There are certain printing corrections which I should like to read out before I proceed. In page 2, amendment No. 2, subsection (1) (b), the reference to section 56 of the Corporation Tax Act, 1976 should read, "section 156"; in page 6, amendment No. 7, paragraph (d) sixth line, "the" omitted before "expenditure"; in page 7, amendment No. 7, subsection (8) (a), fifth line, "plant" should read "film" in page 9, amendment No. 8, third line, "Corporation Tax Act, 1967" should read "Corporation Tax Act, 1976".
Finance Bill, 1986: Report Stage.
I move amendment No. a1:
In page 10, in the Table, Part 1, Column 1, to delete "£4,700" and substitute "£4,850".
The purpose of the amendment is to endeavour to reduce the burden of income tax which has grown enormously under the Coalition. On Committee Stage I tabled an amendment seeking to extend the payment of the standard rate of tax to those earning an income up to £5,000 but the Minister did not see fit to accept it. Accordingly, I have reduced my proposal. It is worth noting that this — and the amendment in relation to married couples — is the only amendment I have tabled. I am proposing we increase the application of standard rate of tax from the figure of £4,700 to £4,850. The consequence of that would be that the figure for a married couple would rise from £9,400 to £9,700. The income tax take under the Coalition has increased by more than 40 per cent and that says more than anything else about the ill-advised fiscal attitude of the Government. They have increased the income tax take from £1,400 million to £2,500 million in the space of three years. No other country has experienced an increase of that level in income tax. We are all obliged to endeavour to convey to the Minister, even at this final stage, how essential it is in the interest of economic development and providing a breathing space for workers, investors and employers, that the proposed additional taxation he is introducing in the Bill is reduced even by the marginal amount I am suggesting.
Unless and until we receive some signal from this Government that the direction they have followed is being radically altered they are dooming, not just themselves, but the country to wallowing in the depression we have experienced over the last few years. Instead of moving in that direction what this Minister and Government are doing is adding new taxes, which are in effect income taxes, under a different name. One of the best examples is the DIRT, which is imposing income tax at 35 per cent on deposit interest that was exempt from taxation to date because the income on the interest itself was below the tax limit. It is absolutely essential, even at this late stage of the game, that the Government repent of the course they have been following at great disadvantage to everybody.
I make no bones of the fact that what we are endeavouring to achieve here is a pattern of income tax similar to that which existed before this Government came into office. I want to remind the House, and the Minister particularly, that at that time two-thirds of all income taxpayers were paying income tax at the standard rate. I believe I will have the support of all other parties in the House, if not that of the Government parties, in saying that we should as quickly as possible revert to that position because of the consequences for all of us of the penal levels of taxation imposed by this Government.
In moving in that direction it is important that certain facts be put on the record. Within the last two weeks I asked the Minister in the House here what would be the gross and net cost to the Exchequer of applying the standard rate of income tax — 35 per cent — to two-thirds of income taxpayers in 1986 and, secondly, in a full year. The Minister's reply was that the cost to the Exchequer of expanding the standard rate band to ensure that the marginal rate of tax of two-thirds of income taxpayers would not exceed 35 per cent is estimated at £38 million in 1986 — that figure is very important — and £63.4 million in a full year. Both of those are gross figures. The Minister indicated that the net cost in 1986 would be, at very most, £25 million. It should be remembered that that information was given by way of official reply by the Minister in this House.
I want now to direct the attention of the House and of the Minister to a totally false statement on the part of his party in relation to what they claimed were the outrageous proposals of Fianna Fáil. Here I am referring to a Fine Gael Information Services document issued on 24 April last. I presume the Minister has some little association with those who issue these misleading documents, this outrageous propaganda. I am quoting from the document relating to the Fianna Fáil proposal to restore the income tax position to that obtaining prior to this Government coming into office, when two-thirds of taxpayers were paying at the standard rate. The document has this to say:
...But Mr. Haughey has said he will bring two-thirds of taxpayers onto the standard (35 per cent) rate of tax. Assuming that allowances remain the same this would cost £218 million.
I hope the Minister will get back to the Fine Gael Press Office and have them publicly repudiate this outragous, false propaganda, that is, as is claimed in that document, increasing the 35 per cent band by about £1,100 to take in an extra 100,000 taxpayers. The Fine Gael Press Office say that it would cost £218 million whereas the official statement of the Minister for Finance puts that figures at £38 million in 1986. If we are to have any proper analysis of the political positions of the various parties, I must insist that the Fine Gael Press Office, through the Fine Gael Minister for Finance, immediately and publicly withdraw that totally false, misleading propaganda which multiplies by at least seven the cost, as given directly by the Minister himself, of moving to the position in which we were before this Government set out on this outrageously dangerous and damaging path for our economy. A net cost this year of approximately £25 million would constitute not only a major boost to our economy but would be a signal that, even at this late stage, the Government are prepared to repent of their ways and lift the burden of this awful tax increase of 40 per cent we have experienced over the last three years.
I think we have covered all of this ground already on Committee Stage. We spent hours, during which Deputies O'Kennedy, O'Malley and others put forward various proposals to increase the tax bands, personal allowances and so on, all in the full knowledge that there was not any possibility of their being accepted because the Government have set their financial targets for the year in the budget as far as expenditure and revenue are concerned. In a sense I feel that Deputies opposite have not made the best possible use of their time. While amendments of this kind do afford Deputy O'Kennedy an opportunity of making a political speech——
They afford the Minister an opportunity of withdrawing this propaganda.
——in that sense constituting a clothes peg on which he can hang a political speech, although he might have other ideas as to how the parliamentary process might be utilised, in reality that type of contribution does not contribute very much to improving the Finance Bill and essentially is something of a time-wasting exercise.
To come to the amendment that Deputy O'Kennedy has put forward, its proposals would cost £7.6 million in 1986 and £12.7 million in a full year. The House might well say that this is a relatively small amount. That is true, but if one were to tot up the cost of the various amendments put forward, of which this is one only, then the amount would be very considerable indeed. I do not feel that Deputy O'Kennedy is making very good use of his time.
I would point out to the House that the reason the income tax burden is so severe in this country is that its revenue has to be used almost exclusively for the service of debt, the payment of interest on foreign and domestic loans. Practically every other European country is in a position in which a small proportion only of its income tax revenue is used for that purpose, leaving most of its income tax revenue available for normal, day-to-day expenditure. That is not the case here. Almost our entire income tax revenue is used for that purpose; it is in fact used to support deadweight.
Deputy O'Kennedy made the point in the past that, of course, some of that debt was incurred in the course of office of other Governments and some in the course of office of this one. That is undoubtedly true. However, the important change that has occurred as far as this is concerned is that in recent years the budget deficit has been significantly less than the cost of debt service. In other words, if there were no debt service there would be a budget surplus of somewhere around 3 per cent of GNP this year, whereas in the earlier years the budget deficit was considerably greater than the cost of debt service. To use a commercial analogy, the Government were trading at a loss in those years. Now we have moved to a position in which, while the legacy of the past means that we have a deficit, on day-to-day expenditure and taxation we have a surplus of income over outgoings. That is a major change which has occurred during the period of office of the present Government.
It is now 4.30 p.m. and I must put the Question: "That amendment No. 1 in the name of the Minister be made to the Bill."
I move amendment No. 2:
In page 20, between lines 3 and 4, to insert the following:
12. —(1) (a) In this section—
`director' has the same meaning as in Chapter III of Part V of the Income Tax Act, 1967;
`eligible employee' in relation to a qualifying company means—
(i) where the company is a trading company, a full-time director or full-time employee of the company, or
(ii) where the company is a holding company, a full-time director or full-time employee of the company or of a company which is its 75 per cent. subsidiary;
`eligible shares', in relation to a qualifying company, means new shares forming part of the ordinary share capital of the company which—
(i) are issued on or after the 6th day of April, 1986,
(ii) are fully paid up,
(iii) throughout the period of five years beginning with the date on which they are issued, carry no present or future preferential right to dividends or to the company's assets on its winding up and no present or future preferential right to be redeemed,
(iv) are not subject to any restrictions other than restrictions which attach to all shares of the same class, and
(v) are issued to and acquired by an eligible employee in relation to the company at not less than their market value at the time of issue;
`full-time director' and `full-time employee' have respectively the same meanings as in section 8 of the Finance Act, 1978;
`holding company' means a company whose business consists wholly or mainly of the holding of shares or securities of trading companies which are its 75 per cent. subsidiaries;
`market value' shall be construed in accordance with section 49 of the Capital Gains Tax Act, 1975;
`ordinary share capital' has the meaning assigned to it by section 155 (5) of the Corporation Tax Act, 1976;
`qualifying company' means a company which is at the time the eligible shares are issued—
(i) incorporated in the State,
(ii) resident in the State and not resident elsewhere, and
(iii) (I) a trading company, or
(II) a holding company;
`trading company' means a company whose business consists wholly or mainly of the carrying on wholly or mainly in the State of a trade or trades;
(b) In this section `75 per cent. subsidiary', in relation to a company, has the meaning assigned to it for the purposes of the Corporation Tax Acts by section 56 of the Corporation Tax Act, 1976, as applied for the purposes of section 107 of that Act by subsections (6) and (7) of that section.
