We referred in the course of the discussion on this section to subsection (5) dealing with partnerships. We asked certain questions and the Minister gave certain answers. However, I believe that the matter involved is a good deal more complicated than was indicated either by the questions or the answers. Rather than go into a great deal of technical detail on the matter I should like to refer the Minister to an article in a magazine called Taxation, dated 25th January, 1975. It was a leading article on capital gains tax and partnerships and it dealt in considerable detail with this situation as it has arisen, and as it has apparently been resolved under the British legislation which in this regard is very similar to what is before the House at the moment. I would ask the Minister to have that article examined and on the next Stage if there are aspects arising which were not dealt with in previous discussions perhaps he would clarify the position for us. I imagine that the article in question will be available to the Minister but, if it is not, I can furnish him with a copy.
Private Members' Business. - Capital Gains Tax Bill, 1974: Committee Stage (Resumed).
I have it in my hand.
Good. The Minister will appreciate that the aspects of this matter dealt with there are a great deal more complex than those we discussed in the House on the previous discussion on this section. I should like to ask the Minister a little more about the position. In regard to the proviso at the end of section 4, subsection (2), a proviso which has been amended in one of the Minister's amendments, I understood him to say that the position is that, on foot of the double taxation agreements between ourselves and Britain, automatically on the passing into law of this legislation, there will be double taxation relief in operation between this country and Britain.
The amendment which the Minister moved, and which was passed in regard to this proviso, imports the agreements contained in Schedule 6 of the Income Tax Act, 1967. There are a number of agreements contained in that schedule and I wonder would the Minister explain, since there are a number of agreements none of which I think deals with capital gains, on what basis does it happen that there will be automatically granted double taxation relief in respect of capital gains on the passing of this legislation.
The Deputy will see that what we provide in section 4 (2), as amended, is that the subsection is not to apply to any person who by reason of provision of Schedule 6 of the 1967 Act is exempt from income tax charges. It is the person who, by reason of Schedule 6, is exempt from income tax who, by virtue of this, enjoys similar exemption in respect of capital gains.
That is the point.
This is a unilateral concession by us towards the UK and the UK provide a similar provision, except that they already have capital gains tax. They give that concession to us. We are providing a similar concession to them.
This is the point I am raising. I think it is true to say that the British capital gains legislation of itself does not contain a provision similar to this. What I am trying to find out is: what is the basis for saying that automatically Britain will apply double taxation relief in respect of capital gains if I am right in saying that this is not a statutory provision for it and there is no provision for it in the double taxation agreements referred to in Schedule 6 of the 1967 Income Tax Act?
I am getting the written authority now, but I know that in practice they do not make the charge.
I certainly accept the Minister's word for that.
It is contained in section 20, subsection (2), of the British Finance Act, 1965.
It is specifically provided for?
It shall not apply to any person who, by virtue of the provisions of the Income Tax Act of 1970, the Double Taxation Agreements Part, is exempt from income tax. The phraseology is on a par with ours.
It specifically refers to this country?
No. The proviso provides for the exemption to any person who enjoys the exemption from income tax which is provided in the Income Tax Act of 1970 and that happens to include Ireland.
It includes Ireland?
Yes.
I should like to ask the Minister if he could tell us in reasonably simple terms what would be the effect of subsection (4).
I hope these terms are sufficiently easily understood. Subsection (4) provides that gains usually enjoyed in any manner or brought into the State in any way are to be deemed to have been received in the State. The provisions of section 4 of the Finance Act, 1971, under which income used outside the State in payment of debts is, in certain circumstances, treated as received in the State are to apply to a similar use of capital gains made outside the State. Thus an individual who is not domiciled in the State, but is resident or ordinarily resident here, will be chargeable on any capital gains made abroad and so used in the same way as if he had remitted the gains to this country.
All of that proviso would presumably be subject to double taxation relief in the case of Britain. The Minister says it would operate immediately in other cases if and when the necessary double taxation agreements have been concluded.
That is correct.
