Michael Noonan was warned multinationals tax break would ‘backfire’
Peter O’Dwyer, Senior Ireland Business Reporter
June 5 2018, 12:01am, The Times
A tax break for multinationals, estimated to have cost the state billions of euros in recent years, was introduced by the government despite concerns from officials, The Times can reveal.
Michael Noonan, the former finance minister, raised the level of capital allowances on intellectual property (IP) assets from 80 per cent to 100 per cent at the end of 2014. The move allowed companies to shield more of their profits from corporation tax using capital allowances — tax savings on the purchase of assets.
Documents, obtained by The Times using freedom of information rules show that a senior official warned that a more modest proposal than the one ultimately introduced by the minister would reduce the tax bills of companies on IP assets to unacceptably low levels.
Paul Kealy, a policy adviser at the Department of Business’s tax policy unit, warned of the reputational damage to Ireland that could result from the change.
His comments concerned a suggestion to increase the cap on capital allowances from 80 per cent to 90 per cent. Mr Noonan went even further by raising the cap to 100 per cent.
“I disagree [with the proposal] on reputation grounds, this would reduce the potential minimum effective tax rate from 2.5 per cent to 1.25 per cent, as 1.25 per cent is too low and such a change could backfire,” Mr Kealy wrote.
The increase in the cap on capital allowances was highlighted late last year after the Paradise Papers leak showed how Apple moved large amounts of its IP assets to Ireland in 2015. As a result of Mr Noonan’s change in October 2014, the tech giant reduced its corporate tax rate to a nominal amount.
After the leak, politicians raised concerns that Mr Noonan’s decision could have cost the state billions of euros over three years, while Seamus Coffey, the Irish Fiscal Advisory Council chairman, estimated that Ireland was missing out on up to €850 million of tax revenue a year as a result of the higher cap.
Leo Varadkar said that the lost tax revenue was an “unintended consequence” of the government’s decision. Paschal Donohoe, the finance minister, reversed the change last year, taking the cap back to 80 per cent.
The tax revenue should be available to the state at a later date once the capital allowances expire. However, concerns have been raised about the potential for firms to leave Ireland or rearrange their corporate structure before the tax becomes payable. Politicians have also argued that the tax revenue is needed by the state as of now.
Separate documents obtained from the Department of Finance cast doubt over Mr Noonan’s decision to increase the cap to 100 per cent. However, in one draft submission finance officials warned: “Given the international tax environment, any overt accentuation of the tax treatment that applies to what is often highly valuable IP may attract international attention.”
The documents show that department officials asked Revenue to estimate the cost of increasing the cap to 85 per cent, 90 per cent, 95 per cent and 100 per cent respectively. The records also show that the minister was lobbied by a number of bodies, including the American Chamber of Commerce, to increase the cap to 90 per cent or 95 per cent.
Mr Noonan ultimately chose 100 per cent despite the records showing no evidence of this policy being suggested by outside bodies. The proposal was included in a draft policy document for the minister but the records do not show any evidence of it being suggested by department officials prior to its inclusion.
Pearse Doherty, the Sinn Féin finance spokesman, said the government must clarify the rationale for the decision and outline whether Mr Noonan was aware of the concerns of one of his senior policy advisers. “The FoI documents shed light on the motivations behind a move costing the state €850 million every year but it leaves many questions unanswered. Where did the idea to move to 100 per cent come from, even though it seems there was no demand for it from any side?” he said. A Department of Jobs spokesman said Mr Kealy’s comments were part of discussions during which different views were aired before a decision was taken. He added that the department’s policy suggestions were designed to increase Ireland’s competitiveness.
Mr Noonan did not respond to a request for comment when contacted.
In response to a query as to why the cap was raised to 100 per cent as opposed to the initial recommendation that it be raised to 85 per cent, a spokesman for the Department of Finance said the initial proposal was made “at the early stage of the decision-making process when a number of options were being considered”.
Apple did not respond to a request for comment.