Cavan): I wish to inform the House that I am standing in for the Minister for Finance who is in the Seanad with another Bill. Perhaps Deputy Colley would repeat very briefly the point he was making?
Wealth Tax Bill, 1975: Committee Stage (Resumed).
Debate resumed on amendment No. 9:
In page 10, after line 10, to insert the following subsection:
"(5) This section shall not apply to a private non-trading company of which a body corporate which is not a private non-trading company has control and, for the purposes of this subsection, where a body corporate (in this subsection referred to as the first body corporate) has control of a second body corporate and the second body corporate has control of a private non-trading company, the first body corporate shall be deemed to have control of the private non-trading company and if a third body corporate has control of the first body corporate, the third body corporate shall be deemed to have control of the private non-trading company, and so on.".
—(Minister for Finance.)
We were dealing with the Minister's amendment No. 9 and I indicated last night that while the amendment is in response to points made from this side of the House on the Second Stage and is therefore in principle acceptable given the terms of the Bill, nevertheless, I consider the general lines of the Bill as approached in this section to be unsatisfactory and I am suggesting that the amendment will illustrate some of the problems that arise because of the approach in the Bill; but before I develop the matter, I did draw attention last night to what was in effect a drafting query although it may be of some importance, that is, in the amendment in the second line there is a reference to "a body corporate which is not a private non-trading company". There are further references in the amendment to "a body corporate" but the other references to "a body corporate" do not incorporate the phrase "which is not a private non-trading company". If that phrase is carried through further on by implication, then the matter is all right but, if it is not, I believe the amendment is not achieving what the Minister wants it to achieve. Perhaps the Minister might give his view on whether he thinks that qualification to the phrase "body corporate" is in fact carried through the amendment?
(Cavan): Just to deal with that one specific point, in the second case to which the Deputy refers it does not matter whether the body corporate is a trading company or a non-trading company. That is the point in it. In the first case it sets out that the body concerned must not be a non-trading company but the other companies further down may be trading companies or non-trading companies.
Could I ask the Minister a question in reference to the second reference? Perhaps I might read the first few lines:
This section shall not apply to a private non-trading company of which a body corporate which is not a private non-trading company has control...
(Cavan): If the Deputy would stop there. A private non-trading company is treated as an entity for the purposes of this Bill. If that private non-trading company is owned by a body corporate which is not a private non-trading company, in other words, if it is owned by a trading company, it is exempt. We have a situation then where there may be holding companies intervening between the trading company at the apex and the private non-trading company further down. It does not matter whether these intervening companies are trading companies or non-trading companies. The liability of the private non-trading companies at the bottom will be determined by the status or qualification of the parent company at the apex.
I know what is intended to be achieved. My question is whether in fact it is being achieved.
(Cavan): The first part of it is absolutely clear.
I agree, there is no problem there at all, but if you go on from there, it says:
and, for the purposes of this subsection, where a body corporate (in this subsection referred to as the first body corporate) has control of a second body corporate...
If we could stop there for a moment. The rest of the amendment is going on really to visualise a change of control in that portion of it. In other words, where a body corporate (in this subsection referred to as the first body corporate) has control of a second body corporate. If we take the first reference in that, a body corporate in which the control vests, if that body corporate in which the control vests is a non-trading private company, does that not defeat the object of the exercise?
(Cavan): No. If the parent body corporate is a non-trading company then the private non-trading company controlled by that is an entity and will be taxed.
The entity controlled by that——
(Cavan): If the first body corporate is a private non-trading company and it owns or controls another private non-trading company then both of them are in. This section as drafted was intended to capture close family non-trading companies and to defeat avoidance but as a result of representations and further thinking it was considered that the section as drafted captured private non-trading companies that it was not intended to capture. In other words, it captured holding companies and sometimes there can be more than one subsidiary company intervening between the parent company and the private non-trading company at the bottom.
What the Minister is saying then is that if there is a parent company controlling a subsidiary company and both of them are private non-trading companies——
(Cavan): Then both of them are in if they are private non-trading companies.
——they will then each be liable separtely as entities?
(Cavan): Yes, but the shares held by the first would be exempt because we have given exemption.
There is no double tax.
Just on the basis of no double tax. Let me refer the Minister to the definition in subsection (3) of a company. The definition says a company means "a body corporate, wherever incorporated," and then certain conditions are imposed in (a), (b) and (c). Can the Minister reconcile that with the amendment? The amendment, as far as I can see, seeks to designate what I might call a trading company by reference to it as a body corporate which is not a private non-trading company. I wonder whether the definition of "company" as set out in subsection (3) conforms with the drafting in the amendment. The reference to the "body corporate" in the amendment would seem to include, by implication at any rate, the reference to companies in subsection (3). If you marry the amendment with the definition in subsection (3), I wonder are you getting a conflict between what is sought to be done in subsection (3) which, effectively, is to define what is a private non-trading company, and the effort in the amendment to distinguish from that a body corporate, which is not a private non-trading company? I wonder whether that is successfully achieved. I am not saying there is a contradiction. One would nearly want to see the amendment inserted to judge it accurately. Is the Minister satisfied that there is no contradiction?
(Cavan): It is necessary to use the words “body corporate” as distinct from “company” because corporations or companies have different titles all over the world but I am told that “body corporate” captures all of them. The words “body corporate” are wide enough to include a company whether it is a Japanese company or a German company or any other company and to grant them the exemption we want to grant them.
The Minister is satisfied there is not any contradiction?
(Cavan): I am so advised and I am satisfied.
I referred last night to the fact that I was afraid this amendment might be providing a major loophole for escape from liability for wealth tax. If a trader puts his wealth or a great deal of his wealth into a private non-trading company and then so arranges matters that that private non-trading company is controlled by his trading company is he not thereby, on foot of this amendment, enabled to escape liability for wealth tax?
(Cavan): He would be liable on the shares of his trading company. If the operation increases the wealth of the trading company and enhances the value of the shares, he will pay on the enhanced value of the shares.
If he is liable, and if the Minister is right in saying he is liable on the shares, because the trading company as such is not liable, is it not quite clear that the effect of the wealth tax on a trading company is quite substantial and that it is unrealistic to suggest, as has been suggested by the Minister for Finance and I think the Minister for Lands previously, that because there is no wealth tax levied on a trading company it is not going to affect the operations of a trading company? Does the very point the Minister has just made not illustrate clearly that the wealth tax will affect quite directly and in some cases seriously the operations of trading companies?
(Cavan): We argued all this out before when I was handling the earlier sections of the Bill. I have repeated several times that trading companies as such are not subject to wealth tax. It is conceded that the value of shares in the hands of individuals are liable to wealth tax assuming that the threshold of £70,000 or £100,000 is reached and they are then liable to wealth tax at the rate of 1 per cent but they are exempt from death duties.
That is the argument I am making and it is the one I stand over. I do not think there is any substantial hardship imposed by the Wealth Tax Bill. This present discussion arose out of Deputy Colley's suggestion that the amendment provided machinery for a massive avoidance of wealth tax by the wealthy individual putting all his wealth into a private non-trading company and then giving control of it to his trading company. I said that if a very wealthy individual did that his little game would not work because he would artificially, according to the Deputy, inflate the value of the shares in the trading company.
Not necessarily.
(Cavan): The Deputy said that he was putting his wealth, which was not properly connected with the trading company, into the private non-trading company and then giving control of that private non-trading company to the trading company in order to avoid wealth tax. I pointed out that that game would not work because he would be inflating the value of the shares in the trading company and he would have to pay tax on that.