Could I refer the Minister to subsection (8) paragraph (e)— the last paragraph in the section. The Minister will see on line 14 the words "shall be treated as if paid or given in respect of a security issued for the advance by the company". Could the Minister tell me what is it that shall be treated as if paid or given, and so on?
The Deputy is looking for a specific example?
No. I think the syntax is wrong, but maybe I have got it wrong. I cannot see from the wording of the paragraph what is it that is referred to as "shall be treated". Is it securities not creating or evidencing a charge on assets, or is it interest paid by a company on money advanced without the issue of a security for the advance?
It is the interest paid by the company. It is the interest that shall be treated as if paid or given in respect of a security issued or advanced by the company. I will look at the syntax in case there is any doubt about it but I do not think there is.
Then it would read "interest paid or other consideration given shall be treated ..."
Yes.
Could the Minister give me an example in this case of securities not creating or evidencing a charge on assets?
Security is defined in this general way in order to catch any situations which might be contrived as they could be. Even if I were to give one or a number of examples it would not be the limit of man's ingenuity to contrive situations.
That I appreciate.
A parent company could set up with a small share capital consisting of preference shares to acquire land, mineral assets or rights on the Continental Shelf. Its subsequent operations could be financed not by issuing further shares but by means of unsecured loans whereby the persons making the loans would effectively secure control of the assets of the company and on the sale of underlying assets the lender could avoid the provisions of subsections (2) and (6) of this section if we did not define security in the general and extended way so defined here.
I understand the object of the exercise but I am trying to visualise a situation which would come within the security not creating or evidencing a charge. The Minister mentioned unsecured loans giving effective control, say, over a company. Would the Minister develop that point a little further? I do not quite follow how that would happen.
The effective control, as the Deputy knows, goes with loans——
Unsecured?
The firm who lends the money invariably has the control and sees to it that it has such effective control.
Surely there is a charge then?
Not necessarily, if there is an understanding or an arrangement made.
An understanding not in writing.
It need not be apparent but certainly in a closed company a private arrangement could be made which would give effective control in that situation.
I wonder whether the objective the Minister has in mind might not be more accurately secured by some such phrase as "securities not on their face, creating or evidencing a charge". It seems to me to be the kind of objective the Minister has in mind. If they do not actually create a charge, maybe the word "evidencing" is meant to convey the same meaning as I have in mind—I do not think they come within the kind of example which the Minister gave.
We are arguing with semantics now. The objective is the same. The language may be different.
We should ensure we are achieving the objective if that is what it is. I am not convinced that to say that "securities not creating a charge" on the face of it does not mean anything.
"Not creating or evidencing a charge in assets", I think it does. This is an extended definition but I will certainly look at it in the light of the Deputy's observations to see if it needs to be further extended.
If the Minister would, it would help. To conclude, I should like to make my argument clear. As I understand it, what the Minister is trying to do is to cover a case in which there is, in fact, a charge created but it does not appear to be created. Would that be a fair summary of what the Minister said?
Effectively, they might be creating a charge, but they could be evading in such a way, that the whole arrangement could be such as to give effective control. This extended definition would include any fabricated or any contrived arrangements.
(Dublin Central): How could one give an effective control unless one had some legal power?
It might not be regarded by lawyers as a legal maxim but Deputies know what I mean.
We know what the Minister is seeking to do but it is not clear that he is succeeding in his objective.
I will certainly in the confidence that if I need it strengthened I will have the support of Deputies opposite.
Right. I raised a question on this previously. I am not quite sure if I understood correctly the reply given by the Minister. I instanced the case, say, of an American who is resident in Britain but domiciled in America; he is resident both in Ireland and in Britain but domiciled in America. If he disposes of an asset which he owns, say, in Britain, what is that person's position in regard to liability for capital gains in so far as this Bill is concerned?
What the Deputy has in mind is this American who is in Britain and is, therefore, liable to capital tax in Britain.
He is resident in Britain.
If he is resident here he is also liable here. A double taxation agreement would ensure that he would not have to pay twice.