(c) References in this section to a disposal of shares include references to a disposal of an interest or right in or over the shares and an individual shall be treated for the purposes of this section as disposing of any shares which he is treated by virtue of paragraph 5 of Schedule 2 to the Capital Gains Tax Act, 1975, as exchanging for other shares.
(d) Shares in a company shall not be treated for the purposes of this section as being of the same class unless they would be so treated if dealt in on a stock exchange in the State.
(2) Subject to the subsequent provisions of this section, where, in the year 1986-87 or any subsequent year of assessment, an eligible employee in relation to a qualifying company subscribes for eligible shares in the qualifying company, he shall be entitled, in estimating the amount of his total income for the year of assessment in which the shares are issued, to have a deduction made of an amount equal to the amount of the subscription:
Provided that a deduction shall not be given to the extent to which the amount subscribed by an eligible employee for eligible shares issued to him in all years of assessment exceeds £750.
(3) Subsection (2) shall not apply as respects any amount subscribed for eligible shares if within the period of five years from the date of their acquisition—
(a) they are disposed of, or
(b) the eligible employee who made the subscription receives in respect of the shares any money or money's worth which does not constitute income in his hands for the purposes of income tax,
and there shall be made all such assessments, additional assessments or adjustments of assessments as are necessary to withdraw any relief from income tax already given under subsection (2) in respect of the amount subscribed:
Provided that where an event mentioned in paragraph (a) or (b) occurs after the fourth anniversary of the date on which the shares were issued to the eligible employee relief shall be withdrawn only to the extent of 75 per cent. of the amount which would otherwise be withdrawn.
(4) Except where the shares are in a company whose ordinary share capital, at the time of acquisition of the shares by the eligible employee, consists of shares of one class only the majority of the issued shares of the same class as the eligible shares must be shares other than—
(a) eligible shares, and
(b) shares held by persons who acquired their shares in pursuance of a right conferred on them or an opportunity afforded to them as a director or employee of the qualifying company or any of its 75 per cent. subsidiaries.
(5) In relation to shares in respect of which relief has been given under subsection (2) and not withdrawn, any question—
(a) as to which (if any) such shares issued to an eligible employee at different times a disposal relates, or
(b) whether a disposal relates to such shares or to other shares.
shall for the purposes of this section be determined as for the purposes of section 17 of the Finance Act, 1984.
(6) Where there occurs in relation to any of the eligible shares of an eligible employee (hereinafter referred to as `the original holding') a transaction which results in a new holding, as defined in paragraph 2 (1) (b) of Schedule 2 to the Capital Gains Tax Act, 1975, being equated with the original holding for the purposes of capital gains tax, then for the purposes of subsection (3)—
(a) the new holding shall be treated as shares in respect of which relief under this section has been given,
(b) the transaction shall not be treated as involving a disposal of the original holding,
(c) the consideration for the disposal of the original holding to the extent that it consists of the new holding shall not be treated as money or money's worth, and
(d) a disposal of the whole or a part of the new holding shall be treated as a disposal of the whole or a corresponding part of the shares in respect of which relief has been given under this section.
(7) Any amount in respect of which relief is allowed under subsection (2) and not withdrawn shall be treated as a sum which, by reason of paragraph 4 of Schedule 1 to the Capital Gains Tax Act, 1975, is to be excluded from the sums allowable under paragraph 3 of that Schedule.
(8) An eligible employee shall not be entitled to relief under subsection (2) in respect of any shares unless the shares are subscribed for and issued for bona fide commercial reasons and not as part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax.
(9) All such provisions of the Income Tax Acts as apply in relation to the deductions specified in sections 138 to 143 of the Income Tax Act, 1967, shall, with any necessary modifications, apply in relation to relief under this section."
The purpose of this amendment is to introduce a new provision in regard to income tax reliefs to promote profit sharing. The position at the moment is that the company can transfer shares to their workers and the workers pay no income tax on the benefit they receive in the form of the ownership being conferred on them of shares. All they need do, as a result of this Finance Bill, is retain these shares for a minimum of five years in order to qualify for that relief. This amendment is designed in a totally new and different way to provide an extra incentive to worker shareholding. In this context, what the company may now do is transfer the money to the workers so that they can use that money to buy shares at a particular time. By providing for the building up of a fund in the name of individual workers for the purchase of shares, this new scheme is more particularly suited perhaps to situations where it is desired to give shares to workers to whom it might not be suitable to give them all at once, but rather that they should build up a fund in their name to purchase shares.
This measure represents a radical step in the development of the profit sharing concept here and is intended to complement the two schemes already introduced to promote investment in business ventures which involve a degree of risk — relief for investment in corporate trades and the new relief for business research and development. Under this additional measure, employees will be granted a deduction for income tax purposes up to an overall limit of £750 in respect of money paid as a subscription for new ordinary shares issued after 5 April 1986 by the company in which they are employed, or new ordinary shares issued by their holding company where the employer company are a 75 per cent subsidiary of that company. The company issuing the shares must be one whose business consists wholly or mainly of the carrying on in the State of one or more trades. However, that company may instead be a holding company for companies carrying on wholly or mainly in the State a trade or trades provided the trading comprises companies which are 75 per cent subsidiaries of the holding company. A company which is both a holding for such subsidiaries and a trading company will also qualify.
The relief is confined to full time employees and full time directors of the company or of their subsidiary company. This condition is in line with the interest relief introduced in 1978 for individuals who borrow money to finance the acquisition of shares in an employer company. The decision to confine the relief to employees was not taken lightly. As the House knows, I am very interested in promoting greater participation by Irish investors generally in business equity and venture capital. I am satisfied, however, that special extra measures are necessary to encourage share ownership by workers in the firm in which they themselves are employed. A scheme open to all investors would have been too costly.
A new section provides for a deduction, in computing income, up to £750 in favour of each employee who subscribes to the eligible shares. The investment does not have to be made all at once and can be spread over a number of years. To the extent that the individual exceeds, in the aggregate, the maximum of £750 per year, the income tax relief will not be given. However, the succession of £750 amounts can be put into the fund to be used in a subsequent year to buy shares worth a lot more than £750 at one time.
It is not possible to forecast the take up of this measure but there are already indications that many thousands of employees will benefit from it. I have received substantial representations from firms interested in introducing profit sharing for their employees, who felt that the existing scheme which involved the direct transfer of shares was not quite suitable to them and that instead a scheme which allowed them to transfer money which could be used to buy shares would be more suitable for their financial circumstances and the financial circumstances of their employees.
In order to facilitate every possible opportunity for the extension of worker share ownership in industry, I have introduced this amendment. As the House will be aware, I gave notice of my intention to introduce an amendment on these lines on Report Stage. I hope it will receive a welcome in the House. I know there is an interest on all sides of the House in the promotion of worker share ownership in industry. I had the honour to introduce the first tax concessions for this purpose in the budget in 1982 and those proposals were carried through into the Finance Act by my successor, Deputy MacSharry. It is very clear that there is support on all sides of the House for the promotion of worker share ownership and I hope this further incentive and further extension of this concept will command support in the House. I certainly intend to do all I can to promote this concept throughout the country in the coming months and hope I shall have support in so doing from Deputies of all parties.
The Minister has rightly anticipated the response from this side of the House in relation to this proposal in so far as it is something for which we have been calling for some considerable time. We are quite happy to give our full support and I make only one comment. I hope that in its application it will be not circumscribed by any regulations or qualifications which will make it unwieldly and impossible to implement, as were some of the schemes which we have seen introduced in the past few years. I am glad to give our support for this proposal and the Minister will find that when he brings proposals of this kind before us he will always get a response such as this.
I should mention that this amendment is one that has not been introduced in other countries. Some of the incentives we have introduced previously such as tax relief on share transfers to worker shareholders and the business development scheme were incentives which had been introduced in other countries, in particular in Britain, where the legislation was used as a model. This new concession is, to the best of my knowledge, being pioneered here in Ireland. I hope other countries will look at what we have done and consider that maybe they will imitate us. It is desirable that we should be giving a lead in this area. It is fair to say that in Ireland there have been some problems in the past in industrial relations, but the truth of the matter is that in well managed Irish firms industrial relations are better than they are anywhere in Europe. The fact that under this scheme more and more companies will now be in a position to give shares in their own firms to their workers will mean that we will be able to build further on the success of existing Irish companies in the industrial relations field. Clearly there would be far less problems in the areas of absenteeism or disruption of work on the part of workers who happen to be also owners of shares in the company in which they work.
I would further mention that in the case of manufacturing companies there is an added incentive in this Bill for worker shareholding. Under the provisions of this Bill the effective tax rate on dividends received from manufacturing companies is being reduced from about 58 per cent down to 23 per cent under another section. This means that workers who receive a substantial part of their income in the form of dividends on shares owned by them in the company will pay on that income a much lower level of tax, around 23 per cent, than they would if they insist on taking their entire income in the form of wages.