He would get thresholds.
(Cavan): Against the value of the shares.
If he left it in the private non-trading company he would not get any threshold.
(Cavan): Of course, what the Deputy says is right but what we are doing here is just putting the private non-trading company and the individual in exactly the same position. The Deputy told me that he will get the threshold against the shares. That is so. He said he will not get the threshold in respect of the non-trading company. That is also true but if he had not gone to the trouble of incorporating a non-trading company and kept the assets in his pocket or in some place else in his possession, he would still get the threshold.
Is it not the position that the Bill set out to apply wealth tax to a private non-trading company with no threshold and, therefore, to apply wealth tax to the first £ of assets? Is it not a fact that the effect of this amendment is to enable persons affected—it is the people about whom we are talking who have to find the money to pay it—to so overcome that to the extent at least of getting the benefit of thresholds by placing control of the private non-trading company in a trading company?
I am not saying that this amendment should not be made. This amendment is necessary, given the approach to the whole thing in the Bill and particularly in this section. I fully agree that that is necessary but I am pointing out that one of the consequences is to give a considerable advantage to persons to whom it was not intended to give any advantage when the Bill was introduced. I suggest the reason this happens is that the whole approach to this matter produces this kind of morass. In reality the whole approach in the case of a private non-trading company should be to assess the owners of the shares in those companies on the value of their shares as you do in a trading company and to give them the benefit of the thresholds. I believe that would have to follow.
This artificial approach to the private non-trading company produces the kind of morass into which we are getting now with this very necessary amendment, given the approach in the Bill. The Minister has agreed that the consequence of the amendment is to provide a method whereby people who heretofore, as the Bill was presented, would have been liable for wealth tax with no benefit of a threshold, will now in many cases be able to get the benefit of those thresholds which it was not intended to give them.
I am saying that consequence arises because of what has to be done to treat the genuine case of a trading company that we have put forward here. Some very large companies operate non-trading companies and investment companies as subsidiaries and it would be quite wrong to treat them as not being entitled to be assessed on the shares with the benefit of the thresholds. This amendment is necessary given the approach in the section but, nevertheless, the consequence of the whole approach and of this necessary amendment is, as I have stated, to give an opportunity to persons to whom it was not intended to give any benefit of thresholds. They are now by this method being given the benefit of applying thresholds and thereby saving a considerable amount of wealth tax which the Minister did not intend them to save.
(Cavan): I believe the Deputy concedes that private non-trading companies are largely tax avoidance instruments and there is not a lot of sympathy for them. The object of section 6 is not to ignore private non-trading companies as far as wealth tax is concerned, not to treat them as nonexisting unless in certain circumstances where they happen to be genuine bodies corporate which are held as holding companies for the purposes of traders. The point made by the Deputy is not a realistic one for a number of reasons. If the individual mentioned by Deputy Colley puts his money or his wealth into a private non-trading company and then hands it over to a trading company, he is immediately putting it at risk. It goes into the trading company and if the trading company goes down all his personal wealth goes down with it. It is unlikely he would do that.
Secondly, if he were a very wealthy man and put all this wealth into the trading company it could have the very undesired effect of converting the trading company into a non-trading company. If he put enough wealth into it to create a situation where the balance was in favour of the non-trading element rather than the trading element——
That would be easily remedied.
(Cavan): The first point made by the Deputy is very serious and it could not be remedied. Unless he has such faith in a trading company that he regards it as absolutely secure he would be putting his personal wealth at risk by putting it into it.
When the Minister says that the approach is to ignore private non-trading companies, except where they are genuine subsidiaries, what does he mean?
(Cavan): To ignore them for wealth tax purposes in certain cases.
What does the Minister mean by saying "to ignore them?"
(Cavan): They are penalised. They will be taxed without thresholds.
If one approches the application of a wealth tax on companies of any kind on the basis of assessing it on the shareholders and the value of their shares, why not apply that to all companies, trading and non-trading, private and public?
(Cavan): I have a note here on non-trading companies which might be of help to the Deputy. The difficulties associated with private non-trading companies in the tax scheme arise out of their nature. They are by definition closely held companies controlled by five or fewer persons as defined. Being so tightly held, their promoters have enormous scope as regards the capital formation of the company and its policies generally, all of which affect the shareholders and the values of their interests. They have considerable potential for manipulation which is rendered easy by the small numbers involved and the fact that the parties are usually related.
The private non-trading company which is treated as an entity in the Wealth Tax Bill is, in effect, a private investment company, that is, a company whose business consists mainly in the holding of investments and whose income is derived mainly from dividends, interest and rents. The number of such companies has grown steadily. Of the 1,017 in existence in 1967, only 193 were incorporated before 1950. The number is now estimated to be 2,500. Of the investment companies in existence in 1967, 91 per cent were set up to acquire the assets of individuals or families. In such companies the assets, while technically belonging to the companies, remain under the personal control of the individuals or families who thereby secure the continuity of succession and the protection which incorporation gives. At the same time, the structure and policies of the company can be determined to achieve the best taxation results. In this latter aim, they have presented extreme difficulties for other taxes. It is significant that income tax which has been in existence for many years has not finally solved its problems vis-á-vis these companies.
In the estate duty field, the experience of the British was that they found it necessary to amend their major legislation enacted in 1940 no less than eight times before 1968. In this country we have found it necessary to make major changes in our private company legislation relating to estate duty which was enacted as recently as 1965. There can be little doubt, therefore, that the private investment company will be developed as a vehicle for mitigation or avoidance of wealth tax also. This would have two effects. It would make the administration of the tax more difficult and increase administrative costs. Both results would not be justified in view of the low effective rates of the tax. They would also be unfair to other taxpayers who ultimately would have to meet those costs. It would well nigh cripple the administration at its weakest stage, precisely when the tax is trying to get off the ground. The inevitable result would be that discretionary trusts would be developed in a similar basis because any departure from the entity principle for private non-trading companies would give rise to an irresistible call for its extension to those trusts.
To sum up, the treatment of private non-trading companies has the merit of extreme simplicity for both the Revenue and the taxpayer. It is fair all round in that it kills avoidance. Furthermore, it does not affect the very wealthy as they are liable at 1 per cent, whether or not they place their property in an investment company, and it is open to the parties to liquidate the company and have it reconstituted if necessary in the light of the changed circumstances. We are aware that many such companies have, in fact, been liquidated. The company is not the only vehicle for holding property. At that point let me say that the cost of liquidation, as the Deputy knows, is negligible. There is no duty payable.
That having been said, there will be no doubt cases where companies will not be wound up without difficulty and there will be cases where a company is liable at 1 per cent and yet an individual shareholder may not be a wealth tax payer. It is not considered that this can arise often since the company as such is liable at 50 per cent and is, therefore, unlikely to have a shareholder in a lower income tax bracket, certainly not all its shareholders. Where there are mixed shareholders, some liable to wealth tax and others not, it should not be impossible in the context of a closely held investment company for the parties to make arrangements to share the burden of the tax equitably among themselves.
It is difficult to know the exact extent of the problem. This can be ascertained only when the facts come to light. For that reason there is a very strong case for retaining the position as it is in the Bill. No great hardship can be caused by the payment of wealth tax for the current valuation date. Before next year's valuation date arrives, the extent of the problem, if any, will be known and changes can be considered in that light and in the light of the experience of working the tax.