That concerns the double taxation agreement as between Ireland and Britain.
Yes.
Does the fact that he is domiciled in America not exclude him from the benefit of the double taxation agreement?
I think that under existing law he might well not be covered by the agreement but in so far as it is meant so to cover that situation and prevent double taxation liability arising we would, of course, negotiate necessary amendments to the existing agreement.
This is an important matter and having regard to the number of persons who have been resident in this country who would fit into the category I have described, I should like to get an assurance on the record, in so far as the Minister can do so at present, that (a) the necessary double taxation agreement would be negotiated as fast as possible and (b) that when negotiated it would be retrospective to the commencement of liability for capital gains tax here.
Yes, that is, of course, the intention. The Deputy will appreciate that it would not have been possible to have double taxation agreement affecting capital gains tax between Ireland and any other country.
I appreciate that.
Once this Bill becomes law, then we will make wherever necessary double taxation agreements with countries which have capital gains taxation. Of course, we will ensure that they would apply from the date of commencement of this Act so that no incidence of double taxation would arise.
I can appreciate that this would be the Minister's intention. Can he say if there is any reason to anticipate that there will be any difficulty in making it retrospective from the point of view of the other party to the agreement?
I think it is a well-established principle of taxation and accepted internationally that where tax arrangements are changed the relief should operate from the date of change. I cannot say whether any difficulties have arisen, for instance, in respect of double taxation agreements affecting income tax where income tax changes have taken place. But the Deputy knows that hardly a year passes in which we do not have one or more double taxation agreements tabled here in the House as a consequence of new situations arising between this and other countries. This is an ongoing exercise and it is not possible at any particular stage or at any particular time to say that no difficulty will arise between one country and another, but it has been possible to overcome them all in the process of negotiation.
Could I ask further if in the event of a situation arising such as I have described—and there is no doubt it will arise—in the interval pending the completion of the necessary double taxation agreement, say, with the United States, what will be the attitude of our Revenue Commissioners to such a person's liability? Will they collect the tax and then refund when the agreement is operative? Or, in the light of these circumstances, would they tend to leave the tax outstanding pending the conclusion of the agreement?
The normal practice, I understand, is to leave the tax outstanding if it is accepted that it would be objectionable, in principle, to collect it. In this case we are dealing with capital gains which would not accrue until the passage of time. There is less urgency about the matter than there might be in respect of recurrent income.
Some might have occurred already.
(Dublin Central): They are occurring since last April.
Some could have occurred already but they are likely to grow with the passage of time and they would probably be slow at the commencement as we have, again and again, publicly acknowledged. In practice, we may take it that the Revenue Commissioners will not be proceeding with the collection of something if in principle they will accept that it would be inappropriate to charge it and collect it when they are involved in negotiations with other countries to ensure that there would be no double liability.
I can hardly hear that but I take it that what the Minister has said indicates his view that in circumstances of that kind it would be undesirable to collect the tax, that it could create difficulties and unnecessarily adverse consequences.
(Dublin Central): I wish to follow up something that was mentioned last night in respect of capital gains of companies with investments in this country. The invitation given by the IDA was mentioned last night and the new undertakings given such as tax-free allowances, free movement of capital within the country and every facility to repatriate their money. Has the Minister carried out any investigation as to what damage this Bill will do as regards new investments in the country? Deputy Colley mentioned last night that undertakings were given regarding free movement of, and investment of profits within the country. These are binding undertakings. I am not talking about future development and what has happened from last April onwards but I am concerned about guarantees given by successive Governments down through the years as regards the tax benefits which were granted by the IDA and which contribute to a very large extent to bringing investments in.
Some of these companies will probably think that we are backing down on our commitments to them, and this may create a very damaging image abroad, especially in regard to our standards with regard to investments in this country. I do not wish to exempt anybody from last April onwards. We cannot do that to any great extent, but people who made commitments under certain undertakings as regards these taxes—probably industrialists coming into the country, four, five or ten years ago—never anticipated that a capital gains tax would apply to them. I hope that this will not have a damaging effect by undermining confidence. It is of vital importance that when we make a commitment, irrespective of what Government make it——
The Deputy is straying somewhat away from the section.