As the Minister has pointed out this deals with a different section. We do have a timetable. I have given an indication of our support for this and the Minister will be aware of the fact that we are all constrained. I have an amendment down for which I will have approximately four minutes to move. I assume the Minister will allow me the courtesy to move my amendment, not to this proposal but to a section in the Bill.
I am sorry. I should say that the £750 limit is an overall limit, not a limit for each year. I may have inadvertently misled the House in what I said earlier but I would intend to keep this limit closely under review and to increase it in the light of the success of the scheme.
Amendments Nos. 3 and 4 may be debated together.
I move amendment No. 3:
In page 20, between lines 39 and 40, to insert the following:
"14.—That a marketing or other duly authorised representative who is based abroad of an Irish resident employer shall have his Irish tax payable reduced by reference to the following formula:
T is total Irish liability to tax in respect of the employment
F is total number of days abroad on employer's business
A is 365 days.
(a) No relief shall be granted unless in excess of 70 days are spent abroad on the instructions of the employer and such days are spent exclusively in the business of marketing the products of the employer, in the income tax year.
(b) No relief shall be granted to any person who is a participator, or an associate of a participator, of the employer.
(c) No relief shall be granted unless a marketing programme is submitted to and agreed with Córas Tráchtála in advance of the tax year for which relief is claimed.
(d) Provided all the foregoing conditions are met, relief shall be given by way of repayment of tax paid on production to the Revenue Commissioners of verification by the employer and employee of days spent abroad in a form prescribed by the Commissioners.".
One of the major priorities for this country is to realise the marketing potential that is of vital importance for our economy. This proposal is an incentive to marketing personnel abroad by way of a limited tax allowance in relation to the amount of time spent abroad which will cost little or nothing, a matter of a few hundred thousand pounds. I strongly commend this amendment to the House because we depend to a very great extent on export led growth. We are a very small country and account for 0.5 per cent of total world trade in terms of aggregating both our imports and exports. We require to win and maintain only a very small proportion of world markets in order to achieve our economic success. Our attempts to date have been excellent in many spheres, but they still have not been enough to earn for us the jobs and living standards to which we aspire. For that reason, I suggest we must make a far greater effort to export abroad. We must do this with thoroughness and determination but, most of all, we must focus on getting export marketing executives into foreign markets.
In many ways, export marketing is all about shoe leather and aeroplane tickets and about travelling at the weekend rather than spending a working day in travel. In other words, export marketing is all about export marketing executives not only working hard but also accepting grave personal inconvenience. Our amendment is geared to acknowledge that. The extent to which we must encourage people to enter export markets is very obvious if we study the degree to which we have penetrated various markets in 1985. Irish merchandise exports in 1985 were estimated to have amounted to about £9,744 million. A breakdown of this will show that the island of Great Britain was our biggest customer with £2,607 million followed by the Federal Republic of Germany with £984 million and the USA with £953 million.
If we define the penetration of a market by the value of Irish products which we sold to each inhabitant in that market, we get the situation that we sold £47 worth of goods to each person on the island of Great Britain, an identical £47 to each Dutch person, despite the fact that in absolute terms of value of exports the Netherlands only came fifth in our export league table. The figure for penetration fell to £16 per inhabitant in the Federal Republic of Germany. It is obvious that we can penetrate the German market to a far greater degree if we encourage export sales executives to work in that market. Penetration of the German and European markets generally to the same degree as we have already achieved in the Dutch market could add almost £2 billion to our exports each year. Surely, this is not an unrealistic proposal.
In a similar fashion, greater focus could be placed on the US market where we sold only £4 per inhabitant in 1985 and on the Japanese market where we sold only £1 per inhabitant in 1985. Relatively little will happen until we give the individual international marketing executive the incentive to go abroad and work foreign markets. The most effective incentive can be the reduction of the income tax bill of the international marketing executive pro rata, which is what I am proposing here, to the time which the executive spends undertaking export marketing activities outside of Ireland in any one tax year. The return to the Exchequer and to the whole economy would be well justified and would be very considerable.
It has been estimated by the Confederation of Irish Industry that each additional wholetime export marketing executive would generate enough sales to sustain at least seven jobs at home. It would be well to remind ourselves of the proposals we have made. I regret the fact that I have had to move such an important amendment at such speed. The message nonetheless is there and one I feel the Minister is in agreement with. For the small amount involved I ask the Minister to accept this amendment.
I move amendment No. 5:
In page 29, line 44, to delete "20 per cent" and substitute "49 per cent."
This amendment proposes to amend section 20 of the Bill which defines a qualifying research and development company for the purposes of new relief in respect of investment in research and development. Under the existing provisions of the Bill, a company could set up a research and development company which would qualify for this tax relief on money coming in to it but the company setting it up was not allowed to own more than 20 per cent of the shares in the R and D company. It was represented to me that this was too restrictive a provision and that many companies who would be setting up research and development companies to develop products which they themselves would be selling would want to have more of a share in the action of the research and development company. It was represented to me that the 20 per cent limit was too small. To restrict them to 20 per cent would not encourage them to set up these research and development companies.
I have been concerned to try to make this scheme as attractive as possible. We are proposing in this amendment to increase the minimum shareholding of the sponsoring company from 20 per cent to 49 per cent. Deputy O'Kennedy and Deputy Wyse might ask: why 49 per cent? Why not 100 per cent? The whole purpose of this R and D scheme is to bring in outside money and, if you enabled people to get tax relief simply by putting their own money in, you would not be bringing in any extra money into the research and development activity of the manufacturing company. Therefore, there has to be a majority of the money coming from outside if you are to have the incentive effect for additional new resources coming into manufacturing. On reflection, I felt that requiring 80 per cent of the money from the outside and only 20 per cent from the existing company was probably setting the target too high and that it would be more realistic, certainly initially, to allow the relief where up to 49 per cent of the money was coming from the company itself.
The overall purpose of the scheme is to give specific tax incentives to research and development in Ireland. To my knowledge there is no other European country with a tax incentive of this kind. There is such an incentive in the US tax code but not in Europe. As a country which has been spending far too little on research and development as a percentage of our GNP we have a lot of catching up to do. Furthermore, I would stress that this incentive would help Irish companies to develop Irish products. To too great an extent high tech industries in Ireland have been dominated by foreign-owned companies. These companies have undertaken very little research and development in Ireland. The production is carried out in Ireland on the basis of research and development which is done elsewhere. This makes the Irish plant rather vulnerable to changes at corporate headquarters or in the marketplace. On the other hand, if research and development is being done in Ireland, preferably by Irish-owned companies, and if that is the main source of innovation in the Irish economy, the jobs created thereby are much more secure because they are Irish originating in every sense, right back to the seed from which they grew, which is research and development. I hope that I will have the support of the other two parties represented in the House at the moment for this amendment, which is a pioneering one and one which meets a long-felt need.
We accept and support this amendment because we have been calling for developments of this kind for the last few years. Just as we believe that marketing is essential we also believe that the added value through knowledge-based activities in industry such as research and development is essential. For that reason we are glad that the Minister has responded to cases which we have made by way of amendment in each of the last number of years for a scheme such as this. The Minister will understand if I make some general comments on the scheme. I agree with the amendment introduced today which relaxes some of the regulations and limitations on the scheme, which I think is worthwhile. There is the risk that this scheme will also suffer from the constraints which have been placed on it by the Minister.
The scheme is not available to a research and development company. There has to be a sponsoring company. We proposed on Committee Stage, which unfortunately we did not have a chance of debating, that the requirement in this section which is limited to a sponsoring company, was unreal and inappropriate. Where a pure research and development company was formed for that reason and that reason alone the tax incentives that are being made available here should also apply to such a company. We are trying to promote pure research and development and the Minister has our support in this. The incentives which are being introduced here should not have been restricted in the way they were. We are, as the Minister has pointed out, light years behind in this area. To that extent we should be encouraging and not discouraging the development of research and development corporations in their own right.
The business development scheme is available to pure research and development companies.
Unfortunately the business development scheme, as the Minister will know, has been so circumscribed with limitations, regulations and complications that only £5 million——
Ten million pounds.
——has been invested in that scheme in the last two years. If it has gone to £10 million it must be in the last three or four days. The figure the Minister quoted was £5 million. When we are all agreed on the need to promote the vitally important areas of marketing, which the Minister acknowledged is vital, I regret that he could not accept the amendment. I regret that he does not go far enough. I want to assure the Minister that anything he would do in this area would not only have our full support but our enthusiastic support.
I wish to mention some other restrictions which I fail to understand. There is a limitation in the Bill to £25,000. I know that what is being proposed today will be a help. The figure of £25,000——
Per person, per year.
——in respect of any research and development programme is but a pinhead. We proposed on Committee Stage, which again we did not have an opportunity of debating, that in respect of a company the figure should be at least £250,000, which is a very small sum and totally inadequate. The Minister has confined the amount of participation to £25,000. If the Minister can point out to me where he provides for a much higher figure for a company I would be very glad to accept it. Allowing that he has increased the share participation to 49 per cent, there is nothing here that makes it clear that there is no limit on what a company can do in terms of figures. Why should there be a limit?
