Minister Noonan addressed the @IRLDeptFinance Tax and Economics Conference on
Enabling a Growth Friendly Tax System:
Department of Finance Tax and Economics Conference
19 June 2013
Opening Address by Mr Michael Noonan TD, Minister for Finance
Thank you very much Ann. Can I say at the outset how pleased I am to open this important event and to welcome you all. It’s great to see such a wide representation from a diverse range of communities of interest here including policymakers, academia, tax practitioners and social partners. I would like to particularly welcome our contributors from abroad; Pascal Saint Amans from the OECD; Gilles Mourre from the European Commission; Jonathan Shaw from the Institute for Fiscal Studies in the UK; Michael Hallsworth from the UK Cabinet Office and Professor Michael Devereux from Oxford University. I am sure the conference and the discussions will benefit greatly from their expertise and international perspective on issues around taxation policy as well as those of the other speakers including Professor Ron Davies from UCD and economists from my own Department and the Revenue Commissioners.
As you know, the theme of our Conference concerns “enabling a growth friendly tax system”. So I thought I would begin with the economy and briefly outline some key features of our current situation before turning to issues around economic policy generally before concluding with taxation policy as an instrument of economic policy.
Current economic situation and outlook
All of you are familiar with what has happened to the Irish economy over the past decade. But I am confident that we have started to get to grips with the situation. In terms of correcting our public finances, we overachieved on fiscal targets in 2011 and again last year. The Government remains firmly committed to reducing the deficit below the 3 per cent of GDP threshold by 2015.
The Government’s actions over the past two years have rebuilt the trust of the markets and of our European partners in our ability to manage our fiscal and economic affairs. This has facilitated the various agreements which this Government has negotiated since it came into office such as a lowering of the interest rate on our EU programme funding and an extension of maturities on lending from our European partners. Most notably, the success in restructuring the promissory note helps to underpin our longer term debt sustainability.
We have started to see the benefits of this disciplined policy approach emerge. Recovery – in the form of economic growth – began in 2011, and modest growth was recorded again in 2012. Ireland continues to attract inward foreign direct investment with the highest net job creation from this investment in a decade recorded last year. The unemployment rate fell to 13.7 per cent in May from a peak of 15.1 per cent in February last year. While unemployment remains unacceptably high, the signs of stabilisation are clear.
Economic Policy and Medium-Term Strategy
Looking to the medium term, it is clear that economic growth is the essential precondition to address the many economic challenges we face. To provide a focus and coherence to the various policy initiatives that the Government is pursuing to this end, my colleague Brendan Howlin, Minister for Public Expenditure and Reform, and I recently brought a proposal to Government to develop a medium-term economic strategy to cover the period out to 2020.
Our proposal, which has been accepted by Government, is for a strategy that sets the direction for economic policy for the period after the EU/IMF Troika programme. Put simply, the strategy will focus on how we can boost the growth potential and performance of our economy while at the same time reducing our elevated debt levels through a balanced budgetary position over the medium term. I want to emphasise that the strategy will be an integrated, whole-of-Government effort, which will draw on sectoral plans prepared under the aegis of other Government departments and complement the sectoral focus of the Action Plan for Jobs. It will aim to ensure that our policy efforts remain coherent and focused on implementation in a post-Troika environment.
Given the focus on growth and employment, I anticipate that key structural policy areas that will be considered include industrial and innovation policy, competition policy, labour market activation and skills policy and the whole area of access to credit. The question we need to ask is whether we can adjust the orientation of policy in these and other areas in ways that improve competitiveness and productivity leading in turn to increased economic activity and growth.
Of course tax policy – the focus of this conference – is a key policy instrument that will be used to achieve the Plan’s objectives.
Irish Tax Policy
In this vein, in each of my Budgets and Finance Bills, I have sought to use targeted taxation measures to promote sectoral economic development:
• in the hospitality sector through the temporary targeted VAT reduction;
• through targeted changes to both personal and corporate taxation including through the R&D tax credit scheme to attract foreign direct investment and encourage research innovation by indigenous companies;
• and to help stimulate small and medium sized business, including the agri-food sector, through initiatives such as the 10 point tax reform plan to help small businesses create jobs.
Of course, there are limits to how effective tax incentives can be and sometimes the costs can exceed the benefits. Some of you may have seen my Department’s recent review of the film tax relief scheme which I have now reformed to improve its effectiveness and value for money.
More broadly, I am also conscious that taxation can have harmful effects on economic growth and in particular the conclusions of the OECD in this regard that taxation of corporate and labour income rank as more harmful to growth than taxes on consumption and property. In writing the Programme for Government, we were conscious that high marginal tax rates on income can deter inward investment, entrepreneurship and employment.
The introduction of the Universal Social Contribution by the last Government created marginal tax rates on income in Ireland of 52% for employees and 55% for the self-employed. As will be set out in Brendan O’Connor’s presentation shortly, these high rates of taxation by international standards occur at relatively low levels - €41,800 for a 1-income family and €32,800 for a single person - below the average income. This means that for a working person on average income in Ireland, out of every extra euro they earn the Government takes more than half.
Taking this into consideration, and to incentivise the take up of employment, the Government has removed 340,000 low-paid workers from the Universal Social Charge, cut employers' PRSI on lower-wage jobs and dropped the commitments made by the previous Government to the Troika to further increase income taxes on low- and middle-income earners.
These policies are beginning to work as can be seen in the overall employment levels, which grew by over 20,000 in the 12 months to the first quarter of this year. Over this period, the private sector is adding about 2,000 jobs per month.