The point made by Deputy Colley is that the amendment may lead to avoidance. I do not think that is so, but I do concede that there will from time to time and especially in the early stages be methods of avoidance discovered and, of course, it will be the duty of the Revenue Commissioners to monitor those and keep an eye on them and to close the loopholes for avoidance. When I last spoke on this measure after Deputy Colley had left the Chamber, I also gave an assurance that in the early years of the operation of this Bill the Revenue Commissioners would also keep an eye on and monitor the system to see if any hardships were emerging and that they, too, would be rectified. In the meantime, especially in this year, it is extremely unlikely that any severe hardship can be done.
While I do not know, I would strongly suspect that the note which the Minister read out to us was written before this amendment was produced because the general tenor of that note was that private non-trading companies really are something to be discouraged and that in so far as one can encourage their liquidation, that is a good thing; but here we have an amendment which merely recognises that there are certain kinds of private non-trading companies which are genuine and must get the same treatment as trading companies. In effect, that is what the amendment has been saying and thereby recognises the fact that there are private non-trading companies which are genuine and should be treated accordingly. The Minister will agree that the note from which he read does not appear to recognise that there are any genuine private non-trading companies. That is the first point.
The next point is that the approach seems to me to be one of saying: "We will give no thresholds in the case of private non-trading companies because they are a bad thing and thereby really ultimately get rid of them." It may be from certain points of view desirable to get rid of private non-trading companies, although one is immediately up against the problem of the genuine one being recognised here, but even if that is to be regarded as a sound objective, I question whether the right way to approach it is to say: "If your wealth is in a private non-trading company you will pay wealth tax on the first pound but if it is not and if you hold it personally or through shares in a trading company, we will give you the benefit of the thresholds." That is the approach in the Bill and I am questioning that approach. I am pointing out the consequence of that approach is that the Minister has to bring in an amendment of this kind. I am also pointing out that bringing in an amendment of this kind is in practice providing one loophole for persons who, as the Bill so provided, were intended not to get any threshold at all and this, I am suggesting, is providing a method by which people in certain circumstances will be able to get themselves the benefit of the threshold.
The whole concept of the Bill, and this is reinforced by the note the Minister has just read out, was not to give the benefit of thresholds to people whose wealth was in a private non-trading company. If that approach is valid—I question whether or not it is—then it seems to me illogical to bring in an amendment which has the effect of providing just that benefit—in other words, the benefit of thresholds—to certain people whose wealth is in a private non-trading company. I am suggesting that the consequences of this amendment highlight what is basically a wrong approach to the whole method of applying wealth tax to private non-trading companies and I do not think the Minister answered precisely the point I put to him.
Why not apply wealth tax to private non-trading companies on the basis of the shareholders in proportion to their shares and the value of their shares, giving them the benefit of the threshold? The Minister may say this device is such that people could juggle around with it so that we cannot get at them. In answer to that I would say there is now a good deal of experience of private non-trading companies, that the law in relation to death duties has been, as the Minister said, amended a number of times and pretty effectively closes these loopholes and enables the Revenue Commissioners to impute value to property or to people who may have shares in a private non-trading company. I am suggesting that the use of the existing machinery in order to assess the wealth of individuals holding shares in private non-trading companies would be an effective way of getting assets and you would then have a consistent approach throughout the Bill. I am suggesting it is inconsistent, to use the Minister's words, simply to ignore private non-trading companies and, in practice, go out of your way to penalise them by saying they will get no thresholds. It is inconsistent to do that, and the consequences of that inconsistency are that we get amendments of this kind, necessarily giving the approach, but highlighting the difficulties, if only because the amendment provides a method by which people in certain circumstances with their wealth in private non-trading companies will now be able to get the benefit of the thresholds the Minister said they would not get.
As Deputy Colley has pointed out, at this point the amendment and the section are merged. We are not approaching the original approach in the section in such a significant way that it raises the question of principle in approach to the section. What the Minister read was extremely interesting and very valid. One can understand it as the whole basis to the approach to this section. Incidentally, I would like to express appreciation of the fact that the Minister read out that memorandum. It is very helpful. It is a help we do not, unfortunately, often get. I take this opportunity of expressing my appreciation for this help and for other attitudes on the part of the Minister when he does not get on what someone called "his high horse" in his approach to this legislation, and we would like to respond in turn. If the Minister will bear with me, the amendment raises the question to which Deputy Colley referred about the whole philosophy of the approach to the section, and I would like to reserve a more detailed discussion on that until we come to the section itself when, I think, it would be more appropriate.
The amendment sets me querying as to whether, if you have to go this far, what you are saying is that, as I understand it, if the non-trading company is a subsidiary of a trading company then the exemption arises. The reasons for that are understandable and personally I believe very justifiable. As far as the amendment goes the only objection that can be raised is the objection Deputy Colley raised: in its context it appears to invite an approach to the whole purpose of the section by possibly providing a loophole. My comment is more by way of addition. Taking it that some such adjustment was necessary, it is realised that there are cases in which the device of the private non-trading company, taking that phrase within the meaning of the section itself, is useful commercially and possibly also socially. We have to realise that commerce is not wholly equivalent to administration, particularly to revenue administration.
Furthermore, I have been struck, as this code of legislation develops, by the fact that more and more this is impinging on what was traditionally considered to be another area of legislation, namely, the area of company law. Perhaps I am a little sensitive to this because I happened to be a member of the committee that sat on the last Companies Bill, the Companies Act of 1963. I make that comment in order to emphasise that there is substance and purpose in the Minister bringing in this amendment. It has a joint purpose. Whatever representations were made to inspire this amendment, the Minister and his advisers quite rightly judged on whatever particular cases were adduced to prompt the amendment that the amendment was desirable in a very general context.
These are aspects which must arise on the amendment for an Opposition which is trying to be reasonable. The question arises as to whether we should oppose the amendment on the ground that, by so doing, we may emphasise a point or express disapproval of what is being done, for whatever reason, either because it is objected to or because of sufficiency or insufficiency. This problem arises for us here because we feel this is an appropriate amendment for the Minister to introduce, but we also feel that it has the possible disadvantage of a loophole. If it covers that type of case, there are other devices that should be covered in an amendment of this nature.
I will give the Minister an example of what I mean. The Minister has now provided for non-trading companies in the position of subsidiaries. Non-trading companies can be bona fide and properly used for purposes where they would be controlled by a non-corporate group or even by an individual. I do not cavil at the memorandum the Minister read out.
(Cavan): I do not want to interrupt the Deputy, but I think this would be more relevant to the section.
I agree. If this amendment is accepted, would the Minister consider on Report Stage the point I am making? If it is recognised that in the case of the trading company for bona fide purposes, other than the accumulation of wealth for tax avoidance purposes, because that is where the abuse was and that is where the memorandum comes in, it is necessary to bring in an exception where the control is in a body corporate, should not the principle then be widened bona fide where the control is not necessarily in a corporation—that is, in an incorporated corporation?
This brings me to the point I have repeated continuously—and I am afraid I will go on repeating it until we come to the end of this whole system of legislation. The problems have arisen and will continue to arise and, in my humble opinion, will only be solved now or in the future by the residual device of providing generally for contingencies and, having given the general guidelines to the Revenue Commissioners, giving the necessary discretion to the Inspector of Taxes to give relief. I will go as far as the Minister wants to go in safeguarding against provisions which could be enforced against the Revenue Commissioners by law or by action in the courts but I would give that bona fide discretion to the inspector, or other officer, who has to make the decision in the genuine case and who has to decide in the last analysis and on principle whether this is fair or whether it is the intention. Yesterday the Minister for Foreign Affairs referred to the problem arising there and said he would go a long way to limit the powers of the Revenue Commissioners in this matter. Having regard to many other checks and balances, I still continue to adumbrate and emphasise that point. I thank the Minister for the memorandum.