All they need is more people and more investments.
We are talking in terms of knowledge, the application of knowledge and of research and development. We are not just talking about a number of people who will take part in the scheme. We are talking about the investment of funds by those who are really geared to R and D programmes. It is ridiculous for a Government to introduce what is worthwhile and then to impose an unreasonable limit of £25,000 per person, particularly in the area of research and development. The Minister's answer is: all they need is more people. If there are three people who are totally committed to research and development projects in areas in which they are particularly experienced and highly skilled, does the Minister not realise that he is confining——
They should be able to convince their friends to put in money. They could all contribute up to £25,000 per year tax free.
——the amount of money that can be used to £75,000 which is totally and utterly inadequate in an area where we are so far behind.
That is not the case.
It is the case. In the Minister's Bill he confined the figure to £25,000 per person per year.
The Deputy has one minute to conclude.
I think I am failing to get through to the Minister. If the Minister says that a figure of £50,000 or even £75,000 a year for research and development is going to make a major impact——
All you need is ten people.
If we could get one person who knows where he is going and who has the experience, the capacity and the funds we should be encouraging him to put in £25 million and not £25,000. That is the point that the Minister has failed to grasp.
This can only be taken from an individual's income tax. There are not many individuals in the country who have £2,500 let alone £25,000. Unless we had people earning £50 million a year it would be meaningless to put in a figure of £25 million. A figure of £25,000 per person per year is very generous. If people have a good idea of R and D — it will be a company that will be launching this scheme — they should be able to get plenty of people to put in £25,000.
Tá, with reservations. I move amendment No. 6:
In page 46, between lines 6 and 7, to insert the following:
"38. —(1) Notwithstanding anything contained in this Chapter, appropriate tax shall not be deducted from any relevant interest paid to any of the following——
(a) persons, other than companies, who establish to the satisfaction of the Revenue Commissioners that no liability to taxation exists under the Tax Acts;
(b) an individual, or his spouse, who
(i) at some time during the relevant year proves to the satisfaction of the Revenue Commissioners that he or his spouse was sixty-five years of age or upwards, or
(ii) throughout the relevant year he or his spouse was, or as on and from some time during the relevant year he or his spouse became, permanently incapacitated by reason of mental or physical infirmity from maintaining himself or herself.
(c) organisations or bodies of persons who satisfy the Revenue Commissioners that they are in nature voluntary and exist solely as non-profit making bodies established in the public interest for charitable, philanthropic or humanitarian reasons.
(2) The Revenue Commissioners, where satisfied under subsection (1) of this section, shall issue an appropriate exemption certificate as provided for in section 34 and subject to the conditions of that section to deposit takers identified for the purposes of this section.
(3) Any person to whom this section applies who is aggrieved by the Revenue Commissioners' decision shall have recourse to the Appeal Commissioners as if the non-issue of an exemption certificate was an appeal against an assessment for the purposes of the Tax Acts.".
This amendment relates to the DIRT. We have approximately half an hour, but at least it gives me an opportunity to move the amendment, which I did not have on Committee. My first point is that this tax has been introduced without any knowledge of how much it will bring in and without any regard to the principle of applying income tax to those who do not have taxable incomes. The Minister gave me three or four different figures in regard to the cost of exempting people not already liable to income tax. In the course of his statement announcing the DIRT the Minister said it would cost £60 million to exempt those not liable to tax, but in reply to a question two weeks later he gave a figure of £25 million. If the Minister is not aware of the cost of exempting non-liable persons from this tax he should not have introduced it in the form in which it is before us.
The Minister has given one figure twice the size of the other in the space of two weeks and it is clear, therefore, that this tax has not been properly conceived. The Minister should not have introduced it without at least being aware of the amount it would yield and the impact it would have on those affected. The reason for its introduction, according to the Minister, is that it would reduce the tax burden on others who are liable to tax.
In these circumstances it is vital that we should know at least how much it would cost to exempt people below income tax liability level. It is totally unacceptable to us, and I believe to the population at large, that a tax would be imposed on people who have not got taxable incomes, simply because it would cost too much not to do so. That is an outrageous principle. For the first time we will be applying a tax to people whose incomes are below the limit, and to add insult to injury, the Minister said this is necessary if he is to reduce the burden of income tax on those already paying. That introduces another outrageous principle.
We all know that the burden of income tax on those liable to it has been increased by 40 per cent since this Government took office, an intolerably high rate of tax, but is the Minister sincerely suggesting that the way to reduce the burden on those already paying too much is to impose a tax on people who have no liability to it? That, in effect, is what the Minister has said.
Logically, because the Minister does not have an idea of how much it would cost to exempt those people, he cannot know how much he will get from this tax. I have said that it is wrong to impose a tax on people who are not liable to income tax, and the Minister's argument is that it would cost too much not to do it. For those reasons we propose to exempt from this tax at 35 per cent all people whose incomes are below taxable levels. This proposal by the Minister is unprecedented in any Parliament, this taxing of people who are below taxable levels. It is unacceptable by any standard to tax widows entirely dependent on their deposit interest, to tax children and other categories below taxable income levels.
I have not heard the Minister seriously trying to justify this. Those people will be put through the nonsense of having the tax deducted at the beginning of the year and then having to apply to the Revenue Commissioners for refunds, putting them through periods of worry and anxiety.
The obligation to prove that such people should be in the exempted class should rest on the Revenue Commissioners. There is no reason citizens should have the burden of proving that they have only such a level of income. Apparently we are not just to have a police State but a police revenue State, because people will have to prove that their incomes are already so miserably low that they should not have to pay tax.
Our argument is that this awful, outrageous tax should not apply to anyone older than 65 years no matter what their incomes. When people reach that age and have money on deposit it is so that they will feel secure in their own homes, so that they will not be a burden on their children or grandchildren. If they were prudent enough to invest money to provide small incomes for themselves, my God it is a terrible reflection on us if we impose a tax on them. Throughout their lives those people have paid taxes and their small investments have been made in order to relieve their families and relations of the burden of providing for them.
Any principle of social justice would insist that old people should be exempt from the tax. During the past weekend four old people came to my clinic to speak to me about this matter. One of them might have been marginally at the taxable income level but none of the others was in that category. The Minister should be aware of the apprehension, anxiety and needless worry he is causing these old people. We should have respect for them at this stage of their lives. It is ridiculous to impose such a nonsensical tax. It appears the Minister is not even able to let us know the cost of excluding these people.
If he does it will probably be a different figure from any he has given me before. I have had at least four different figures from the Minister.
I will explain. It is no big deal. It is a matter of terminology.
The Minister has used the same terminology, that of non-liable persons. The terminology was the same but the figures were different. I am not now talking about non-liable persons because some of these old people could just come into the tax bracket. I am talking about excluding people over the age of 65 years. The amount of money involved would be buttons. Many of these people have been prudent enough during their working lives to provide for their old age and for their funerals. They wish to have the self-respect of being able to provide presents for their children and grandchildren. If we are to penalise them for being prudent, we are not fit to have the name of parliamentarians. I do not know where all this nonsense came from or who dreamed it up in the first instance. Whoever was responsible for this tax had no awareness of what it is like for old people. That is the only exception I am making in respect of persons who would be liable. Those who are non-liable should not be made liable now to this tax.
The voluntary organisations mentioned in my amendment are doing magnificent work. I do not know how we can adequately express our appreciation of the positive impact of their work on society. They may be quasi-charitable organisations who will not get the exemption granted to charities because they are not exclusively legal charities or they may be community and sporting organisations who do so much to enhance community life. For the life of me I cannot see why the Minister should have imposed this tax on them. The money such organisations put on deposit when they come into funds, either because of special collections or receipts at major sporting events, should not be liable to a 35 per cent rake off by the Government. What the Minister is proposing is outrageous.
I will give the case to illustrate my point and it has to be Cumman Luthchleas Gael. Since I spoke to the Minister about this matter, I have got some other figures. While I am using this example to illustrate the point, I wish to point out that it applies to other organisations also. The GAA have a special place in our community and the Minister would do well to consider the impact of this outrageous proposal on them.
I do not know if he is aware that they are at present promoting a new self-financing insurance scheme for their players. This is very important because they are amateur players, having all the qualities that follow the pursuit of amateur sport. These amateur players in vigorous, manly games such as hurling and gaelic football, are liable to injury. One of the most important developments in the GAA recently was the introduction of an insurance scheme they are funding themselves to cover accidental injury to their players during the games. They estimate that the cost to them of this tax will be not less than £300,000 and they also know it will cost them at least £400,000 to fund the new insurance scheme for their players. I am sure this matter must have been mentioned to the Minister already because I am not the only person privy to this kind of information. Now, instead of being able to fund this scheme, they will have to pay at least £300,000 to the Government and there is a danger that this essential scheme will be aborted. In case the Minister tells me he does not accept my figures, I wish to point out that they are figures the GAA can make avaiable to the Minister. They know how much they have on deposit.
