The next amendment is No. 38 in the names of Deputies McDowell and Desmond O'Malley. Amendments Nos. 39 and 53 are related and I am suggesting that we debate those three amendments together with separate decisions on them if required. Is that satisfactory? Agreed.
Finance Bill, 1988: Committee Stage (Resumed).
I move amendment No. 38:
In page 35, subsection (1), line 32, to delete "47 per cent." and substitute "45 per cent.".
The purpose of the amendment is to draw from the Minister the precise implications of the exchange, if I can use that word, between high rates of corporation tax on the one hand and on the other hand the new arrangements in relation to advance depreciation of capital allowances.
There has been some recent comment in the media to the effect that the Minister is not giving away as much as he ought in view of the increased revenue that will flow from the new treatment of capital allowances. Is this correct? Has he not more leeway by reason of the reduction in the rate of depreciation which is allowed for and is there more money in the kitty which would finance a greater reduction in corporation tax? The Minister may be aware of the suggestion in the media that he is getting in more by reason of the change in the depreciation rules than he is giving away in reducing corporation tax. It is my understanding that, when the Minister mooted this change in his budget speech, he indicated that there was to be a parity of increased revenue arising from the change in depreciation rules which would compensate for the loss of revenue arising from a reduction in corporation tax. Could the Minister clarify whether a fair balance has been struck and whether he will gain more from the depreciation changes than he will lose on corporation tax reductions?
These two amendments relate to section 30 which provides for reductions in the rate of corporation tax announced in the budget. From a standard rate of 50 per cent, section 30 provides for reductions to 47 per cent in the year to 31 March 1989 and 43 per cent from 1 April 1989. These reductions are part of a package which combines reductions in the rate of corporation tax with reductions in the levels of accelerated capital allowances over the same period, that is, 75 per cent in the year to 31 March 1989 and 50 per cent from 1 April 1989. Thus the increased liability to tax because of the reduced capital allowances is balanced by reductions in the rate of tax.
The purpose of this package is to remove the bias in our existing system towards investment in fixed assets. The package has been costed having regard to current budget requirements. If the amendments now proposed were to be accepted, those costings would be upset since reductions of the rate to 45 per cent instead of the proposed 47 per cent and to 40 per cent instead of the proposed 43 per cent would add a significant extra cost in the region of £100,000 in 1988, £6.6 million in 1989, £18.7 million in 1990 and £20 million in a full year. For those reasons I cannot accept the amendments. However, the rate of corporation tax and other elements of the corporation tax system will be kept under review and, to the extent that there is scope for further reductions, they will be considered in the future.
The proposed reductions of the maximum levels of accelerated capital allowances from 100 per cent to 75 per cent from 1 April 1988 and to 50 per cent from 1 April 1989 increase the yield from corporation tax but only temporarily. As the aggregate amount being claimed by way of normal annual wear and tear allowance increases following the reduction of accelerated allowances, the initial gain is whittled away over a period of five to eight years after the reductions are introduced. Therefore, reducing accelerated capital allowances is in itself insufficient justification for reducing the rate of corporation tax. Rather two purposes are served by the reduction of the rate of tax and reduction of accelerated allowances. The 50 per cent rate of corporation tax which applies to companies in service, construction and other labour-intensive industries is high, both by comparison with the 10 per cent rate of corporation tax which applies to manufacturing companies and by comparison with the standard rate of corporation tax in other countries. In the UK it is 35 per cent, in the USA 35 per cent, in Holland 42 per cent, in France 42 per cent and in Belgium 43 per cent.
Our current rates of capital allowances are an excessive incentive to investment in fixed assets in times of high unemployment. The tax relief we give in respect of investment in buildings, plant and machinery is now too generous in the light of international comparisons. These two principal imbalances in the structure of the corporation tax code — a relatively high rate of corporation tax and excessively generous capital allowances — are directly addressed in the provisions of the Bill. These twin reforms of the corporation tax code reflect an international movement towards lower rates of corporate tax coupled with a phased withdrawal of excessive reliefs in respect of investment in fixed assets.