(Dublin Central): The Minister read out a document which was quite enlightening, so far as I am concerned, with regard to the formation of non-trading companies. The formation of these companies could have something to do with the avoidance of income tax. Deputy Colley dealt with genuine non-trading companies. I cannot see the sense in a trading company forming a non-trading company, but evidently it happens. I believe that we should have no loopholes and that people in this category should be caught. I would give no exemptions where they are concerned. Nobody on this side of the House would go out of his way to try to exempt any group of people who have various devices and the necessary experts at their disposal to form this type of company for a particular reason. We would not have any time for that type of arrangement.
Deputy Colley is trying to ensure that there is no hardship and that we are not victimising any section. The Minister brought in this amendment to exclude certain types of non-trading companies that might be victimised. That is quite acceptable. The Minister has in mind certain non-trading companies who are genuinely operating and who might be subject to wealth tax. Throughout this Bill we are trying to ensure that genuine cases are not caught. We have found this in the Capital Gains Tax Bill and we find it in the Wealth Tax Bill and we have put forward genuine cases which we think might be victimised under this section or various other sections.
The Minister for Finance put forward his point of view and mentioned cases where there could be avoidance. We appreciate that but our duty is to point out the cases where innocent people might be victimised. We did that throughout the Capital Gains Tax Bill and we will do so section by section in this Bill. Deputy Colley put forward cases this morning where this could happen. Without this amendment matters could have been worse. The amendment seeks to exempt genuine cases which would otherwise be brought within the ambit of the section and therefore we welcome it, though Deputy Colley is not altogether satisfied with it.
I must say I was surprised when I heard the Minister enumerate the large number of non-trading companies in the country. I am sure there is some device, legal or otherwise, through which avoidance could be achieved. However, what we are mainly concerned with is that innocent people would not be caught.
I am sorry I missed the Minister's statement—I was called out. Could he assure us there will be no question of double taxation?
(Cavan): There are exemptions.
This amendment would not exclude the question of semi-State bodies which are trading?
(Cavan): It does not deal with that issue.
(Dublin Central): It will come up later.
I would ask the Minister to bear in mind the point I made about cases where non-corpor-ated companies might have to be included.
(Cavan): There will be at least two ways, sometimes many more than two, of dealing with this. The Government think the best way to deal with private non-trading companies is to treat them as entities. Unless we do that the tax will not work. When I was dealing with this Bill earlier Deputy de Valera conceded that there is a large number of non-trading companies here and Deputy Fitzpatrick more or less accepts that. They have mushroomed here in recent years. As a country solicitor I cannot clearly understand it, but most tax consultants are inclined to form companies and it would be interesting to know how many limited companies of this kind have been incorporated in this country in the last few years. I should think thousands and thousands. I am sure the bulk of them have tax relief. However, that is our approach to private non-trading companies in general but it appeared to us that some genuine holding companies were caught by the section and the amendment, which I think the House is accepting, will exclude genuine non-trading holding subsidiaries which are part of trading companies.
Deputy Colley began his argument by saying we were leaving a loophole for people. I think that an individual creating a non-trading company and putting his wealth into it and more or less giving control to the trading company will get away with a lot because he is at least putting his wealth to work in the trading company and exposing it to risk in the trading company. It is conceivable that he could convert the trading company into a non-trading one. The amendment serves the purpose for which it was introduced, to give exemptions to genuine companies. It is not for me to lecture the Opposition as to how the debate should be conducted, and I do not propose to do so, but whether the Opposition like it or not we are working to a timetable——
(Dublin Central): We do not like it.
I do not think the Minister is under any illusion about that.
(Cavan): Whether we like it or not, we are working to a timetable and I suggest in the public interest that the best use be made of that time.
Of course the best use is to deal with each matter in detail. The Government are depriving us of the opportunity to do that.
Amendment agreed to.
Question proposed: "That section 6, as amended, stand part of the Bill."
There are a number of points that should be raised on this section, some being matters of principle and some of detail. Perhaps it would be better if I dealt with matters of detail first. There is one matter which I referred to on the Second Stage and perhaps the best thing I could do is to quote what I said then. I quote from the Dáil Official Report of 5th March, 1975, columns 1514 and 1515:
Under section 6 it appears to me that double wealth tax can arise on the one hand in the case of a private non-trading company, first, on the company itself and, secondly, on the shareholder in respect of the same property. The same thing can hold true where one company holds a large stake in another company.
I think the Minister dealt with that in the amendment we have just discussed. I went on:
In answer to that the Minister may say that there is provision to deal with it in section 21 (2), but I have some doubts as to whether it deals with it. I should like the Minister to have another look at this.
(Cavan): Section 7 (1) (j) deals with it.
The shares in the private non-trading company are exempt —yes.
(Cavan): I think it clearly covers the case the Deputy has in mind.
Yes, I think it does. The other point I was going to quote from, in fact, is a matter of principle which I will raise later. As I say, I would prefer to get matters of detail out of the way, if possible, first. The next point I want to raise is in regard to subsection (2). This is a point which I raised yesterday. A similar provision occurs in section 5. I raised this with the Minister for Finance. Briefly, the point is whether or not the effect of subsection (2) is that where there is a limited interest the treatment will be the same as it is in the case of an individual. The subsection appears to be saying that but the Minister for Finance yesterday seemed to suggest that it was not doing that. If it is to be treated in the same way as in the case of an individual then it means that two persons can be liable for wealth tax on the same property at the same time and the Revenue Commissioners have to opt. That was the position which emerged according to the Minister for Finance—I am not sure whether it was the Minister for Lands or the Minister for Finance— in regard to the treatment of the individual, and yesterday, on the similar provision in the previous section, the Minister for Finance said you cannot have two people owning the same property at the one time. He meant where they were not jointly owning. Of course, I agree with that proposition, but it seemed to me that in fact the Bill was providing in practice for just that contingency, and when I raised it yesterday, after some discussion the Minister for Finance undertook to communicate to me whether the point I was raising was correct or not. I do not wish to delay the House on this today. I merely want to draw attention to the fact that the same provision applies here and perhaps that could be included in the communication to me that the Minister for Finance promised yesterday.
(Cavan): Yes.
The next point I want to refer to is in paragraph (c) at the top of page 9, (i). The beginning of that reads:
A company shall be deemed to be under the control of not more than five persons if any five or fewer persons together exercise, or are able to exercise, or are entitled to acquire, control, whether direct or indirect, of the company;...
The question I want to raise there is in regard to that phrase "are entitled to acquire". Does that mean or include entitled to acquire by purchase?
(Cavan): Unless they had an option to purchase, or something like that. It would not mean that anybody could go into the market and purchase without any prior rights. I think it covers an option to purchase, an election or executing some document which could require somebody else to give them control. It means a right to acquire control by doing something themselves, if I am making myself clear.
I know, I think, what is intended to be covered by this, and clearly it should be covered, but I just want to be quite clear as to what is involved. I take it that what is intended is that an arrangement whereby somebody could on his own choosing exercise——
(Cavan): That is right.
——an option that would give him control—that is intended to be covered.