I look forward to talking to them about it.
Now is the time to change it. It is not good enough first to talk to them. We want to see this tax gone so far as GAA and other organisations are concerned. On this side of the House we are totally committed to repealing this awful section. The contribution of the GAA to our society must be respected, not penalised. I cannot understand how any Government with any sense of awareness of that contribution could presume to impose a burden of £300,000 on them and that is only at headquarters level. It is appalling to think it will apply to every club throughout the country. They raise funds to buy hurleys, build halls and they provide training facilities for their teams but instead of saying "well done" to them for all their work and the enjoyment they give to many thousands of people, the Government are demanding this penal tax from them.
Has the Minister any idea of the revenue the State gets from the replaying of a major match? Last year we had some marvellous games in gaelic football. Let us consider the replay between Mayo and Dublin. Will the Minister consider for a minute how much the Government got because of that replay? If up to 70,000 people travelled to Dublin, and with petrol charges ensuring that the Government get 67p in every pound ——
The Deputy should not forget the drink.
I wager that that day provided at least £200,000 to the State in terms of taxes on drink, cigarettes and petrol.
Not to talk of the ramshackle trains.
There is also the cost of travel by train. However, instead of recognising the contribution of this organisation, the Minister's attitude is to take another £300,000 from them.
This is the time for the Minister to make an exemption for the GAA, although I would suggest other sporting organisations as well. I do not mind making an exception of the GAA because they are entitled to it. The Minister's predecessor, Earnán de Blagdh, is remembered for his action in relation to old age pensioners. But he recognised the special place of the GAA in our culture, recreational activity and history by exempting them from income tax and the application of other taxes. Unless the Minister exempts them from this provision he will have the very doubtful distinction of imposing a penal burden of taxation on an organisation which has deserved much better. I plead with him to write in an exclusion for the GAA. The Minister would be the one to benefit. While doing that he should also drop VAT from hurleys. The Minister must recognise that if someone is doing something worthwhile some time the Government must commend him rather than penalise him.
I want to support Deputy O'Kennedy's amendment. The Minister made the point during an earlier stage of the debate that it is important to have a simple tax where deductions are made from everybody. It is a good argument because it is important to have simplicity in taxation. If that is so, it should apply in all cases and there should be no exemptions. If it is deducted from old age pensioners and those who are incapacitated because they have no exemption, then it should be deducted from everybody and these people should be able to claim the money back in the same way as the others. That is not the case. There are exemptions in the case of companies and beneficiaries of interest who are nonresident have an exemption. There is a lack of consistency and an anomaly in the Bill if the same procedure is not adopted for everybody. Those who are not liable to tax because they are on very low incomes should be exempted, because even their income from a small redundancy sum would not bring them into the tax bracket.
Ken O'Brien, an economist in The Irish Times, said when the budget was introduced on 1 February 1986 that this was a non-PAYE/income tax. He gave it considerable praise because it extended the bracket from the PAYE to the non-PAYE income sector. He made the point that the tax net was being widened in such a way that a significant proportion of our large black economy would be brought into the tax net for the first time. Unfortunately the Bill does not achieve that, because of the exemption system. If we had a system where tax was deducted in all cases and then those who had a claim could put it forward — for example, non-residents — then there would be no escape holes for those with hot money in collusion with the banks. A system whereby they would have to prove a claim to the Revenue Commissioners at the end of the year would be a major improvement. Deputy O'Kennedy's amendment is designed to claim exemptions for individuals. The Minister's original argument of simplicity does not stand up in this case. If it can be done in one case it can de done in others. I cannot see how the Minister can argue for making old age pensioners reclaim while allowing exemptions for businesses who have the services of accountants.
The declarations of non-residency will be available to the Revenue Commissioners who will be able to check out suspicions about any of the claims not being genuine. Deputy Mac Giolla is wrong in saying that this provision does not enable us to make a major assault on the black economy. It will constitute a major assault on the black economy. Deputy O'Kennedy made some points about the estimates of the reduction from the yield of the tax in 1987 if all non-liable persons were to be exempted. I should explain that in the press release on the Finance Bill I used the example of non-liable persons, indicating a loss in yield of £60 million. If you include persons and bodies — associations of persons — the loss would be around £60 million. In reply to a parlimentary question from Deputy O'Kennedy on 30 April I was using the word "persons" in the narrower sense as being solely human persons.
That is nonsense. It is a cover up.
Perhaps the Deputy will allow me to explain. In that case, where we are solely talking about the loss from exempting individuals, the figure is £25 million to £40 million. I will explain that situation.
The Minister is only guessing.
The term "person" was used in a different sense in the two statements. I regret that was done but I have explained it fully. I would point out in regard to the GAA and other associations to which the Deputy referred that there are other places where they can put their money. In the case of small sums of money there are various Post Office instruments, saving certificates, savings bonds and the instalment savings schemes are available, as are credit unions. In the case of large sums of money, Government gilts are available. Deputy O'Kennedy referred to an insurance scheme where payments would be made on a regular basis over a long period. Even if there were no deposit interest retention tax, it is not necessarily the best thing to have all the money on deposit in the bank. It makes much sense in the case of long term investments of that kind to have a substantial part in other financial instruments. The GAA and other associations should look at the instruments which are available, particular Government gilts.
I do not know where Deputy O'Kennedy got his figure of a loss to the GAA of £350,000.
From the GAA.
If that is the case then the GAA must have £10 million invested in the banks since it would require a sum of that magnitude for a loss of that type to occur. Perhaps they have £10 million invested in this scheme — I do not know. My information is that they would need to have £10 million to achieve the figures quoted by Deputy O'Kennedy. I would have to question whether that is the case but even if they have £10 million it is open to them to consider other ways of investing. Even if they have £10 million I am sure it is open to them to invest at least a large part of that £10 million so as not to have to pay the tax.
£10 million for such a major organisation?
They would be advised to take advice on this matter from professional advisers as to how they should dispose their funds in the best fashion possible.
They have professional advisers.
However, I have said already to the Gaelic Athletic Association that I would be happy to meet them in the next few weeks to discuss all of their problems with them in an open way and we will see how they can enable themselves to achieve their objectives in a reasonable way.
But would they have power?
I would like to join with all the Deputies here in the House in paying tribute to the work done not just by the GAA but by the other sporting organisations. I regret that it is not possible to provide for an exemption in this case because it would erode the basis of tax.
Surely the Minister knows that he will not have power next week to change the law he is passing now?
I will have power next week and next year and the year after.
I move amendment No. 7:
In page 61, between lines 7 and 8, to insert the following:
52.—Section 40 of the Finance Act, 1984, is hereby amended, as respects machinery or plant provided for leasing on or after the 13th day of May, 1986—
(a) in subsection (1), by the insertion after the definition of `chargeable period or its basic period' of the following definition:
"`lessee" and "lessor", in relation to machinery or plant provided for leasing, mean, respectively, the person to whom the machinery or plant is or is to be leased and the person providing the machinery or plant for leasing and "lessee" and "lessor" include, respectively, the successors in title of a lessee or a lessor;',
(b) in subsection (1), in the definition of `the specified capital allowances', by the insertion after `subsection (6)' of `(7) or (8)', and the said definition, as so amended, is set out in the Table to this section,
(c) in subsection (5), by the insertion after `subsection (6)' of `or (7)', and the said subsection, as so amended, is set out in the Table to this section, and
(d) by the deletion of subsection (6) and the substitution therefor of the following subsections:
`(6) References in this section to machinery or plant to which this subsection applies are references to machinery or plant provided on or after the 25th day of January, 1984, for leasing where the expenditure incurred on the provision of the machinery or plant was incurred under an obligation entered into by the lessor and the lessee—
(a) before the 25th day of January, 1984, or
(b) before the 1st day of March, 1984, pursuant to negotiations which were in progress between the lessor and the lessee before the 25th day of January, 1984.
(7) References in this section to machinery or plant to which this subsection applies are references to machinery or plant provided on or after the 25th day of January, 1984, for leasing where the expenditure incurred on the provision of the machinery or plant (or, in the case of a film to which section 6 or 7 of the Irish Film Board Act, 1980, applies, the cost of the making of the film) has been or is to be met directly or indirectly, wholly or partly, by the Industrial Development Authority, the Irish Film Board, the Shannon Free Airport Development Company Limited, or Údarás na Gaeltachta:
Provided that this subsection shall not apply to machinery or plant provided for leasing on or after the 13th day of May, 1986, unless—
(a) the machinery or plant is a film to which section 6 or 7 of the Irish Film Board Act, 1980, applies, or
(b) the expenditure incurred on the provision of the machinery or plant (not being a film of the kind mentioned in paragraph (a) was incurred under an obligation entered into by the lessor and the lessee before—
(i) the 13th day of May, 1986, or
(ii) the 1st day of September, 1986, pursuant to negotiations which were in progress between the lessor and the lessee before the 13th day of May, 1986.
