Dáil Éireann debate -
Wednesday, 15 Jan 1975

Vol. 277 No. 2

Financial Resolutions. - Financial Resolution No. 8: Value-Added Tax.

The Taoiseach

I move:

(1) That with effect on and from the 16th day of January, 1975, section 10 of the Value-Added Tax Act, 1972 (No. 22 of 1972), be amended as follows—

(a) by the insertion, before subsection (3), of the following subsection:

"(2A) (a) The amount on which tax is chargeable by virtue of section 2 (1) (a) on the delivery of goods of a kind specified in the Fourth Schedule delivered in the circumstances specified in paragraph (b) shall be the open market price.

(b) The circumstances referred to in paragraph (a) in which a delivery is made are—

(i) that the person to whom or to whose order the delivery is made is a body of persons over whom the person making the delivery has control, or the person making the delivery is a body of persons over whom the person to whom or to whom order the delivery is made has control, or both the person making the delivery and the person to whom or to whose order the delivery is made are bodies of persons and some other person has control over both of them,

(ii) that the delivery is made in such circumstances that tax at the rate for the time being specified in section 11 (1) (c) is chargeable in relation thereto, and

(iii) that the consideration referred to in subsection (1) is less than the open market price.",

(b) by the insertion, in subsection (3) (c), before "paragraph (a)" of subsection (2A) or",

(c) by the insertion in subsection (9) (b), before the definition of "the open market price", of the following definition:

"‘control', in relation to a body corporate, means the power of a person to secure, by means of the holding of shares or the possession of voting power in or in relation to that or any other body corporate, or by virtue of any powers conferred by the articles of association or other document regulating that or any other body corporate, that the affairs of the first-mentioned body corporate are conducted in accordance with the wishes of that person and, in relation to a partnership, means the right to a share of more than one-half of the assets, or of more than one-half of the income, of the partnership;".

(2) IT is hereby declared that it is expedient in the public interests that this Resolution shall have statutory effect under the Provisional Collection of Taxes Act 1927 (No. 7 of 1927).

This resolution amends section 10 of the Value-Added Tax Act, 1972 by adding a new subsection, (2A) and by making supplementary and consequential amendments to subsections (3) and (9). The amendments will come into effect as and from tomorrow. The purpose of the amendment is to counter the tax avoidance practice, which the Minister referred to in his budget speech, involving sales between linked companies at artificially low prices of Fourth Schedule goods liable to tax at the 36.75 per cent rate. The amendment will substitute the open market price for tax purposes in such cases.

Mr. T.J. Fitzpatrick

(Dublin Central): I understand what the Taoiseach has in mind is manufacturers supplying to their subsidiaries at low artificial prices. Is that right? In his speech the Minister maintained that they will now be assessed at the market price. I am thinking particularly of deep freezers, refrigerators and televisions. What is the market price? I have seen these commodities being sold at anything under £100 after Christmas in the sales——

Mr. Crowley

Varying by 30 per cent.

Mr. T.J. Fitzpatrick

(Dublin Central): Yes, varying by 30 per cent. How will the Revenue Commissioners decide if this section will apply only to subsidiaries of a company manufacturing and assembling or will it apply to other traders as well.

The Taoiseach

I understand it will apply only to subsidiaries where there is a question of control between one and the other.

Mr. T.J. Fitzpatrick

(Dublin Central): If that is the case there is something in it.

Mr. Lalor

The Minister mentioned today that because of the possible loss of revenue it was desirable to take action at once. Accordingly he proposed to put this in this evening. This is a rather unusual situation on budget day. We have in this resolution and Resolution No. 9 major changes which are appropriate to the Committee Stage of a Bill and involve a great deal of teasing out. It would be more appropriate to deal with this amendment in the Finance Bill. In this Resolution we are amending the Value-Added Tax Act, 1972, which was very intricate legislation. Resolution No. 9 deals with two other amendments to this Act. The Minister explained the purposes of these three amendments and visualised a situation whereby there could be a gain to the Exchequer of £500,000 in 1975. If we did not have these two resolutions but instead it was incorporated in the Finance Bill, would we lose £500,000 or merely portion of that amount for the months before the Bill is passed? Why the urgency of these resolutions? Would it be possible for the Minister with the assistance of his Department and the Revenue Commissioners, to incorporate them in the Finance Bill?

Normally we do not have much discussion on Financial Resolutions but here we have two major changes for very little return. The Finance Bill will probably be through this House before the end of March. As I said, why the urgency?

The Taoiseach

The Deputy is right. It does not mean that the whole amount is lost. The Finance Bill normally takes two to three months to pass through both Houses. Because of avoidance, which was possible under the Act as framed, there is unfair competition between some traders and others. Those with linked companies, or who control subsidiaries, are in a position to take advantage, to a considerable extent, of their competitors.