(Cavan): Yes.
Similarly, I take it that if the position were that a person could acquire control in the ordinary way, by purchase——
(Cavan): There is nobody entitled to purchase.
That is what I am coming at—unless he has a prior agreement or option, or some such thing.
(Cavan): Exactly. I am told that this is taken from the Finance Act, 1965.
You will find strange collections of things in this Bill.
You will find strange collections of things in Finance Acts too over 50 years.
I would not quarrel with that. Could I refer the Minister now to the definition of "private non-trading company" and the reference in line 49 to "earned income"? The context is "would not be earned income within the meaning of section 2 of the Income Tax Act, 1967." Is it not a fact that the distinction between earned and unearned income has been abolished?
(Cavan): I made the same point. I am told it has not been abolished; it is still there but it is not operated. The definition is still there.
It is in reserve.
It remains as a legal distinction but in the penultimate Finance Act it was made that there would be no practical distinction for income tax purposes.
(Cavan): That is right.
Would it be analogous to the position of death duties which still exist despite the headnote saying "Abolition of Death Duties"?
(Cavan): The definition is there.
The definition of "death duties" and the whole machinery is there but it is not being operated. Would it be analogous to that situation?
(Cavan): Entirely different.
I can see a big consolidation committee sitting for a long time very shortly on both codes.
(Cavan): The Deputy would make an excellent chairman of it.
Thank you for the compliment but the burden would be more than any one person could carry.
I am pretty sure that if we do not breach the Inheritance Tax Bill you will find death duties will still apply.
(Cavan): Death duties have been abolished.
No, they have not.
(Cavan): By the Finance Act.
No, they have not. Maybe the Minister thinks they have. Maybe he believes the propaganda. They have not.
It is exactly the same position here: they are in abeyance and the political marginal note is even misleading the Minister.
(Cavan): We are all quite safe in dying as of today and our families will not be worried about death duties. At least, mine will not.
The Minister is quite right, until the retrospective action of the Capital Acquisitions Tax Bill cancels it—with the reliefs—I am not quarrelling with that.
(Cavan): That may apply to Deputy de Valera's family. It will not apply to mine.
The Minister will be surprised, like a lot of other people, as to how it really hits him, particularly with capital gains.
(Cavan): The exemptions.
When the Minister has studied the small print of the whole lot he will find that it is not what he thinks it is. However, we are not on that at the moment.
(Cavan): We will keep to this one.
In subsection (4) (a) near the top of page 10 there is a definition of the word "share". It says:
"share", in relation to a company, includes any interest whatsoever in the company which is analogous to a share in the company.
There are definitions of "share" in other Acts. There is one of them in section 20 (13) of the Finance (Miscellaneous Provisions) Act, 1968 but perhaps more relevantly there is a definition in section 2 of the Capital Gains Tax Bill which does not conform exactly to that definition. Would it not be advisable to have some degree of uniformity in these capital taxation Bills?
(Cavan): The Deputy will agree that we followed a good precedent here—the Finance Act, 1971.
I would not quarrel with the precedent. It is probably the best the Minister could find. Nevertheless, why, if that were being followed, was it not followed in the Capital Gains Tax Bill? The Minister will agree that it would be desirable that there should be some uniformity.
My next point is precisely the same —the lack of uniformity in regard to the definition of what is a controlled company set out in section 35 of the Capital Gains Tax Bill. There is a different one set out in this section. I would urge that there ought to be uniformity in approach unless there is a very good reason for departing from it.
(Cavan): The Deputy will appreciate that this is a capital tax, and in defining various matters for the purposes of the Bill we followed another capital code —death duties. In capital gains we get back to in pari materia which we had at the beginning of this. The capital gains tax is more an income tax. It is analogous to income tax. It is more an income tax than a capital tax.
I think that is a mistaken view. It leads to all sorts of traps.
(Cavan): It explains the approach to it. I understand that the definition of “share” here does not include debenture, for example. Deputy de Valera suggested that considerable discretion should be given to the Revenue Commissioners in the operation of this Bill, and the Bill is drafted throughout in a non-technical way. We say that “share” in relation to a company includes any interest whatsoever in the company which is analogous to a share in the company. I suppose that will enable the Revenue Commissioners to decide that a share includes some other right which gives the same interest or the same power or the same control as a share. I think it is a good thing to have it drafted in that manner.
Would the Minister make the same observation in regard to the difference in approach to this and the Capital Gains Tax Bill on the question of definition of what is a controlled company?
(Cavan): I would rather deal with this Bill.
I made the point that in this section there is laid down a certain approach to the definition of what is a controlled company. I am suggesting that it is, at the very least, unfortunate that the same approach is not adopted in this and in the Capital Gains Tax Bill. I am not necessarily saying that the one in the Capital Gains Tax Bill should be in this, but whichever one is chosen should be invoked when they are represented to be part of an overall package. In regard to the question of controlled companies I really cannot see why there should be any difference in approach between the wealth tax and the capital gains tax.
(Cavan): The Finance Act, 1971, dealt with death duties and sought to close certain loopholes that had appeared. The very same definition of “share” is given in that Act as is given in this Bill. Even “controlled” is given the same definition.
I would ask the Minister if, between now and the Report Stage, short enough as the time is, consideration would be given not only to the question of definition of "share" but also to the question of defining what is a controlled company to see if anything would be lost by using the same words as are used in the Capital Gains Tax Bill on these two topics. If it cannot be done it cannot be done.
(Cavan): We will have a look at this and if it is thought desirable it will be done, but I do not want to be taken as giving any undertaking.
I understand that. The next matter I want to refer to is perhaps more a matter of principle than of technical detailed drafting. The Minister will recall that we spent a considerable time when he was handling the Bill in the House earlier in dealing with the question of on the one hand a disincentive to Irish people to invest and on the other a disincentive to foreign investment. The Minister's approach in regard to foreign investment was that there was no disincentive at all in this Bill. I said to him at that time that on the particular section on which we were arguing it might not have been totally in order but that I thought it would certainly arise under section 6. That is the section we are on now. The Minister will recall that we are dealing in general with an example in which a United States citizen invested in the setting up of a factory in this country and set up an Irish company for the operation of that factory. That Irish company would, of course, be a trading company. I want to suggest to the Minister that not only is it possible but in fact it has happened in a number of cases that where such an Irish company has been set up the shares in that company have been vested in what, in effect, is a private non-trading company and that if that happened under this section, even as amended, with the amendment we dealt with recently, the position will be that the American resident who owned the great bulk of the shares will be liable to wealth tax without any threshold and if that is so that there is a clear disincentive to investment in those circumstances.
(Cavan): The answer to that is that we had this discussion when I was handling the earlier sections of this Bill and I told the Deputy that because a trading company is exempt from wealth tax practically all foreign investment would be free of wealth tax. I would like to take up the example given by Deputy Colley of an American establishing a factory here. The statistics show that practically all American investment for the establishment of industries here comes from American trading companies and that they simply establish subsidiaries here. To that extent what I said is perfectly true. The profit from the Irish trading company goes in the form of dividends on shares to the American trading company and the latter is not subject to any Irish wealth tax. They may be subject to whatever tax is payable in the United States.
What happens if it is a non-trading company?
(Cavan): If it is a non-trading company the amendment, which we dealt with this morning, deals with it.
No.
(Cavan): Yes.
It is the reverse situation to the amendment.
(Cavan): Is the question Deputy Colley is putting to me: if the American company is a non-trading company?
