Finance Bill, 1986: Committee Stage (Resumed).

SECTION 27.

I move amendment No.42 (a):

In page 35, line 15, after "money" to insert "in excess of the rate of change in the consumer price index in the relevant year".

This amendment seeks to make a change in the definition of interest in order to confine the charge to real interest rather than to nominal interest. In this respect, I am reflecting the views of the Commission on Taxation which felt that for tax purpose what should be regarded as taxable interest should be real interest rather than nominal interest. This would have the effect of putting that into effect and confining tax to the difference between the rate of interest and the rate of inflation. This does not make a major difference this year because the rate of inflation, happily, is low and it is estimated that for this year as a whole it will probably come out at about 3 to 3½ per cent. Therefore, interest rates which are payable now are more significant in real terms than was the case in the past.

We do not have to cast our minds back very far to remember a time when banks and other similar institutions were paying 6 per cent or 7 per cent to depositors and inflation was running at 18 per cent to 20 per cent. Therefore, by simply having money in a bank one was actually losing out very seriously in real terms. We could see those days again. We may see them either because there will be a substantial and sustained reduction in interest rates, which I would dearly love to see, or because we may go back to times of higher inflation for reasons which are no more under our control than the reasons we have low inflation today are under our control. They are the result of fortuitous external factors. They are fortuitous at present but the same external factors were not fortuitous in the past. We could well go back to that situation again.

There is very little reality — and clearly this view is shared by the Commission on Taxation — in someone receiving 6 per cent interest on money at a time when inflation is running at 18 per cent and then being taxed on the 6 per cent as if it were an actual gain to them. The purpose of this amendment, therefore, is to try to overcome that situation and bring a sense of reality into what the meaning of interest is. In real terms, it is simply the excess of the amount of interest over the rate of inflation at the time at which the interest is paid. If you are going to tax the interest, at least tax it on its real value rather than on its nominal or national value.

I regret very much many aspects of the proposal, even with the various amendments the Minister has made to the Bill. The failure to exempt people who should be exempted is very serious inasmuch as it is an imposition of tax on a large number of people who would not be liable otherwise for it and who were not liable for it in the past. Insult is added to injury by the failure of the Government to impose the tax on real interest rather than on nominal interest. The injury is very considerable indeed. It is amazing that when the Minister was giving a press conference on 4 April last on the introduction of this Bill and on its circulation he made a statement in which he gave an estimate of the likely yield from this DIRT tax. He said that if all those who were not liable for tax were exempted 60 per cent of the prospective yield would be lost. That is a most shattering statement because it makes it perfectly clear that only 40 per cent of the liability that is now being created is on people who are liable for income tax and that the other 60 per cent is in respect of people who are not liable. They were not liable for tax up to now for a variety of reasons but the main one was that their incomes were so low. These huge amounts are to be taken from them now. The prospective yield of tax in a full year is £130 million.

The Deputy should come back to the amendment. He is debating the section at the moment.

I am debating the rate of interest and the tax. I am trying to point out that considerable injury will be done by this proposed tax. Substantial insult will be added to that injury if the tax is to be charged on nominal interest rather than on real interest. This is especially so when we have regard to what the Minister said on April 4: that 60 per cent of the yield from the tax would be lost if people who were not liable for tax were excluded from the provisions. That is appalling. It does not seem to have made any great impact at the time. The tax is not just being imposed on poor people but also on sporting organisations and community organisations.

The Deputy is moving back to the section again.

These people have had no liability for tax up to now. Suddenly it is being imposed on them at 35 per cent.

To add insult to that injury — and this is the point I am trying to put across in my amendment — the tax is to be changed, not on the real interest that accrues to them, but on the nominal interest.

I would ask the Minister to contemplate the equity of the situation which existed in this country in the not too distant past of somebody being paid interest at 6 per cent when inflation was running at 18 or 20 per cent. What real gain is there to such a person? There is only a real loss and in serious terms. It is quite inequitable to tax somebody on the nominal gain which in fact is a real loss. That difficulty can be overcome. If the House wants to accept the principle of this DIRT tax, which I am not keen on, at least they should apply it only to interest that is earned in real terms.

Fortunately, for somebody who has money on deposit this year he will earn interest in real terms. The interest rates one is likely to get on deposits will be double or more than double the likely rate of inflation. That is good but it is very rare. Therefore we should legislate not just for the fortuitous circumstances in which we find ourselves this year but for the circumstances which have been much more common for quite a number of years past.

On a point of Order, can I ask if there is any restriction on the time allowed for chapter 4 which includes this amendment and this section or will we have an opportunity to speak on it after the adjournment for lunch?

A number of sections will be taken at 6 p.m.

Deputy O'Malley's amendment echoes the recommendation in paragraph 11.15 of the first report of the Commission on Taxation.

I said that.

That paragraph states:

We recommend that the income from all interest-bearing deposits should be charged to tax to the extent only that the rate at which it accrues exceeds the rate of inflation during the period of accrual. In so far as the interest earned is insufficient to compensate for the erosion of the capital value of the deposit, the shortfall should be allowed as a deduction against other income.

The interesting part is:

Interest on borrowings should only be allowed for tax purposes to the extent that the rate at which it is paid exceeds the rate of inflation. These are essential elements in our recommendations which involve a systematic adjustment of the tax base...

Note the word "systematic".