As competitors for internationally mobile investment we must respond to trends elsewhere towards a lower standard rate of tax applied to a wider income base. In this context I would add that our 10 per cent rate of corporation tax for manufacturing companies and certain other companies continues to be a very significant inducement to foreign investment. The 10 per cent rate of corporation tax is unaffected by the changes in the corporation tax code provided for in the Bill. Even after the reductions provided for in the Finance Bill, the rates of capital allowances available to investors will continue to be very generous and as attractive as those available elsewhere.
I appreciate that we are not comparing like with like when talking about a tax reduction and a change in respect of depreciation. I appreciate that the Minister is dealing with an income flow and is postponing some of the depreciation to subsequent years. This House should be given an adequate quantification of the benefit to the Exchequer which the new regime in respect of capital allowances will give. Has the Minister material available to him which would indicate the benefit to the Exchequer this year and in subsequent years in terms of cash flow? How will he go about the business of discounting that benefit by providing for depreciation in subsequent years? While I appreciate that there is a postponement of the depreciation element, is there not a straight, once-off benefit to the Exchequer? I should like to know what that is.
I want to put on record my complete agreement with the Minister's general proposition that we give depreciation too favourable a tax treatment here which tilts the balance against employment of labour. I fully agree that the balance must be in the other direction. I am worried that we are not being told what industry will lose this year and next year in terms of the change in capital allowances and the basis on which a calculation has been made for subsequent years regarding the flow from corporation tax. What is the benefit expected from non-corporation taxpayers, such as schedule D payers who are entitled to the benefit of capital allowances?
(Limerick East): The points Deputy McDowell has made are very valid. They must be another indication of thinking along the same lines since I had drafted identical amendments. I did not put them down because I think there is some net benefit to the Exchequer from the group of proposals here. If there is a benefit which could be returned to manufacturing industry, it might be better to do something to reduce transport costs rather than swop the gains for lower rates of taxation. My amendments as drafted contained the same figures as Deputy McDowell's amendments.
The Deputy will be accused of copying.
(Limerick East): It is extraordinary. I am beginning to get worried about it. There is a case to be made, if there is a net benefit to the Exchequer, for targeting the employment creation areas. We should do something very quickly about transport costs in the economy. If there were net savings on the reduction of accelerated capital allowances and we were to apply those savings to, for example, excise duty on articulated trucks, or on hydrocarbons, particularly diesel, that might be a way of restoring the benefit which would be more efficient in terms of employment than simply reducing the rates. I am not like Deputy Desmond who has a garage full of Government memoranda, but I have a memory of getting this proposal costed when I was in Industry and Commerce and, speaking from memory, the figure that I was given at the time, over 12 months ago, for the total elimination of accelerated allowances would mean something in excess of £300 million to the Exchequer. On that basis, when this is fully in place in 1989, it seems reasonable to expect a once-off benefit of about £150 million, admittedly spanning two financial years.
The Minister, in his reply to Deputy McDowell, has couched his information rather ambiguously. He talks in terms of the current budgetary requirement not permitting a lower rate. Could he tell us first, what is the benefit to the Exchequer from reducing the accelerated allowances and, secondly, what is the cost to the Exchequer of the move on corporate tax from 47 per cent to 43 per cent? I appreciate that when accelerated allowances are eliminated normal wear and tear will apply over a longer period and the once-off effect can be reduced in subsequent years but there is, I believe, a significant net flow of revenue to the Exchequer from this package of moves. Will the Minister quantify this for us? I agree in general with what he is doing and I also agree with his remarks about our package of incentives for industry now favouring fixed assets rather than labour, capital rather than jobs. If there is a net saving there, it is worth thinking how we should spend it and of spending it in ways other than reducing the allowances further.
Both Deputies are on the same line. I now have the figures which I will give to the House. Taking the last point raised by Deputy Noonan, the loss because of the reduction in rates would amount in 1988 to about £300,000, in 1989 to £12.6 million, in 1990 to £29.7 million and in 1991 to £31.5 million. The gain because of the reduction in capital allowances is zero for 1988, plus £24 million for 1989, £47.7 million in 1990 and £43.9 million in 1991.
To come to Deputy McDowell's point, the overall effect on corporation tax yield is £1.6 million in 1988, £17.5 million in 1989, £43.1 million in 1990 and £40.6 million in 1991. From there on, it tapers off down to about plus £4 million to £5 million in 1995.