Yes. If I could just interrupt for a moment to explain. An Irish trading company is set up and all the shares in that trading company are owned by a non-trading company which is incorporated in Ireland, not always, but usually, and those shares in the non-trading company are entirely, or almost entirely, the property of an American resident. In those circumstances——
(Cavan): Individual?
Yes. On the last occasion I spoke of Americans just to clarify it. I know of cases where it has happened but it happens even more frequently in the case of some continental investors. The same argument and principles apply. There are not very many investments here from the Scandinavian countries, but of the few there are I know at least two where it is an individual rather than a company in the Scandinavian countries who has made the investment. The set up, as far as I know, is the kind I have described, that is, an Irish trading company is set up and the shares in that are owned by a non-trading company incorporated in Ireland. What I am suggesting to the Minister is that in such circumstances——
(Cavan): Who owns the shares in the non-trading company?
The individual, continental, American or whatever.
The entrepreneur.
I am suggesting to the Minister that in those circumstances there is liability for wealth tax on the full value with no thresholds, despite the amendment brought in which does not cover that case.
(Cavan): There would be liability to wealth tax on the shares but of course there would be threshold against the value of shares. The liability would be on the shares.
Could we be clear on this now? Would the liability arise on the non-trading company without threshold?
(Cavan): The Deputy is right there. There would be liability on the shares in the non-trading company, The non-trading company would be liable, as an entity, without threshold. The answer to that is that industries are rarely established here by foreign individuals. That is point number one. Point number two, in cases in which they are, the position has been improved because death duties have gone. The person who in March last was liable for death duties is not now liable. As I pointed out here the last day, the Industrial Development Authority in one of their publications have pointed that out as a major attraction.
Could we pursue that a little further? In the case which I have described would there be liability for death duties? Remember the owner of the shares in the non-trading company would neither be domiciled nor resident in this country.
(Cavan): His assets would be here. The shares would be here.
If the Minister pursues that, in fact, is there liability?
(Cavan): Of course there is if it is owned by an individual, as the Deputy has said. If the non-trading company is owned by an individual.
Whatever the legal position is, I do not think that in practice in such a case the thing would ever come to the notice of the Revenue Commissioners. This is the death of somebody in another country who is neither domiciled nor resident in this country.
(Cavan): Whoever is dealing with shares in this country surely would have to take out a grant of administration to deal with the shares here?
How would you transfer the shares on the death without a grant?
The problem would only arise if, in fact, there is a liability for death duties in such a case.
(Cavan): There is no liability now but there would be if we are talking about the past.
There would have been in the past.
(Cavan): Surely if there is a company registered in this country and somebody owns shares in that company and that person dies before those shares could be dealt with, representation would have to be raised to that person here and a grant of probate or a grant of administration produced to the register of the company, otherwise the shares cannot be dealt with.
That is only true if, in fact, there was liability for death duties in such a case.
(Cavan): No, a grant would have to be taken out anyway even if there never was liability. About that there is no doubt. The liability for death duty would not affect it.
Let us suppose in the case of the individual that representation was taken out in his own country and as a result of his will, say, the shares were going to his widow—remember we are talking about a private non-trading company —how effectively do you ensure, assuming there is a liability to do so, that this matter comes in any way to the registrar?
(Cavan): I cannot prevent people from acting improperly, illegally or fraudulently if they can get away with it. I say to the Deputy that those shares in an Irish company should not be dealt with by the registrar of that company if they belong to a deceased person without the production of a grant of probate or a grant of administration to the estate of that deceased person.
An Irish grant? It could be the production of a foreign grant which would include this property which passed on his death.
That is not acceptable. The Deputy knows that perfectly well.
No. We are in a very complex line of country about this.
Can I mention the position is arising every day still where there are death duties in every country? In England and Scotland the shares are registered there. You have to take out a grant there. I have dealt recently with that situation.
In the case of a private non-trading company?
It is shares in a company; it is the same thing, shares of the same nature, in the way of property.
I am talking about the practical steps that are taken in a case like that.
Those are the practical steps.
The Deputy is speaking of the theoretical position which arises of course in the case of publicly quoted shares.
It is the same type of property.
I do not think I am making my point clear to the Deputy. In the case of a private non-trading company where the shares are owned by a foreign resident, in respect of whose death a grant is taken out in his own country and by his will he leaves the shares to his widow, in practical terms, does the Deputy think that in all such cases a grant is taken out and produced for the purpose of transferring those shares in that private non-trading company?
That was the law prior to the repeal of estate duty. I am assuming the Deputy was dealing with the situation where death duties arose. If a person did not make a fraudulent return, then he has committed a criminal offence.
There might not be a return at all. That is the point.
You can commit a crime by omission as well.
(Cavan): I have a publication from the Industrial Development Authority entitled “Overseas Sponsored Companies”, and it deals with American companies, the United States companies raised by the Deputy. There are 13 pages and I cannot find among them one company which has been sponsored or owned by an individual. Every one of them is owned by an American company.
Is the Minister quoting from the annual IDA report?
(Cavan): No “Overseas Sponsored Companies”—Industrial Development Authority.
Does the Minister know if it is an exhaustive list or is it a list used for the purpose of showing prestigious foreign companies which have invested here?
(Cavan): It is an exhaustive list of 13 pages, and each and every one of them is a company American owned.
The Minister cannot rely on that list. First of all, it may be, and is very likely to be, a list used by the IDA to show the prestigious companies which have invested here. If it is not, if it purports to be an exhaustive list, then can we take it that a statement in that report, that it is sponsored by an American company, means precisely that and that the shares in the Irish company are owned by the American company mentioned? I do not think that is true. I think there are cases in which American individuals have the kind of set-up which I have described, although as far as the IDA are concerned, if they were recording that, they would record the name of the American trading company which the particular individual controls. I do not want to mention individual names but I know that this is so. Mr. X is the person who owns and effectively controls the American trading company, the Irish trading company and the private non-trading company which I have mentioned. As far as the IDA are concerned, in any lists they would give, they would give the name of the American trading company which the individual controls, not the individual.
(Cavan): The list I have referred to lists all the grant-aided overseas firms in Ireland. The United States companies take up 13 pages and each one of them is owned by an American corporation or an American company. In regard to the point raised by the Deputy, the cases in which an individual owns shares here, directly in a trading company or where those shares are transferred to a non-trading company, is insignificant, and where it does happen——
The Minister does not know that.
(Cavan): That is my information, and where it does happen, by reason of the abolition of death duties from 1st April, 1975, the person concerned is much better off. That is my case, as clearly as I can state it.
I am in a certain difficulty as to whether to take the line Deputy Colley took and to follow questions of detail or to come straightaway to the principle on the section. I am afraid that the point has come where we have to look at the principle of the section in approaching this matter. The point which has been uncovered is simply this, that taking the Minister's memorandum first, for which we are grateful, it is quite clear that the approach to this section—it was a valid approach—is that the bulk of private non-trading companies had been generated and designed as tax avoidance measures and that this particular device had to be neutralised. It had already raised problems on the income tax code and would possibly drive a coach and four through this Bill if some provision were not made.
That is commonplace and we are in common sympathy with it, but what has arisen in this debate is the way in which to do this. The approach to—I do not wish to use an emotive word and I do not mean it in any such sense—penalise and so discourage private trading companies as, so to speak, to put them in a limbo is now revealed to be somewhat too sweeping, that valid as this may be from a revenue point of view and having regard to the abuses, it is likely to bring about undesirable commercial consequences and indeed injustice. For that reason the Minister has already brought in one amendment which, being part of the section now, is still open to discussion. That is the first comment I wish to make in order to put the matter in perspective.