...to allow for the erosion of capital by inflation. These elements include, in addition to indexation of interest, indexation for capital gains tax purposes and the adjustment of business income and they form an integrated package.

Note the words "integrated package".

In the interests of equity and efficiency all three elements must be implemented.

What Deputy O'Malley is doing — I am not suggesting that it is by design — is picking from the report the good bits which would reduce the level of taxation applied to interest by subtracting the rate of inflation. He is not putting in the bad bit which would reduce the extent to which interest can be claimed.

I cannot include it.

I know that, but the Deputy did not say it in his contribution. He referred to the Report of the Commission on Income Taxation and quoted selectively from it. The Commission recommended that deduction of interest from taxable income should be done only after the rate of inflation has been subtracted. That would increase the burden on borrowers substantially. Clearly, to do what Deputy O'Malley has suggested would involve considerable extra expense to the Exchequer because you could not pick out the bit that would be beneficial to the taxpayers and the bit beneficial to the Revenue.

The Deputy said it is not possible for him to move an amendment that would impose an extra charge on the Exchequer, but he is clearly familiar with the report he quoted and I am sure he could manage it. My personal opinion is that there is much to be said for the recommendation of the Commissioners on Taxation on this general matter, but it will have to be looked at on an integrated basis rather than in isolation as proposed in Deputy O'Malley's amendment. I will be looking at it during the next year, before the introduction of the next Finance Bill.

As I have indicated, there is much merit in Deputy O'Malley's case because interest rates have the value of what they are worth only against the background of inflation. The Deputy's proposal is not part of an integrated package and, therefore, I cannot accept the amendment. If accepted it would cost in the region of £27 million in 1986. Unless we were to introduce reductions in the way in which interest might be calculated on mortgage relief we would be thereby reducing the value of the mortgage interest allowance. That would be a major change in the tax system. It would be better to look at the whole thing together rather than try to do it in an isolated way. However, it was interesting to be able to debate how interest should be calculated.

Is the Minister confirming that interest rates are running at three or four times the rate of inflation? When is it likely that this will finish, and what can we do about it?

As the House is aware, I am very concerned about this. I have done all I can to reduce interest rates, by every means open to me through the Department's activities with the Central Bank. It is in our interest as a Government to bring interest rates down because the Government are large borrowers and are paying these rates like other borrowers. Since I took office, for a variety of reasons interest rates have gone down, and in the last week there has been a reduction in the short term position. I note with satisfaction reports in today's newspapers that there will be a further reduction in the rates. It is my intention to do everything possible within limits to reduce interest rates, but it must be appreciated that interest rates are the price of money and that they are governed ultimately by supply and demand. The Government can influence the matter somewhat but they cannot overcome the fundamental law of supply and demand.

Amendment, by leave, withdrawn.

I move amendment No. 43:

In page 35, subsection (1), lines 27 to 29, to delete paragraph (a) and substitute the following:

"(a) which is made by, and the interest on which is beneficially owned by—

(i) a relevant deposit taker,

(ii) the Central Bank of Ireland,

or

(iii) the Insurance Corporation of Ireland, plc."

The purpose of this amendment is to allow deposits made by the Administrator of the Insurance Corporation of Ireland to be outside the scope of the retention tax provided for in Chapter IV of the Bill.

For that purpose, the amendment provides for the insertion of a new paragraph (a) in the definition of "relevant deposit" in section 27 (1) of the Bill. The existing paragraph (a) provides that bank etc. deposits are not to be "relevant deposits"— so that, accordingly interest on the deposits will not be subject to deduction of tax at source — where the deposits are held by, and the interest on them is beneficially owned by, a relevant deposit taker, as defined in section 27 (1) or by the Central Bank.

The new paragraph (a), as provided for by this amendment, includes, in addition to the references to a relevant deposit taker and the Central Bank which were in the existing paragraph (a), a reference to the Insurance Corporation of Ireland. Thus interest on deposits made by the company with a relevant deposit taker may be paid without the deduction of tax.

Funds provided under the terms of the rescue scheme established for the Insurance Corporation of Ireland are currently held on deposit by the administrator. The interest arising on these deposits is an important element of the rescue scheme. If such interest were to be subject to deduction of tax at source, the benefit of the interest to the current cash flow of the company would be significantly reduced. It is, therefore, desirable that such interest should continue to be paid in full without deduction of tax, and the Government have decided, accordingly, that the company should be relieved from the retention tax in the same way as interbank deposits, or deposits by the Central Bank with a licensed bank, are relieved.

As the House is aware, the administration of the ICI is being funded by long term loans of £100 million through the Central Bank, of which £70 million has been provided by Allied Irish Banks. The money has been lent by the bank to the Minister for Finance who in turn passed it on to the ICI fund in the High Court which, in turn, makes it available to the administrator with the authority of the court. The interest rate is a very fine one and has been subsidised by the banking system. There is no mark-up on the interest either for the Minister or the compensation fund. Both the Minister and the compensation fund are simply a means of passing the money through to the ICI, in other words, conduits. The administrator has invested the money at the precise interest obtained thereon. It is an essential element in his cash flow calculations — without it he could not service the debts he has. Some of the fund was placed with the Minister but a large part of it was deposited with banks, much of it in compulsory trust accounts to cover potential future liabilities. Therefore, in view of the fact that the State is precluded from giving any direct aid——

We must suspend the sitting.

Progress reported; Committee to sit again.
Sitting suspended at 1.30 p.m. and resumed at 2.30 p.m.