Would it be fair to take it that, apart from the front loaded aspect of the benefit to the Exchequer, there is a benefit of £5 million or £6 million per annum, whatever way the Minister wants to discount it?
Equalisation to plus that amount.
Could the Minister be of any assistance in relation to schedule D taxpayers? They are not being considered in this matter. I am thinking of people such as myself in my other capacity. If I am given 100 per cent appreciation as a schedule D taxpayer for certain plant and machinery, I do not fit into this equation because I am not getting the benefit of corporation tax reductions. Is that being adequately dealt with? It seems that self-employed people who do not fit into the corporation tax framework will suffer the disadvantageous aspect and will not get the benefit of the contra item.
The Deputy is talking about the effects these changes will have with regard to schedule D taxpayers. In 1989, this will amount to zero, in 1989, £14.5 million, in 1990, £29.3 million and in 1991, £26.1 million.
There is the rub, when the questions are asked. It now appears that the unfortunate schedule D taxpayers are being hammered on this transaction but industry, which pays corporation tax, will get a compensation. It appears that this fluctuation in tax revenues will be paid for by the schedule D people, the self-employed.
(Limerick East): Is that additional to the figures already given?
That is in addition to the net figures given for the Exchequer. Effectively, over a period of a number of years — and I take it that the figures will taper down to at least £3 million or £4 million as time goes by in the schedule D area — these people will contribute a huge amount of money to the Exchequer by reason of this change and are getting no compensatory incentives. Arising out of that, I put it to the Minister that many schedule D people employ others. The incentive to employ will not be given to those schedule D people because they will not get a reduction in their taxation treatment. They are getting all the bad news and none of the good news out of this transaction. It looks as if over the next five years they will be contributing an extra £50 or £60 million to the Exchequer for nothing. I wonder how that fits into the pro-employment remarks made earlier by the Minister.
They were in relation to the corporate section.
The point is, whether one is incorporated or not, the same economic laws apply. There are not different rules of economics applying to people who are unincorporated. Just because I run a coalyard without the benefit of a limited liability company, that does not mean that all the same economic pressures are not on me in relation to choosing to employ labour or choosing to capitalise. The effect of this measure appears to give the corporate area, by reason of the artificial fact that there is incorporation in some areas of the economy, a compensatory benefit but when it comes to the schedule D area, the unincorporated traders, they are getting no compensation whatever and paying huge sums of extra taxation to the Exchequer. In the budget we never heard about this — that the self-employed, the schedule D area, the unincorporated private enterprise area — would be giving the Minister such vast handouts. We are only finding that out now. The Minister should acknowledge the full extent of the contribution that the self-employed will be making to his budgetary strategy.
Of course, and the corporate sector, too.
May I take it that Deputy McDowell is not enthusiastically pushing his amendment?
I do not think there will be a division, but I am very interested in the answers I have received in this debate.
I would like the Deputy to bear in mind what we have to accomplish by 7 o'clock. In respect of the two amendments I suggest that we dispose of those and the section will then be up for discussion. We might bear in mind that later on we might have sore heads when we realise that there are many other amendments and sections to be discussed and we might forego anything other than essential comment here so that we can better serve the interests of other sections and amendments.
What transpired here was essential.
Yes, but perhaps we have reached the point of exhaustion now in respect of those amendments.
As soon as we get the tax reform about which we are all talking of 25 per cent and 40 per cent, the Deputy's worries will be allayed.
(Limerick East): Not if the Minister has all that money taken before we get a chance.
I take it that the two amendments are not being pressed — amendments Nos. 38 and 39.
(Limerick East): The Minister in his budget last year announced his intention to reform corporation tax and said he had a working party looking into the matter. I presume this is some of the fruits of the work. Does the Minister intend to proceed next year towards eliminating free depreciation completely and swopping that for a further reduction in rates? If that is the Minister's intention, will he consider looking at what I have suggested? If there is an intention to eliminate accelerating capital allowances which would result in extra revenue being at the disposal of the Exchequer, will the Minister consider targeting, for example, the transport costs in the economy rather than reducing the rates? I am talking in particular about reducing the excise duties on lorry transport, whether on the articulated tractor unit or on the cost of the fuel. That might be a greater benefit to industry than a further reduction in rates. Most of the rates the Minister is reducing do not apply to manufacturing industry, because they are all on a 10 per cent rate. It might be more conductive to job creation if the Minister did what I suggested.