We are going to have to improve the levels of investment and job creation we have seen over the past two years if we are to achieve the Government's target of increasing employment levels by 100,000 jobs by 2016. With this aim in mind, we will continue to look further at the impact of taxes on income and work on our competitiveness and the functioning of our labour market.
At the same time, we must ensure that the better off make a fair contribution to the tax measures still needed to reduce Government borrowing down to sustainable levels. That is why we will also keep our commitment in the Programme for Government to reduce, cap or abolish tax reliefs and other tax shelters which benefit very high income earners. By broadening the tax and closing tax shelters by the rich, while avoiding increases in tax rates on income, I believe that we can strike the right balance in delivering both a fair and competitive system of taxation.
Over the past few years my Department has deliberately sought to increase its level of engagement with stakeholders, academics and the wider policy community in order to ensure that tax policy decisions have regard to a wide range of evidence and opinion.
Since taking office, I have supported the Department’s approach to policy best practice through nine separate public consultations on issues relating to tax policy on topics as diverse as VRT, film relief and R&D tax credits, to name just a few. We have also been evaluating the effectiveness of these schemes and I have published the findings of reviews of the property reliefs, the Jobs Initiative and the film relief that I mentioned earlier.
The Department of Finance economics and tax policy staff are increasingly also publishing articles and research on tax related policy issues as a means of generating debate and discussion and also increasing public awareness of tax policy issues.
I see this joint economics and tax policy conference today as another way for my Department to reach out so as to have a better informed public ’conversation’ about the future of tax policy in Ireland. This conversation will be all the more important and useful as Ireland moves to exit its programme of assistance.
Perhaps the most important single area of work over the last year in the tax policy area has been related to Ireland’s EU Presidency.
Throughout the course of the Irish Presidency of the European Council of Ministers, I and my colleagues in Government have prioritised files that will deliver on “Stability, Jobs and Growth” and an open, transparent and fair international taxation system is an essential prerequisite to this goal.
Countering Tax Fraud and Evasion
That is why during the Irish Presidency in the tax area I have prioritised files aimed at tackling tax fraud and evasion and aggressive tax planning and there have been some notable achievements in this regard.
In April I together with EU Tax Commissioner Semeta issued a joint letter to EU Finance Ministers (ECOFIN) Ministers urging action against tax fraud and aggressive tax planning identifying seven key areas.
And I’m very pleased to say that we have delivered.
In May, we brokered an ECOFIN agreement on aggressive tax planning and good governance – this was acknowledged by Member States as a significant achievement.
Importantly, the Council Conclusions recognised the fact that these are international tax issues that cannot be solved by unilateral action by individual countries and stressed the importance of coordination with the OCED.
A VAT anti-fraud package encompassing a Quick Reaction Mechanism to combat sudden and massive VAT fraud and an expansion of the Reverse Charge Mechanism has been a priority of the Presidency.
The package encompasses other important elements focusing on strengthening the VAT system in terms of fraud-proofing and the sharing of best administrative practice among national tax authorities.
The package will be submitted to the June ECOFIN meeting of Finance Ministers for political agreement. To illustrate the importance of preventing VAT fraud, in one area alone – VAT on emissions trading certificates, some estimates put the loss of VAT at up to €5 billion suffered over a number of weeks.
Automatic exchange of information between authorities is an essential tool in the fight against tax fraud and evasion and must be implemented to a globally recognised standard.
Significant progress was also made in May in working towards the widening the scope of the EU Savings Directive towards this global standard.
In addition, agreement was reached on a mandate for negotiating amendments to the savings tax agreements with Switzerland, Liechtenstein, Monaco, Andorra and San Marino to ensure equivalence of measures with the EU.
Responding to Aggressive Tax Planning
Ireland has a very strong track record of attracting multi-national companies of real substance to invest and create thousands of jobs in Ireland. Many of the large Multi-National Corporations (MNCs) are here for many years and see Ireland as an excellent base to serve their customer in Europe and further afield.
These corporations have set down significant roots in the Irish economy and the Irish Government will continue to take steps to enhance our attractiveness through investment in our people, investment in our infrastructure and our strong commitment to Europe.
Our competitive taxation system is, of course, an element of the Irish package and we remain committed to our competitive 12.5% tax rate.
Our taxation system is open and transparent and all companies in Ireland pay tax at 12.5% on their profits earned in Ireland.
Ireland’s tax regime is set down in statute and policed by our independent, and highly respected, Revenue Commissioners.
Of course, profits earned by these companies that are outside the scope of the Irish tax system are not subject to Irish tax. Incorrectly counting these profits as “Irish profits” is often the reason for the misleading analysis of the Irish taxation system and throws up very low effective tax rates. We can only tax profits that are liable to tax in Ireland.
Aggressive tax planning by companies is a major issue of popular interest at the moment. However, it is clear to us from our work at the forefront of efforts at European and OECD level that these issues cannot be addressed at national level alone - we need a co-ordinated international response.
The OECD’s Base Erosion and Profit Shifting (BEPS) project represents that response and BEPS will be the main toolkit of the global effort to tackle these issues.
The OECD’s report on BEPS will be presented to the G20 in July.
Ireland is taking an active part in the Base Erosion and Profit Shifting (BEPS) project of the OECD and we are committed to working with our OECD colleagues to find solutions to these international problems.
In this regard, I look forward today to hearing from Mr Pascal St Amans, the Director of the OECD Centre for Tax Policy and Administration, on the latest developments in relation to BEPS.
Finally, I would just like to thank all of the speakers for participating at today’s conference and to all of you for attending this event. I hope and expect that it will provide a very useful opportunity to exchange ideas on tax policy matters that are of critical importance to all of our citizens.