(Dublin Central): We are now applying capital gains tax to people to whom had been given undertakings through the IDA as regards capital investment in this country, when they sell their property. It is along these lines that I think this section is relevant. I also think it would have a damaging effect internationally as regards the inflow of capital. I hope that the Minister is satisfied that some of the companies that have come here during the past years will not take a poor view of this.
I am very happy to assure the Deputy, the House and the country that there will be no loss whatsoever of the kind contemplated by the Deputy. It is now a year ago, this month, since the Government published their outline proposals for the reform of the capital taxation system to replace estate duties. During that year there has not been as much as a whisper or a murmur of complaint from the IDA or from any investor who came into the country as a consequence of the package of tax and grant incentives. I am sure that if these people felt that they had in any way been unfairly dealt with, or dishonourably dealt with, they would have complained before this. There has not been one murmur or whisper. I was interested in Deputy Colley only going as far as page 3.
I went to page 7 as well.
It is a pity the Deputy did not go to page 10 which I shall come to. On page 3 Deputy Colley quoted the financial incentives. He said that the IDA told foreign investors they would have total freedom from tax on profits generated by exports to 1990, and complete freedom from Government control over investment of profits. He did not draw attention to page 10, where it is pointed out that in Ireland there are —and have been at all times since the IDA were set up—taxes on capital. It took the form of estate duty which ran at rates up to 55 per cent. The abatements which are available on estates of less than £100,000 net value do not apply when estates are above that value.
When I mentioned death duties yesterday, Deputy Colley and some others opposite tried to assert that death duties were irrelevant in this situation. Of course they are not.
No, we said that if they are brought in they should be compared with the whole package replacing them, not with one section of it.
Whereas the exemption from tax on profits is related to profits made on exports, the individual holding shares in a company enjoying these tax incentives would be liable to estate duties here. The IDA booklet not only draws attention to the rates of estate duty which are exceptionally savage by international standards, but also says under the heading: "Proposals for a new Scheme of Capital Taxation", that the Government are considering a new scheme of capital taxation which would replace estate duty. Therefore, they have been put specifically on notice by the IDA not only of the existing law, which we are now proposing to abolish as from April next, because we regard it as a disincentive to investment and as unfair and likely to break up companies and sensitive business arrangements but that we are also bringing in a new scheme of capital taxation. That new scheme, or the bones of it, have been available to any person contemplating investing in this country for over a year now. During all that time there has not been one murmur of complaint or one suggestion from anybody until the suggestions made from the Fianna Fáil benches that the Government proposals would be in conflict with undertakings given to foreign investors in this country.
As I have emphasised again and again, the new capital taxation arrangements are comparable to what exist in most other countries comparable to ours. Overall, they will be much more easily managed by people as they will not have the upsetting effect which the existing law on capital taxation has on them. I am sure this is the reason why there has not been one murmur of complaint from people who are knowledgeable about the tax arrangements internationally. They see that Ireland is moving in the same direction as all sensible countries.
(Dublin Central): The Minister for Industry and Commerce made a tour of Japan about 12 months ago. Did he find any indication at that time that they had capital gains tax there? They had capital gains tax in Japan some time ago and it was found to be unacceptable. Would the Minister have any indication from his colleague the Minister for Industry and Commerce, who made an intensive tour of Japan some time ago, that there is no capital gains tax there?
They have.
(Dublin Central): In Japan?
Yes they have.
In relation to the quotations from the IDA booklet which I made, may I draw the Minister's attention to the fact that I quoted from page 7 and laid considerable stress on the words "tax legislation as at present in operation". I laid stress on that and then went on to deal with the actual consequences.
Yes, I had forgotten that.
Right. Is the Minister saying, for the record, that no complaints, no objections and no apprehensions were expressed by any industrial investor in this country from abroad, or any potential industrial investor, to the IDA? Is that what the Minister is saying?