In relation to the proposals in the section, will the Minister comment on the effect on building societies and small companies and on the interest on housing loans made by banks? Would the Minister outline the implications of the changes for small companies? I understand there is a 35 per cent rate at the moment which is being moved up to 47 per cent. Is the Minister taking the rates up to 47 per cent to bring them back down to 43 per cent, or is the Minister taking them up to 43 per cent and leaving them there?
The section provides for the abolition of certain lower rates of corporation tax with effect from 1 April 1989, the date from which the 43 per cent rate will have effect. The rate of 35 per cent applicable to the investment income of the life fund of a life assurance company is being retained. This rate is linked to the standard rate of income tax and represents the income tax at the standard rate which a policyholder would be liable for if he were to receive investment income directly. The abolition of the lower rates of 40 per cent and 35 per cent will affect companies with annual profits of less than £35,000, certain public utility companies, the ACC, housing loan interest received by certain banks and the income of building societies. Banks and building societies will then be on an equal footing in respect of interest on housing loans.
(Limerick East): Does the Minister intend to move from 35 per cent and 40 per cent to 47 per cent in the first instance and then bring it back down to 43 per cent?
Up to 43 per cent in the first instance.
(Limerick East): What is the Minister's estimate of the benefit to the Exchequer from that move, on the small companies, on the banks and on the building societies, exempting the assurance companies?
The increase in corporation tax liability in the building societies from 1 April 1989 as a result of the increase in the taxation rate from 35 per cent to 43 per cent is estimated at about £1 million per annum. The building societies paid about £5.4 million in tax in 1985 and about £4 million in 1986.
(Limerick East): And the banks?
The increase from the banks in the home loan area is nil in 1988, nil in 1989 and in 1990 it is expected to be £7 million. In 1989 it is expected to be £8 million and so on.
(Limerick East): Has the Minister a figure for small industry earning up to £35,000.
The gain from small companies in 1988 will be zero; in 1989 it will be £200,000; in 1990 it will be £8.5 million; in 1991 it will be £9.5 million; and £9.5 million from there on.
(Limerick East): That is serious money when we move on.
Yes. In relation to the Deputy's other point about the on-going review, the review is still going and now, with the items we are discussing here and the changes that are taking place arising from this legislation, we have settled the scene until 1990 and it remains then to be seen what might be done thereafter.
In relation to the small businesses I accept that the gain for the first two years is negligible but then it gets to £9 million from small businesses. This calls into question whether or not we are going towards a single rate of corporation tax which does not give any leading or reduced rate for smaller businesses. In that respect we seem to be going against the international trend of corporate taxation. To apply a 40 per cent rate as a first rate of taxation is very strong medicine for a company. I know that the phrase "poverty trap" does not apply to a corporation but it is a very high initial rate of taxation to apply to a company.
In England the smaller companies pay a reduced rate of corporation tax. They do not pay the rate paid by the biggest businesses straight off. Is the Minister happy with the general proposition that there should be a single uniform rate without any reduction for people just entering into profitability and who are vulnerable companies because they are just teetering on the edge of profitability?
The figures the Minister has given give rise to the question as to what is the situation in relation to the Government's overall strategy for the relationship between the standard rate of income tax and corporation tax. Is there a general policy to make these figures converge, or is there a view that they should be independent and disconnected from each other. There is an argument to be made, and the Commission on Taxation made that argument fairly strongly, for making the standard rate of income tax converge with the standard rate of corporation tax to get rid of all sorts of anomalies and incentives to incorporate and all the rest of it. In relation to the small industries, by hiking up their first rate to 40 per cent we are, as a long term aim, going in the opposite direction to the recommendation of the Commission on Taxation and we are putting up a very severe barrier which they will hit on the first occasion on which they make profits. What is the philosophy behind this? I do not see the thinking that goes into it.
We are moving in that direction in relation to the personal rates and corporate rates. When we talk about picking out particular sections such as the income tax rates and the contribution of the PAYE sector — and we are all interested in seeing what we can do for them, though we know there is very little we can do because of the cost to the Exchequer involved — it is no harm to put on the record the yield from corporation tax. In 1980 it amounted to £140 million and in 1988, post budget, it will amount to £280 million. In 1980 it amounted to 5.3 per cent of the total tax take and in 1988 it will amount to 4.2 per cent. The highest percentage it ever reached was 5.7 per cent in 1982. Therefore, one can see the tax contribution from the corporate sector is very small in the overall context. It will amount to only 4.2 per cent this year.