(8) (a) The reference in the definition of "the specified capital allowances" in subsection (1) to machinery or plant to which this subsection applies is a reference to machinery or plant (not being a plant of the kind mentioned in paragraph (a) of the proviso to subsection (7) provided on or after the 13th day of May, 1986, for leasing by a lessor to a lessee (who is not a person connected with the lessor) under a lease the terms of which include an undertaking given by the lessee, that, during a period (hereafter in this section referred to as "the relevant period") which is not less than three years and which commences on the day on which the machinery or plant is first brought into use by the lessee, the machinery or plant so provided will be used by the lessee for the purposes only of a specified trade carried on in the State by the lessee:
Provided that any machinery or plant in respect of which such an undertaking has been given by a lessee, and which at any time has been treated as machinery or plant to which this subsection applies, shall at any later time cease to be machinery or plant to which this subsection applies if, at that later time, it appears to the inspector (or, on appeal, to the Appeal Commissioners) that the undertaking has not been fulfilled by the lessee; and, where any machinery or plant so ceases to be machinery or plant to which this subsection applies, such assessments or adjustments of assessments shall be made to recover from the lessor any relief from tax given to the lessor because the machinery or plant was treated as machinery or plant to which this subsection applies.
(b) This subsection shall not apply to machinery or plant provided for leasing on or after the 13th day of May, 1986, if the expenditure incurred on the provision of the machinery or plant was incurred under an obligation entered into by the lessor and the lessee before—
(i) the 13th day of May, 1986, or
(ii) the 1st day of September, 1986, pursuant to negotiations which were in progress between the lessor and the lessee before the 13th day of May, 1986.
(9) For the purposes of subsections (6), (7) and (8)—
(a) an obligation shall be treated as having been entered into before a particular date, if, but only if, before that date, there was in existence a binding contract in writing under which that obligation arose, and
(b) negotiations pursuant to which an obligation was entered into shall not be regarded as having been in progress between a lessor and a lessee before a particular date unless, on or before that date, preliminary commitments or agreements in relation to that obligation had been entered into between the lessor and the lessee.
(10) In subsection (8) (a), "specified trade", in relation to a lessee, means a trade which, throughout the relevant period, consists wholly or mainly of—
(a) the manufacture of goods (including activities which would, if the borrower were to make a claim for relief in respect of the trade under Chapter VI of Part I of the Finance Act, 1980, fall to be regarded for the purposes of that Chapter as the manufacture of goods), or
(b) exempted trading operations within the meaning of Part V (Profits from Trading within Shannon Airport) of the Corporation Tax Act, 1976:
Provided that a trade shall be regarded, as respects the relevant period, as consisting wholly or mainly of particular activities if, but only if, the total amount receivable by the lessee from sales made or, as the case may be, in payment for services rendered in the course of those activities in the relevant period is not less than 75 per cent. of the total amount receivable by the lessee from all sales made or, as the case may be, in payment for all services rendered in the course of the trade in the relevant period.
(11) Section 157 of the Corporation Tax Act, 1976, shall apply for the purposes of subsection (8) (a), save that, for the purposes of determining whether a person is connected with another person whose profits or gains are chargeable to income tax, the provisions of section 16 (3) of the Finance (Miscellaneous Provisions) Act, 1968, shall apply.'.
`the specified capital allowances' means capital allowances in respect of—
(i) expenditure incurred on machinery or plant provided on or after the 25th day of January, 1984, for leasing in the course of a trade of leasing, or
(ii) the diminished value of such machinery or plant by reason of wear and tear,
other than capital allowances in respect of machinery or plant to which subsection (6), (7) or (8) applies;
(5) The proviso to subsection (1) of section 296 of the Income Tax Act, 1967, and sections 14 (6) and 116 (2) of the Corporation Tax Act, 1976, shall not have effect in relation to capital allowances—
(a) in respect of expenditure incurred on or after the 25th day of January, 1984, on the provision of machinery or plant, or
(b) in respect of the diminished value of machinery or plant by reason of wear and tear if that machinery or plant was first acquired on or after the 25th day of January, 1984, by the person to whom the capital allowances are to be or have been made,
other than capital allowances in respect of machinery or plant to which subsection (6) or (7) applies.".
This is an amendment to section 40 of the Finance Act, 1984 and it relates to capital allowances for certain leased assets. The new section 52 which is now to be inserted in this Bill proposes to amend that section of the 1984 Act in respect of the range of leased machinery and plant which is to be free of certain restrictions imposed by section 40 on the offset of capital allowances by lessors. Unrestricted relief will continue to apply in respect of capital allowances on the following two categories; first, there will be unrestricted relief on capital allowances on machinery and plant leased for use by the lessee for the purpose of manufacturing activities carried on by him or trading activities which, though not manufacturing, are exempted trading activities carried on at Shannon Airport and, second, unrestricted relief will continue to apply in respect of capital allowances on a leased film, the making of which was assisted by the Irish Film Board. The master negative of a film can be treated as machinery or plant for tax purposes, that is, prints can be produced from the master negative and it is treated as machinery in that sense.
To explain the amendment to section 40 of the Finance Act, 1984 it is necessary to go back and say what section 40 of the Finance Act, 1984 provided. It imposed certain restrictions on the extent to which capital allowances arising from leased machinery or plant could be set off against profits other than profits arising from the leasing itself — this was in the context of the taxation of banks. The restrictions in the 1984 Act were directed primarily at financial institutions which until then could set capital allowances on leased machinery or plant against any of their profits for tax purposes. It was decided, however, in 1984 to preserve the full benefit of tax based leasing for the following two categories: machinery and plant grant aided by the IDA or SFADCo or Údarás na Gaeltachta or film assisted by the film board. Those categories could continue to set off such allowances against any source of profits where the lease applied to those two categories. However, the European Commission — and this is the nub of the problem that they are addressing here — has informed us that these exceptions to the restrictions offend against the Community's rules of permissible economic aids. The Commission has therefore requested the Government to amend the exceptions. It is of course entitled to make such a request under Article 93 of the Treaty of Rome and so, under Article 92, we have negotiated with the Commission on the matter and it has been agreed with it that if the exception referred to broad sectors of activity rather than specific categories, as was the case in the original of section 40, it will not raise any more objections to it and will consider that it is in compliance with the provisions of the Treaty of Rome. It is proposed therefore by the amendment contained in the new section 52, which this amendment will insert, to amend section 40 in the way I have described earlier. The specific reference to the film board in the amendment is being retained because the aid provided is not simply an economic aid but is also cultural in nature and the film board will, presumably, be exercising cultural as well as economic judgment. There is a lot more detailed information that I could give but I think that explains the origin of this relatively complicated amendment in the most simple terms. We have had to redefine slightly the terms of a previous exemption in order to comply with an EC decision. I think we have succeeded reasonably well in maintaining the basic intention of the House in enacting section 40 of the 1984 Act but in slightly different terminology so that it complies with the EC rules.
I move amendment No. 8:
In page 61, between lines 9 and 10, to insert the following:
52.—Section 84A (inserted by the Finance Act, 1984) of the Corporation Tax Act, 1976, is hereby amended by the insertion after subsection (9) of the following subsection:
(10) (a) This subsection applies to any interest or other distribution which, apart from this subsection, would be a distribution for the purposes of this Act, other than any interest or other distribution which is paid by the borrower under an obligation entered into—
(i) before the 13th day of May, 1986, or
(ii) before the 1st day of September, 1986, pursuant to negotiations which were in progress between the borrower and a lender before the 13th day of May, 1986.
(b) Subsection (2) shall have effect as respects any interest or other distribution to which this subsection applies as if paragraph (c) of subsection (3) were omitted.
(c) For the purposes of paragraph (a)—
(i) an obligation shall be treated as having been entered into before a particular date if, but only if, before that date there was in existence a binding contract in writing under which that obligation arose, and
(ii) negotiations pursuant to which an obligation was entered into shall not be regarded as having been in progress before the 13th day of May, 1986, unless, on or before that date, preliminary commitments or agreements in relation to that obligation had been entered into between the lender referred to in that paragraph and the borrower.
I announced on Committee Stage that I would introduce Report Stage amendments to sections 40 and 41 of the Finance Act in order to respond to certain EC objections. The Commission also had an objection to section 41 of the same Act to which I have just been referring to the effect that certain provisions of it constituted a State aid which is in contravention of Article 92 of the EC Treaty. The amendment now proposed here provides for the insertion of a new section which is to be section 53 of this Act and which will contain an amendment of the Corporation Tax Act, 1976. There will be a new section 84A as a result of the Corporation Tax Act and this imposes certain restrictions on access by companies to what have become known as section 84 loans. Many people will be familiar with this form of tax base financing for industry. In effect, the result of this amendment means that interest paid on section 84 loans was to lose its character as a tax free distribution in the hands of the lender. However, this was not to apply to loans made to companies carrying on certain specified trades as defined in section 84A, (3) and (4). When we were closing the loophole in 1984 we decided to exempt certain trades from these restrictions as we were anxious to continue to encourage manufacturing. The European Commission has objected to the inclusion of service undertakings in the category of specified trades as defined in the original section. The grounds for the objection are that subsidies which would be what section 84 loans could confer are to particular limited categories of economic activity or contrary to article 92 of the Treaty of Rome.