Mr. O'Malley

The definition in section 10 of the Value-Added Tax Act, 1972, of "open market price", which is the relevant concept in regard to this resolution, seems to indicate that open market price for the purposes of this resolution means the price the commodity would fetch on the open market, presumably at retail level. This resolution is designed, it would appear from what the Minister said, to catch the situation where the manufacturer is allegedly selling at a lower value than its real ex-factory value to a subsidiary company which he also controls and which, presumably, would be a wholesale company. On the face of it, it would seem that by declaring the ex-factory price for the purposes of VAT to be the open market price, as defined in section 10, the resolution would have the effect of imposing the retail price on the commodity for the purposes of tax when it was leaving the factory.

If the resolution was simply confined to avoiding an anomaly or a possible method of avoiding the payment of full tax, what it should do is not refer to open market price but to a bona fide ex-factory value. It would seem that, instead of imposing VAT on a bona fide ex-factory value to which no one could object, it may well be that the VAT will be imposed on what in effect will be a retail price as defined in section 10 (9) of the 1972 Act.

The Taoiseach

This applies to a limited range of goods covered in the Fourth Schedule. The 36.75 per cent rate operates on a two-tier basis—at the manufacturing or import level and at the wholesale or retail level. Of the 36.75 per cent rate applicable at the earlier levels, 30 per cent is not subject to the normal VAT recoupment arrangements but is trapped in the price passed on to the next stage of distribution. When the manufacturers' or importers' price is fixed at an artificially low level, the loss of tax is appreciable even if at the retail stage the price is fixed at the normal market level. It has come to the notice of the Revenue Commissioners that the practice is developing of manufacturers selling at artificially low prices to their own subsidiary wholesale companies and so avoiding much of the tax.

Mr. T.J. Fitzpatrick

(Dublin Central): Is there any danger this will increase the price of these products?

The Taoiseach

It should not because then their prices would be above those of their competitors.

Ruairí Brugha

Would the Taoiseach define "open market price"? Does he mean the manufacturers' true price or the retail price?

The Taoiseach

The open market price is defined in the 1972 Act in relation to the delivery of any goods or the rendering of any services as the price, excluding tax, which the goods might reasonably be expected to fetch or which might reasonably be expected to be charged for the services if sold or rendered in the open market at the time of the event in question.

Mr. O'Malley

Would the Taoiseach not agree that that definition appears to mean the going, fair retail price at the time of the event?

The Taoiseach

What happens here is that the manufacturer or importer sells at an artificially low price to his subsidiary and, therefore, he avoids the appropriate payment of tax although the ultimate retail price is the same as it would be because the other part of the percentage is added on.

Mr. O'Malley

I accept that he sells at an artificially low price to his wholesaling subsidiary and it is necessary to rectify that situation but is it not being rectified in a way that is quite unfair because the price now for the purpose of VAT will not be the ex-factory price but will be the retail price?

The Taoiseach

I think it is the normal ex-factory price.

Mr. O'Malley

The definition which the Taoiseach read out says:

The price which the goods might reasonably be expected to fetch in the open market at the time of the event in question.

The open market seems to suggest availability to the public at large, that any potential purchaser can come in and buy. It is unreal to describe the act of a manufacturer selling to a wholesaler as being the open market. It clearly is not.

The Taoiseach

No, but if this amendment is accepted the new subsection will lay down the circumstances in which the open market price will apply. The first is that one of the parties to the transaction has control over another of the parties and, therefore, has the power to affect the pricing or profit distributiton policies. In order to limit the application of the provision within a reasonable area the sub-paragraph applies only where one or more of the parties is a body of persons, that is to say, principally a company or other body corporate or a partnership. The second condition is that tax at the 36.75 rate is chargeable. Effectively this means that the rate is at the manufacturing level since at the wholesale or retail stage only 6.75 per cent applies. The third condition is that the consideration actually charged is less than the open market price. If, therefore, the actual price exceeds the open market price there will be no interference with the normal invoicing arrangements.

Mr. O'Malley

If a manufacturer is stuck with goods that he wants to get rid of in order to improve his liquidity and he sells them cheaply in order to get rid of them will he be caught by this?

The Taoiseach

No, provided he does not sell them to another company of which he has control. This only applies where the two are linked. In other words, where there is a fiddle between the manufacturer or the importer and a subsidiary company, where he sells the goods at the manufacturing stage. Otherwise there is no change.

Mr. Brennan

If we pass this when does it come into effect?

The Taoiseach

Tomorrow, I think. The 16th.

Question put and declared carried.