The second comment I wish to make, and to join issue with the Minister, is this: There is a constant appeal—it has occurred more frequently on this Bill than on the Bill which the Minister for Finance personally piloted through, the Capital Gains Tax Bill, though it has occurred in that too—to the idea that this will not happen, that this cannot happen. These are two different things—this will not happen, that this is unlikely to happen. It is one thing if the answer is this cannot happen, that is fair and that is a valid reason. I would like formally to record that I do not think it is correct for a Legislature to take chances where injustice or imbalance in equity, or even commercial considerations may take place and be prejudiced, on the plea that the number of times it happened is minimal and that, worse still, somebody takes the attitude that it will not happen. I would like to join with the Minister on that point once and for all to avoid repetition. We cannot accept that argument. We have to approach a Bill on the basis as to what can happen, because what can happen may have happened, and it may be desirable that it should happen, and to prejudice it merely on the ground that it has not happened to date, or is not as likely to happen as other things, is not good enough for a Legislature.
Having gone thus far with the general argument, let us take Deputy Colley's point. On the amendment now incorporated in the Bill an exception is made whereby a private non-trading company, which is in effect, a subsidiary of another company, is exempted from the section. There is no need to go into the actual details and the fine content of the amendments as incorporated. That statement is sufficient. The exception is made because it is now recognised that there can be bona fide cases where a manifest injustice could occur by the taxation of a non-trading company as a unit without thresholds. What Deputy Colley is really doing is, and I think I would support him, pointing out that recognition of the principle here that there can be a non-trading company for bona fide purposes and commercial utility, or maybe social utility, which is not a tax avoidance device and which does not really prejudice the Revenue in any way. Once that principle is admitted for the company's control the same situation can arise where the effective control is not a company.
As I said, this is so complex that we are all at one stage or another in the course of this debate making statements we have to correct and I hope the Minister will not mind when I say that I think he was mistaken for the moment when he thought the amendment covered the cases we are talking about, because it is an inverse relationship Deputy Colley is talking about, the inverse to what is covered by the amendment. You have an Irish trading company; for some reason or other, the investment is by a non-resident. Various nationalities and possiblities were mentioned. Indeed, it is important to consider the case of Europe and the Community of which we are a member. There may be an interest there, whether an individual or a collection of individuals, that may not be covered by the phrases used in the amendment: "a body corporate has control" is the effective phrase.
May I interrupt? It is a body corporate which is not a non-trading company.
That is so: where a body corporate which is a non-trading company. Deputy Colley has slightly telescoped me here because there is one non-corporate possibly and the other non-trading involved in this. It is very difficult to be completely clear in this. I am postulating an Irish trading company which has come into being or been set up or acquired, or anything else you like, and is under the effective control in whole or in part—I am widening it to try to capture the general case—of an individual or group of individuals whether to be regarded as a corporate person or not, using the word person in the legal sense, who are not Irish residents or domiciled. In other words, it covers the case where Deputy Colley wandered all over the world; he said Americans, Scandinavians and Continentals.
We have them all.
I wonder if I have made that much clear—an Irish trading company, whether acquired or set up, controlled in whole or in part by a foreign individual or group of individuals, corporate or otherwise. I will even go as far as to say it is not even necessary to postulate control. One could even say a substantial interest in the Irish company. These are the two ends. You have the Irish company here and you have the other interest over there. Now consider the case Deputy Colley made where, for commercial, administrative or any other reasons, a private non-trading company is set up as a holding company here—that is what it amounts to—for what I will call the foreign interest and, from the Irish point of view, that foreign investing interest. That particular private trading company, as the section stands, comes completely within the scope of the section provided the technical details are complied with, which would be most likely, and the word "penalty" comes within the disabilities of the section.
The next question arising is: is it not desirable that, in such case, such a private non-trading company should be taken out of the ambit of the section and brought within the ambit of trading companies? I think that that would be possible. I wonder have I made that point clear? It is difficult to be clear. Does it make sense?
(Cavan): It does indeed. I can follow the Deputy.
I would like to spare everybody the agony of listening to something that does not make sense. If it makes sense, I want to say this on the whole approach to the section. We agree that the section is necessary because the device was so much abused and used for tax avoidance, more abused than used, and the first approach certainly had my sympathy. If this question of opening up the section arises, can I not ask this fundamental question on the section? Is not the purpose of this section to ensure that, where tax is payable or justly payable in equity within the principles of the Bill, that tax should be collected? What is really of interest is the financial stake or interest of the Revenue and of the taxable entity? It is here this section gets into trouble and that is why this amendment had to be brought in. I can see the difficulty of avoidance in tackling control because if you do not tackle control you can cause difficulty. The bringing in of the element of control has caused the difficulty here. That, in turn, might easily bring in elements of double taxation.
If the Revenue Commissioners are satisfied that the wealth concerned is ascertainable, and if they can apportion the wealth, as in the case of trading companies and other companies over the shareholders, should not that principle arise generally? The only justification, therefore, from the point of view of this Bill, for going after the private non-trading company is because the device makes that procedure very difficult if not impossible. I wonder does that make sense? May I put it this way? The essential difference between a trading company and a non-trading company and, shall I say, non-trading companies as defined in this section, is that in one case the wealth tax is distributed over the shareholders. That is possible because the shareholders are easily ascertainable and there is not much scope for juggling to avoid the payment of tax. Will the Minister accept that I am right in this? I do not want to develop arguments where this is a fundemental objection.
(Cavan): Is the Deputy saying it is comparatively easy to follow shareholders of——
Yes, that is what I am saying.
(Cavan): I do not accept that.
If I am right in saying that the essential distinction from that point of view is that in the case of the trading company, you are getting directly at the shareholder. In the case of the private non-trading company, you are not getting at the shareholder but you are getting at the entity because through this device the individual shareholder is impossible to isolate. It is like the three-card trick.
(Cavan): More correctly, it is impossible to aggregate.
Aggregate. In other words, there are loopholes in this. If we accept that as being the real kernel of the affair could something not be incorporated in this section giving a general direction to the Revenue Commissioners, coupled with the discretion I have so often advocated, to the effect that where the financial aspect of the matter is clear and satisfactorily accounted for by the Revenue Commissioners, discretion will be given to obviate the manifest type of difficulty or injustice that can arise in cases such as Deputy Colley mentioned and in cases such as the Minister has provided for in his amendment? That is where I stand on the principle of the section. I hope my remarks have been helpful rather than obstructive.
Having said that, I want to ask some questions here. After all, when one comes to subsection (3) it is the subsection which causes the bulk of the trouble and I understand it is necessary to give effect to the original intentions of the section. At the end of that subsection is the acceptance of the principle that I state here, because it is the norm. The criteria is money, the due collection of tax. Therefore, I ask the Minister to look at it this way. If in any case of a private, non-trading company—and I say "any case" now—which is in the opinion of the Revenue Commissioners—I am putting it that way because I am fairly certain that that opinion would correspond to the fact—not a device or to be adjudged a device to avoid tax, and where it is possible to ascertain the purpose clearly and to satisfy oneself that the tax avoidance abuses are neither there nor was it provided that they should be there, that there should be discretion on the part of the Revenue Commissioners to treat that company as outside the narrow ambit of the provision, in other words, giving the option to the Revenue Commissioners to treat companies in that position as trading or non-trading as would suit the merits of the case.
