 4% or 5% alongside another method which puts the rate at 11.9% or even higher than 12.5%. That is a problem in terms of our ability to calculate what is actually going on. Frankly, it is doing the public a disservice to not at least show that there are different ways of calculating these things. That is my first point.

The graph that has been provided by the witnesses is very useful. As I understand it, the graph shows the increase or decrease in trading profits by sector for 2015 over 2014. Is that correct?

Dr. Keith Walsh

Is the Deputy referring to slide No. 3?

Dr. Keith Walsh

Yes, that is the percentage increase in trading profits within each sector. To take the one on the far right, for example, within the manufacturing sector trading profits in 2015 increased by 110%.

Dr. Keith Walsh

Yes, over 2014.

How far back could Revenue go in terms of its ability to reproduce that graph? Could it be done for 2016?

Dr. Keith Walsh

Not yet, no.

Would it be possible to provide us with the same graph for the previous ten years? Would that be a lot of work or-----

Dr. Keith Walsh

I am not sure if that exact graph is on the website but we can-----

This graph is not on the website.

Dr. Keith Walsh

We can certainly have a look at that. Five years might be the easiest but we can certainly see what is possible.

I must be honest that I find it difficult. The thing I presume the witnesses are referring to on the website is a paper which is not very readable and which was quite difficult to find. It is not as clearly set out as a previous manifestation which used to be available.

The witnesses are going to do this and have committed to coming back with five year data. On top of that, Mr. McCarthy said in his opening statement that the Minister for Finance has asked Seamus Coffey, chairman of the Irish Fiscal Advisory Council, to undertake a review of the sustainability of corporation tax receipts, and that report is due to be submitted to the Minister at the end of this month. The Deputy is asking legitimate questions, specifically his last few questions relating to the different bands. Does Mr. Howard want to come back in on that matter?

Mr. Gerry Howard

When we are working out the effective rate, we can only use Revenue data. We have no problem with explaining fully how we have calculated it. If people are using data other than Revenue data, we would not be comfortable using that as the source but we have no problem explaining the figures. If the Deputy has issues with the documentation, we will try to set it out better. Is that okay?

It is not really okay but we will see how we go from here. By the way, I do appreciate all of the witnesses' work, even if I am being a bit pushy.

Mr. Gerry Howard

We try to present as clearly as possible.

The parliamentary budget office might help us on this, whenever it is established. I thank all our witnesses for their attendance and contributions today.

The select committee adjourned at 5.30 p.m. until 4 p.m. on Tuesday, 20 June 2017.
Top
Share