I said none have come to my notice, I am not aware of any.
I am glad the Minister said that.
I am not now going to fall into the trap which Fianna Fáil set in relation to mining taxation where they started a campaign of asserting that people were being unnerved by it so that whenever a Government spokesman said they were not, they then made a claim that the Government had to go out of their way to assure pople that they would, if necessary, sign contracts so that the people would know exactly where they stood. I have said that the IDA has made no complaint, no murmur of that sort, and there is nothing on record in the Department of Finance. I am quite certain that if these complaints had been voiced they would long since have been brought to our notice. This has not been done, and I am satisfied on that account that there is no feeling of concern such as was indicated by Deputies opposite.
First of all, may I point out that the Minister is, of course, glossing over the actual situation in regard to what happened in mining. Deputy O'Malley last night told the Minister that the announcement was made on a Friday and on the Sunday the Minister for the Gaeltacht, on behalf of the Government, was assuring people that nothing was going to be done in regard to industrial incentives other than mining. The Minister for Finance can hardly suggest seriously that in the interval, between the Friday and the Sunday, the effect of Fianna Fáil pronouncements—I do not recall at the moment that there were any, but assuming that there were some—was such that it was necessary immediately to go in with the kind of statement made by the Minister for the Gaeltacht. The Minister is, in fact, glossing over what really happened, which was that there was a very adverse reaction from abroad. I am glad that I asked the Minister the question I did ask, because my recollection of what he said a few moments ago is that in the past 12 months, since the Government published its White Paper on Capital Taxation, there has not been a murmur from industrialists or potential industrialists to the Government or to the IDA. When I asked him whether he was putting it on the record that the IDA had no complaint whatever and received no complaint whatever he said he had not heard about them.
I would like to make quite clear what the Minister is saying and putting on the record of this House. As I understand it now, he is saying there is no complaint on record in the Department of Finance. If the Minister has not consulted with the IDA and the Minister for Industry and Commerce in regard to this provision it is an absolute disgrace, and bears out the suspicion that we have had that the Minister is ploughing on with legislation without finding out what are the likely consequences of it.
I have found out that Fianna Fáil is reverting to type.
Did the Minister consult the IDA?
I am not going to follow the Deputy across his mischievous path. At this stage Fianna Fáil is reverting to type and is trying to harm the national interest.
Either the Minister consulted the IDA or he did not. If he did not consult them it is an absolute disgrace that he should bring in this provision without doing so, having regard to the importance of their activities to the employment situation in this country. If he did consult them he should be able to put on the record of this House that he did and that they had no objection and received no objection. He purported to put that on the record of this House, but when questioned he backtracked. I am now giving him the opportunity again. Would he say whether he consulted the IDA and did the IDA receive any complaints or "murmurs", to use his own word, from anybody in regard to this proposal?
And if I say that I consulted the IDA Deputy Colley and his henchmen will go to the length and breadth of this country and say that the Minister knew that it would cause unrest and he therefore went to the IDA. I am not going to get into that game again. There is no justification for this complaint.
I want to tell the Minister that we spent many years building up this country. I, personally, was involved in the activities of the IDA as Minister for Industry and Commerce and it was work of which I was extremely proud. I am very apprehensive at the effects of the Minister's nonchalant unconcern about the effects of what he is doing on the development of this country.
And every time Fianna Fáil——
It now appears that the Minister did not consult the IDA, which was what we suspected. If he did consult them, let him say for the record what he was told. It is an extremely important matter, and the Minister should not be so flippant about the future of this country and particularly of the 100,000 unemployed people. It is not good enough to have the Minister adopt this supercilious attitude in regard to proposals which are extremely serious in their potential consequences. Could I ask the Minister to treat this matter a little more seriously? It deserves serious treatment, which it is getting from this side of the House but not——
It is not. It is getting totally mischievous treatment from the far side of the House.
That is a good excuse when you make a mistake.
There was no mistake made at all.