The Workers' Party are opposing this section of the Bill. I am glad that the Minister is proposing to reduce the accelerated capital allowances. It has been recognised in Britain that there is no advantage to be gained by having capital allowances and the whole area is completely doubtful. As I understand it, over a period of three or four years the Thatcher Government abolished capital allowances and I do not think there will be any arguments about what the Minister is proposing here, which is reducing the rate to 50 per cent. We will certainly be giving it our support.
Under this section the Minister is proposing to give some compensation for halving capital allowances which we believe should be abolished and replaced by direct grants and subsidies. The recommendation of the Commission on Taxation in the area of company taxation was that we should move away from the huge array of tax reliefs and allowances but this Government are actually increasing those reliefs and allowances. For example, what is the need for extending the 10 per cent corporation tax rate to the financial institutions who will set up in the Custom House Docks site? As far as we are concerned, this is just a giveaway.
Earlier this year the Minister said that capital allowances in 1987 amounted to £310 million, which at one stage amounted to £116 million, and he has just pointed out that the actual tax return doubled between 1980 and 1987, from £140 million to £280 million, even though there was a reduction in the percentages from 5.3 per cent to 4.2 per cent, this despite the fact that the allowances had almost trebled. In addition, export sales reliefs amounted to £337 million; Shannon reliefs amounted to £29 million; manufacturing profits reliefs, a reduced rate of tax for the manufacturing area, amounted to £123 million; stock reliefs amounted to £11 million; reliefs for small companies through a reduced rate of corporation tax amounted to £8.5 million and section 84 loan reliefs amounted to £64.3 million. In all, total tax reliefs amounted to £900 million. The Minister should reduce the number of reliefs and should offer assistance by way of direct grants and subsidies for specific projects with specific returns and performance.
It is difficult to say whether the granting of these reliefs has proved to be of benefit to the economy because in the manufacturing sector, in which there is a 10 per cent rate of corporation tax, in the seven year period from 1981 40,000 jobs were lost, which amounts to 20 per cent of the total number of jobs in the sector, this despite the payment of enormous tax reliefs and allowances. In addition, a further £400 million was paid out by way of grants and subsidies. When are the Government going to decide whether these tax reliefs are of benefit to the economy? They are introduced and continue to be paid year after year, generation after generation, until the Government hear of some country which has got rid of them when they in turn will begin to reduce them. At some stage we will have to decide if they are of any benefit to the economy and the point I am trying to make is that I believe they are not. Generally, those tax reliefs go into somebody's pocket and do not lead to the creation of more jobs.
One headline which appeared in a newspaper last year read "No tax is good for Guinness". According to that report over a half year period in 1986 Guinness paid only £600,000 tax on profits amounting to £16 million and they did not pay any tax at all for the other half of the year. In fact, Guinness estimated that they were unlikely to pay any taxes for at least seven years in Ireland because they had accumulated capital allowances in the region of £120 million. They had accumulated capital allowances to the extent that they would not have to pay any taxes for a period of seven years. I hope that as a result of the Minister's proposal to reduce the rate we will catch some of this before the seven years are out. The idea that a company can accumulate capital allowances to the extent that they do not have to pay any taxes for seven years is unbelievable, particularly in the light of the high profits being made by that company and that is only one example.
As far as Guinness are concerned, there will be no increase in the number of jobs over that seven year period. Nor was there an increase in the number of jobs over the previous seven year period which, in fact, saw a reduction in the total number of jobs because a reduction in the total number of jobs meant higher profits for the company because of new technology. Therefore, these tax reliefs and allowances are not of much benefit to the economy and there is no evidence to the contrary. The Government have stated that a reduction in the national debt is only part of what they are trying to achieve. Their primary objective is the creation of employment and to keep people at home. All of the other things are just steps on the way to achieving that objective. What I am saying is that the evidence does not indicate that the granting of various tax reliefs and allowances will help the Government in achieving their objective.