The Government, in response to this objection, have agreed to take this into account and, accordingly, to amend this section to exclude such service activities from the specified trades defined in subsection (3)(c). The benefit of section 84 lending, however, will be preserved for other categories, apart from the services in question, such as manufacturing exempted corporations at Shannon Airport and for the subsidiaries of agricultural and other co-operatives. This is necessary in order to allow us to continue with section 84 lending in a fashion which is compatible with EC rules. We are doing only that which is necessary.
Did I understand the Minister to say that all services are excluded from the benefits of section 84 as a result of this amendment?
As a result of the 1984 Act services in general were excluded with a certain exception. The exception was in respect of four categories of specified trades. One of those was the rendering of services in the course of the service undertaking in respect of which an employment grant was made by the Industrial Development Authority under section 2 of the Industrial Development Authority (No.2) Act, 1981. In other words, once the IDA gave a grant, that grant extended an exemption from the provisions of the restriction in respect of section 84 lending which would otherwise have applied to it as a service. The use of an administrative mechanism, which is a decision of the IDA to confer tax relief in a very selective way, which would lead to tax being administered in the form of administrative decisions rather than on the basis of abstract rules, was considered to be contrary to the EC Treaty and we had to remove it.
This amendment is fairly drastic in the sense that it removes all the export type services which were contemplated by the 1981 Act and which one thought would continue to be placed in the same position as manufacturing generally. That was certainly the intention in the 1981 Act.
That is right.
The non-capital form of assistance is removed as a result of this. This puts us back in the position that, if they are to get any State assistance, for the most part it will be capital grants or training grants. From the State's point of view and from the point of view of public expenditure, these are the most expensive ways of assisting them. Allowing them to help themselves under section 84 was, from the State's point of view, one of the more painless ways of doing so. I regret the movement away from that type of encouragement and assistance and towards more capital expenditure by the State in one form or another. Some proportion of it is increasingly coming to be seen as a waste of money. The section 84 facilities which were available in this country up to recently were very attractive and useful. I do not believe they cost a great deal although I have no doubt, according to the Revenue Commissioners' way of thinking, they probably did. In my experience they were one of the most attractive forms of incentive.
It was never introduced as an incentive but as a tax avoidance mechanism.
It was one of the happier errors the Department of Finance made because it turned out to be one of the most useful and least expensive incentives in terms of industrial development in the late seventies and early eighties when industrial development was at its height. Even though it was not intended as that, some Governments are entitled to credit for not having repealed it when its effect became clear. I hoped that would continue to be the case.
There were many cases where it was a more attractive incentive for many types of companies than large capital or training grants or other things which use a lot of scarce resources. It was one of the most saleable products the IDA had in the good old days. Now the IDA are up against far greater difficulties than they were in the past and I regret that some of the more useful weapons they had in their struggles with competition are being removed. What is left is simply higher capital grants which will have to be paid to compensate for these losses and withdrawals. I think this is the wrong approach and I am sorry it is happening.
Deputy O'Malley has made an interesting intervention to which I should like to reply. First, I want to tell him the categories of activity that will lose section 84 lending as a result of this EC decision. It is not a matter the Government are introducing with any willingness but, having adhered to membership of the EC in 1972 by consent of the people and by international treaty, we have to abide by the rules laid down by the Community. They found the provisions of the 1984 Act to be contrary to the Treaty to which we had freely agreed. That is why we introduced this amendment.
There are two categories which might be described as services which will not lose section 84 status because they can be interpreted to be manufacturing — data processing services and software development services. They will continue to have access to section 84 lending. The following services will lose as a result of this EC prompted change: technical and consultant services, commercial laboratory services, headquarters services, research and development services, media recording services, training services, publishing services, international and financial services and health care services. I greatly regret that these categories are losing the benefit of section 84 lending which was never intended as a tax incentive for business because it was introduced as an anti-tax avoidance measure, but in practice ended up as an incentive.
We must take action in order to stay within the rules of the Community of which we are a freely participating member.
However, I make one qualifying point to the enthusiasm Deputy O'Malley expressed for section 84. The effect of section 84 has been to make it artificially attractive for companies to borrow money rather than to look for equity by essentially allowing the taxpayer to subsidise the interest they were paying on borrowed funds while the taxpayer did not provide any equivalent subsidy or encouragement to the same company to get the same money by means of equity. From the point of view of the taxpayer it has been an expensive concession. There is approximately £1,100 million worth of loans to industry at the moment under section 84 type agreements and the tax loss to the Exchequer is about £80 million per year. However, perhaps if they had to find alternative means of finance there would be other costs the Government would have to meet in another way. Therefore, that £80 million is a gross figure and presumably if it were not there——
They could set out their gross borrowings against it.
——we would not save the full amount of £80 million by any means. It indicates that for those sectors that continue to benefit from these allowances, such as the entire manufacturing sector, data processing, the activities of co-operatives, software development and so forth, this is a very generous, important and valuable concession. It is extremely important that we try to develop Ireland substantially as a centre for some of the activities that have no longer the benefit of section 84 lending, such as international financial services, technical and consultancy services and training services.
We have an unrivalled capacity in terms of availability of trained manpower to provide services of this kind and we should develop a sympathetic regulatory and taxation environment to encourage internationally traded services of this kind. Since taking office as Minister for Finance I have initiated a study on how we can encourage this type of internationally traded service in Ireland. I stress that this amendment is in no sense being introduced because we lack an appreciation of the importance of these services. We have a very high level of appreciation of the importance of these services and are anxious to do everything possible to develop them. Rather we have to make this change in the light of an EC decision.
However, I assure the House that, over the next number of months in consultation with my colleagues, I will be working to ensure that our tax and fiscal environment generally is as attractive as possible to the development of internationally traded services in this country. These services will benefit in other ways from measures initiated in this Bill which will compensate substantially for some of the loss that may have to occur now as a result of this change.
I do not want to delay on the matter, but let me ask the Minister——
All amendments must be concluded at 6.15 p.m.
——how it was possible to distinguish in the list of services between software and data processing on the one hand and still retain the advantages of section 84 and various other things including technical and consultancy services. If I design a software programme, am I doing anything essentially different from my designing a building, or some technical system, or whatever, and putting it on paper? If the EC were agreeable to some of these matters being retained, how is it that things which are essentially much the same are not retained? Does it not seem arbitrary? The list the Minister read out of what is now excluded is very extensive. It is a little frightening. The possibilities of our developing international financial services are greatly weakened by what is happening now.
The bottom line as far as this is concerned is that the EC has accepted that the two I have mentioned are manufacture, but does not accept that the others are.
Did the EC give reasons?
To the greatest extent that reasons could be elicited they were given, but in matters of this kind I suppose we are always talking about shades of meaning and degree. The EC had to draw a line somewhere and this is where it drew it. I would not attempt to provide a metaphysical justification of this because that would be foolhardy. From recollection, an important factor is whether there is transformation of material involved or, in some of the cases, whether the service is a pure service and in others whether it is a service applied to certain material which is transformed by the service. That is not being given with any authority, as an interpretation of the Treaty of Rome, but that is probably the dividing line that would have been used by the EC. I do not know if that is any help to the Deputy.
Not a great deal but it was worth observing. So much for our sovereignty, our Government and our Parliament. We enact changes in our own laws and distinctions between different services and we do not even know why we have to do it other than that we are told by the EC to do it.
So much for Deputy O'Malley's smart remark to which I would like to respond because it is the sort of superficial and glib comment that does not come well from the Deputy.
I am afraid it is true.
As far as State aids are concerned our national law is governed by EC law. That is a decision taken freely by the Irish people, if I do not mistake, at the recommendation of Deputy O'Malley and others who were in Government at the time, and, let me say, supported enthusiastically by me. I think the gains we have had from EC membership outweigh by far the disadvantages, some of which can be seen in the fact that we have to amend our law to take account of Treaty obligations of this kind. Of course membership of the EC involves some reduction in our sovereignty. Why else did we have to change our Constitution in order to join the EC? It should not come as a surprise to Deputy O'Malley that that is the case even 14 years later.
Amendment No. 8a in the name of the Minister. Amendment No. 9 is related. Amendments Nos. 8a and 9 may be taken together by agreement. Lest there be any misunderstanding, each speaker may speak only once on this occasion with the exception of the Minister when he is replying.
I move amendment No. 8a:
In page 68, to delete lines 3 to 17 and substitute the following:
58.—(1) In this section—
"qualifying period" means the period of three years commencing on the 4th day of April, 1986;
"qualifying shares" means—
(a) in subsection (2), shares of a kind which are dealt in on the Smaller Companies Market of the Irish Stock Exchange (hereafter in this section referred to as "the relevant market") and which are not dealt in otherwise on the Irish Stock Exchange or on any other stock exchange, and
(b) in subsection (3), shares forming part of the ordinary share capital of a public company within the meaning of section 2 (1) of the Companies (Amendment) Act, 1983, which has issued shares in respect of which relief has been given under—
(i) Chapter III of Part I of the Finance Act, 1984, or
(ii) Chapter III of this Part,
and which are not dealt in on a recognised stock exchange.