I should now like to ask a couple of detailed points on the section. I know that constantly I am advocating something here that I could be faulted for in other types of legislation, and in ordinary criminal legislation I would take the opposite view, but in the area of Revenue legislation, having regard to all our experience, at the end of a long debate on the other Bill, being in the middle of this Bill and facing a third Bill, I find myself more than ever reassured in the attitude I am taking to the administration in this. After all, we are giving powers of all sorts to every Minister, body and everything else in the State without thinking about it, and just because it is taxation, pure and simple, we are carrying on a traditional attitude of regarding the Revenue Commissioners as criminals almost. We have given powers everywhere, and to semi-State bodies which are not accountable to the House. I do not wish to say anything more because I would be out of order but the more I see of this, the more I see that in every section of this legislation there is need for two things, the giving of an adequate discretion and then encouragement to the Revenue Commissioners to do the right thing in the best way they can. When I say the Revenue Commissioners, I recognise that it really means the unfortunate individuals who have to make decisions, particularly the inspectors, who have to do this type of work. The overall control of that should not be difficult.
There are one or two small questions I would like to ask, having made that point, and I hope the Minister will consider the approach I have made which enlarges on Deputy Colley's point there. I notice something which occurs twice in the section—in subsection (1) of paragraph 6 (b) between (ii) and (iii) the word "or". One says:
(i) the company is incorporated in the State, (ii) the effective centre of management of the company is in the State, or (iii) control of the company is...
That "or" there is quite clear; it is between (ii) and (iii), but are we to infer an "or" between (i) and (ii) ? This is a question of some importance. Should the word "or" be in there?
(Cavan): It should not be there but it means “or”.
I can see the difficulty but they are all mutual alternatives, are they not?
(Cavan): It is comparable to section 5 (2). It is a drafting procedure and that is considered the proper drafting.
But what I am asking is, does this mean that all of them are alternate?
(Cavan): That is right.
I had not looked into the matter and if the Minister is satisfied, I will accept the answer.
(Cavan): That is the proper drafting and it is the drafting that has been insisted upon by the experts.
Does that leave it in subsection (3)?
(Cavan): Yes, either (a) or (b), just under that, under (ii).
I did not notice it there when we were dealing with it. The actual set-out here was such that, once at the very end, it made me ask the question. I have not looked into the matter or researched it and the Minister is quite satisfied that these are the conditions that must be fulfilled for the lot. A question has arisen as to the definition in section 6 of this Bill and section 35 of the Capital Gains Tax Bill which we have passed. The Minister need not be alarmed; I am not going to open up the whole question of pari materia again.
I should like to say to the Minister, as he was not here, that I remarked yesterday that the Minister for Finance appeared to be more inclined to my point of view on that matter and he introduced an amendment which went very far to help me in my argument but this is not the point here. I am making a point on consistency because I recognise that in the case of this section the provisions are specific to the section and as I cannot see any case where it would arise outside the section, the argument of pari materia would be academic and speculative and would not have any practical effect. It is, at the same time, from the point of view of consistency, interesting to note that a “controlled company resident” means a company resident in the State in which the number of persons holding shares is not more that 50—that corresponds to paragraph (a) of subsection (3)— which has not issued any shares as a result of public invitation—that corresponds to (b) (iii)—which is under the control of not more than five persons. So that, so far there is consistency between the two. Furthermore, although control is very much telescoped in paragraph (4) what is in the Bill is wider.
Then you have the difference between the two in the words "whereever incorporated"—paragraph 35 referring merely to "company resident in the State". Of course, one has to take paragraph 36 for capital gains into account for a non-resident company. I am asking whether any difficulty can arise in the case where, for instance, the private non-trading company is incorporated elsewhere and indeed resident elsewhere. Would that in any way affect the situation?
I do not think there is any possibility of tax avoidance. Such ideas as occur do not suggest that any real difficulty arises. There is the general point, the desirability of the sections being on the one foot.
That rather involved argument really hangs on the following points. Firstly, we are d'accord in regard to the purpose of the section and what it wants to do. I did take issue with the Minister in appealing too often to the argument, if there is a difficulty there it is not going to be a practical one. The Minister may go a little bit too far there. I think the Minister is inclined to take refuge.
(Cavan): I find it very difficult to follow Deputy de Valera's argument in that respect and then his strong appeal to leave everything to the Revenue Commissioners.
No. They are not inconsistent.
(Cavan): Very inconsistent. I would say.
The Minister is under a misapprehension here. It is to cover that type of case that if the Minister says a thing is not likely to happen and legislates to exclude, then it may happen, whereas what I am saying is that if you cannot legislate to provide, then leave the Revenue Commissioners the discretion. However, this would be off at a tangent. I hope the Minister will take what I have said in the friendly spirit in which it was said.
The principle is its financial state and the isolation of it and the collection of taxation which is assessed on financial value. Let us not lose sight of this principle in this taxation measure. Let us be careful, therefore, when we are dealing with questions of control that commercial considerations, even social considerations, are not prejudiced that, therefore, when there are bona fide purposes for a private non-trading company, that these should be recognised as the Minister has recognised them in the particular case where he has provided for an amendment and I have gone to some length expanding what Deputy Colley said to say that there may be other cases where that may be so. At the end of that, I am driven to the conclusion that there is only one way of dealing with it, that what he is at is to enforce a wealth tax of 1 per cent and that if the proper persons to be taxed are ascertainable, the discretion in such a matter should be left with the Revenue Commissioners to decide where appropriate whether a non-trading company is there for bona fide purposes and that the conditions which the Revenue require can be satisfied or to leave the discretion to them to say “No, we are not satisfied. We are going to treat it as non-trading”. A discretion within that limited area is probably the only answer to a problem of this nature. If one takes it that way possibly the section could stand subject to details, possibly another amendment on Report, but the amendment might have to be of the general nature I have suggested. I hope I have made myself reasonably clear. I do not think I can push my argument any further.
I do want to say something further but perhaps the Minister might want to comment on some of the points raised by Deputy de Valera before he forgets them.
(Cavan): Really the point in substance made by Deputy de Valera is that a very wide discretion—I would even go so far as to say possibly an unacceptable discretion—should be given to the Revenue Commissioners in any particular case to decide whether or not a non-trading company was a genuine bona fide one that was entitled to be treated as an entity with a threshold or whether it should be treated as an anti-avoidance device. We should bear in mind here that the amount of tax to be collected in any particular case is relatively small, 1 per cent. The administration of the suggestion made by Deputy de Valera would be out entirely of proportion to the amount involved.
I was not thinking of thresholds. I would not press the Minister too hard on that.
(Cavan): I could see a situation arising where the private non-trading companies would continue to mushroom and each one of them would urge on the Revenue Commissioners that is was a genuine bona fide non-trading company entitled to be treated as such and entitled to whatever concessions the suggested amendment would give it. The Revenue Commissioners would have to investigate each of these companies and most of them would go to appeal. Certainly the amount of time and money involved would be out of proportion to the amount of revenue which would come in as a result. It has been accepted by the far side of the House without question that by and large private non-trading companies are anti-tax devices.
Agreed.
(Cavan): The next that has been accepted is that the amendment that I have introduced and which the House has accepted goes a long way towards granting exemption to the type of holding company that we are all familiar with and which has been introduced as a genuine bona fide device for operation by trading companies.
Debate adjourned.