(2) Notwithstanding section 3(3) of the Capital Gains Tax Act, 1975, the rate of capital gains tax in respect of chargeable gains accruing to a person on the disposal on the relevant market in the qualifying period of shares which, at the time of the disposal, are qualifying shares shall be 30 per cent.
(3) Notwithstanding section 3(3) of the Capital Gains Tax Act, 1975, the rate of capital gains tax in respect of chargeable gains accruing to a person on the disposal in the qualifying period of shares which, at the time of disposal, are qualifying shares shall be 30 per cent.
(4) In subsections (2) and (3) "disposal" does not include a relevant disposal within the meaning of section 36 (1) of the Finance Act, 1982.
This section does two things. If gives effect to the Government's decision that chargeable gains made on the disposal of shares in the newly established smaller companies market in the Irish Stock Exchange shall be taxable at the rate of 30 per cent. This rate will apply only to disposals made within three years of the date of publication of the Finance Bill, 4 April 1986. It also gives effect to a further Government decision to extend the same treatment to shares in respect of which tax relief has been given under the business expansion scheme introduced in 1984 and the research and development investment scheme introduced in this Bill. Without this section, gains on such disposals could be taxable at rates ranging from 35 per cent to 60 per cent of capital gains tax.
This measure is designed to foster the rapid development of the new smaller companies market and is consistent with the general desire of small investors in business and industry. The measures, as extended by this amendment, ensures that investors under the two schemes mentioned will not receive less favourable treatment.
One of the criticisms made of the operation of the business expansion scheme was that, while it is very attractive from the point of view of people putting money in, there are not sufficient exit mechanisms, that people who buy shares under the business development scheme should have a readily available means of selling their shares.
We said that all along and the Minister would not listen.
The only opportunity available in the past was that the company would become a publicly quoted company whereby the shares could be sold on the open market or that the shares would be disposed of privately on the basis of an agreement between the parties concerned but, in either case, the rate of capital gains tax would be relatively high.
We are trying to achieve two things in this amendment, first to give concrete encouragement to the Stock Exchange to develop the smaller companies market. The smaller companies market is necessary because the compliance and legal costs of getting a quotation on the full market are extremely high and smaller companies do not go for public quotations. The result is that at present a relatively small number of blue chip companies and oil exploration companies are on the Stock Exchange but small manufacturing companies in the productive sector of our economy have not tended to use the Stock Exchange.
In order to remedy this and as a result of a suggestion I made last year, the Stock Exchange have launched the smaller companies market. To get people to use it, the Finance Bill is giving a capital gains tax concession, reducing the rate of capital gains tax on short term gains and shares bought and then sold on the smaller companies market from what would have been 60 per cent if sold within one year down to 30 per cent and from 40 per cent to 30 per cent if the disposal was after one year. It is an important amendment because the smaller companies market not only provides an opportunity for smaller companies to get funds but is suitable to companies which are developed initially under the business development scheme, getting in amounts of £25,000 tax free from individual investors. If they want to expand still further but cannot go the whole way in getting a full quote on the Stock Exchange, the smaller companies market provides a means whereby they can either raise additional funds or — to come back to the point I was making earlier — where existing shareholders in the business development scheme company can dispose of their shares on an open market where they are likely to get full value for them rather than having to sell them privately where they would not get full value for them.
The smaller companies market is being developed in a fashion, at my suggestion, which provides an exit mechanism for shareholders who acquired shares under the business development scheme. It will, therefore, provide a great increase in the attractiveness of the business development scheme and a big increase in the flow of funds into industry in the form of equity rather than in the form of loans to which I referred earlier.
Furthermore, we have extended the provision of the original section 54 to extend the capital gains tax reduction to the business expansion scheme and research and development companies. Where a disposal of shares takes place, we are reducing capital gains tax on such companies to 30 per cent as well as giving the same concession to disposals in the smaller companies market. The reason for this further concession, apart from providing an exit mechanism, is that representations were made to me to the effect that, if the concession was a 30 per cent capital gains tax and was confined solely to disposals on the smaller companies market of the Stock Exchange, it would give an artificial competitive advantage to the Stock Exchange smaller companies market as against other methods that might be set up, such as those operated by different people to provide a disposal or exchange mechanism for shares, a second form of Stock Exchange, so to speak.
While, obviously, any alternative methods of disposal of shares would have to be regulated in some way to ensure investor protection, it is not desirable that the law ab initio should provide preference for one method over another which might be established in the future. The second leg of this amendment which provides an extension of the reduced capital gains tax rate to business expansion scheme companies is designed to provide an alternative source of companies which might be used by an alternative method of exchange to the smaller companies market of the Stock Exchange, thereby avoiding any suggestion that exclusively was being given ab initio to one private organisation in regard to access to this tax concession.
These provisions are quite important because it is very desirable that more of our money is in investment and productive assets as too much of our money is tied up in relatively unproductive, static uses——
Like Government gilts which the Minister exempted.
——where it is not contributing directly to increased production in the community. I am concerned to channel funds through the tax code into productive activity in the economy. I know some will say the introduction of tax concessions for activity of this kind complicates the tax system and that is an argument which has considerable appeal to those who fully accepted the recommendations of the Commission on Income Taxation. In my opinion in a small open economy such as in Ireland, which is not a fully developed economy, we need to tailor our tax system specifically to achieve certain development objectives. While fiscal neutrality is an ideal much to be sought after, it is probably more appropriate to a country that is already developed than it is to a country like Ireland which is in the process of development. The use of tax mechanisms, such as the business development scheme, the research and development scheme and so on, to achieve a bias in favour of development orientated activity is appropriate, notwithstanding the fact that it complicates the tax system somewhat, in a country at Ireland's stage of development. It is justified and I strongly recommend the amendment to the House.
I should like to strongly commend the Minister for his initiative in amendment No.8(a). The British experience when they tried to deal with the exit problem relating to capital gains and to develop an equity mechanism for small businesses found it was not singularly successful if left to the Stock Exchange. I am glad the Minister has given an opportunity for securities markets and others to get into the area of trying to get money into the equity needs of small businesses. That is wholly desirable. If the section was left as it was there would be the difficulty that low risk or speculative types of business such as property, oil exploration and so on which are quoted on the Stock Exchange would be able to benefit, but the business expansion scheme type of companies, the R and D type, would not necessarily benefit. This will zone in on those who really need. I realise the Minister had difficulties in terms of the timing and producing the appropriate wording, but I am delighted he has come forward with this.
I hope the combination of the business expansion scheme and the start-up phase followed by the OTCs, will ensure that there are two stages of development, the original input capital and the follow-up extra equity needs. It is my hope that because the Minister has come up with this initiative the whole financial services sector will look at the opportunities this presents and ensure that there is a vibrant small company stock market. I do not see any need for amendment No. 9 in the name of Deputy O'Leary.
I move amendment No. 10:
In page 77, between lines 37 and 38, to insert the following:
"(iii) by the insertion of the following paragraph:
(e) Five per cent of the amount on which tax is chargeable in relation to the supply of the following goods or services:
(i) services consisting of the development of immovable goods, and the maintenance and repair of immovable goods including the installation of fixtures, where the value of movable goods (if any) provided in pursuance of an agreement in relation to such services does not exceed two-thirds of the total amount on which tax is chargeable in respect of the agreement;
(ii) concrete ready to pour;
(iii) blocks, of concrete, of a kind which comply with the specification contained in the Standard Specification (Concrete Building Blocks) Declaration, 1974 (Irish Standard 20: 1974);'.".
This is a hopeless attempt on our part to get the Minister to reconsider the impact of VAT on the construction industry. The most recent figures demonstrate that cement sales for the first quarter of this year show a decline of 12 per cent on the first quarter of the previous year, which was a disastrous downturn in the building industry. That is one of the indicators of the effect of VAT on the industry. We are all aware of what has happened in regard to the Public Capital Programme and building in the private sector. We must not forget that the Public Capital Programme has been reduced by the Government by £18 million. When we consider the Government's attitude to this the most characteristic domestic enterprise we see is a withdrawal of the capital programme and additional VAT on the construction industry. In the first few months of this year private housing starts declined by 25 per cent over the same period last year. The decline for the first four months compares very unfavourably with the same period last year.
There is no doubt that that decline is almost directly attributable to VAT on the building industry because the public cannot afford to pay it and many house builders cannot afford to absorb it. It is not surprising that the level of unemployment in that industry is the highest of any sector, 50,000, and that the level of emigration of general construction workers, engineers and architects is out of line with the drastic emigration trends in other sectors. I should like to make a final attempt to get the Minister to correct the error of the ways of his predecessor. I say that more in hope than expectation because the Minister seems committed to the same disastrous path as his predecessor.
As it is now 6.15 p.m. I must put the following questions: "That the amendments set down by the Minister for Finance, including any requiring recommital and not disposed of, are hereby made to the Bill, and recommital and Report Stage are hereby completed".