In this section the Minister is proposing to compensate for the reduction in capital allowances by way of a reduction in corporation tax in one particular area. The Minister should decide whether the granting of capital allowances is wrong and reduce them and should not try to make up for it by giving away a bit somewhere else. While the Minister could reduce the rate of corporation tax in this section of the economy to a rate of either 47 per cent or 43 per cent, he should increase the rate of corporation tax in the manufacturing sector because there is no evidence that a reduced rate has led to the creation of jobs. If the Minister could tell us that a reduced rate of corporation tax has helped to create jobs and that if there had been no such reduction it is probable that 80,000 jobs would have been lost or that we would have no manufacturing industry at all, we would have to think again but that would be unbelievable and nonsensical. Therefore, the corporation tax area should be taken on its own and should not be related to capital allowances. Capital allowances have been shown in many countries to be wrong, and of doubtful proportions from the very beginning. In fact, instead of being reduced to 50 per cent, they should be abolished altogether.
(Limerick East): Are we taking Parts I and II of the Third Schedule together with the section?
And amendment No. 52.
Is that agreed? It is agreed.
(Limerick East): Would the Minister advise us on the effects of Part II of the Third Schedule on the general area of 10 per cent companies. Obviously the reduction in accelerated allowances will apply to all the 10 per cent companies, but there is no benefit to these companies from the reduction in rates because they are not paying those high rates anyway.
That is the position.
(Limerick East): Did the Minister include in the figures he gave us on the reduction in accelerated allowances the yield to the Exchequer from the 10 per cent companies?
The figures include the yield from all companies.
(Limerick East): The figures were not confined to the companies paying the high rates at present?
The net sum I gave in the two sets of figures includes companies paying 10 per cent, 43 per cent, 47 per cent, whatever it is.
Will amendment No. 53 come?
It will come in its own good time.
I thought we were discussing it with these amendments.
It has been discussed but we cannot stretch that far afield now except to have it recorded that it has been discussed. I now direct your attention to a slight matter that needs to be corrected on the list of amendments. I ask you to look at section 31 and the amendments listed therein, and I invite you to transpose amendment No. 39d to follow on amendment No. 39c but under section 31 and not section 33. Amendment No. 39d should appear under section 31.
Amendment No. 39a: Amendment No. 39b is cognate, and therefore amendments Nos. 39a and 39b may be discussed together.
I move amendment No. 39a:
In page 36, line 12, to delete "earned" and substitute "had".
These amendments correct a drafting error in section 31 as it appears in the Bill.
I move amendment No. 39b:
In page 36, line 29, to delete "earned" and substitute "had".
Amendments Nos. 39c and 39d are related and may be discussed together.
I move amendment No. 39c.
In page 38, line 11, after "or" to insert", if it is less, to the extent of".
This is a technical amendment involving a rearrangement of the wording to convey the intention of the Minister in a more concise manner and to remove any doubts on interpretation.
I move amendment No. 39d:
In page 38, line 12, to delete ", whichever is the less".
(Limerick East): This is a quite complex section as drafted and is a limitation on certain practices at present. Is there a yield to the Exchequer from this limitation and if so, what is it?
It is difficult to estimate precisely the tax that will be saved as a result of this measure. However, it can be expected that a tax saving of the order of at least £1 million annually can be expected and in some years it may well be higher.
That sounds ominous.
(Limerick East): Every time the Minister gets up he makes next year's job easier. We should encourage him.
(Limerick East): This section deals with the post-1990 situation as regards Shannon Airport companies. The companies at present under export sales relief which are zero-rated will with the agreement of the European Commission be subject to the 10 per cent corporate tax regime. Why is this done in the manner in which it is done? Why will the companies not move automatically on to the 10 per cent rate and fall within the parameters of the 10 per cent regime immediately?
It appears that all the section does is to remove the prohibition on the issue of 10 per cent tax certificates to companies in the Shannon industrial zone, but it does not positively entitle them to continue operating post-1990. In effect, therefore, zero-rated companies which are at present operating in Shannon must reapply in 1990 for a new licence and it is entirely possible that new restrictions or conditions will be imposed on such companies to which they had not been subject previously.
Some Shannon companies are and will continue to be in difficulty in dealing with third parties in so far as their continued existence in Shannon is now dependent on a new application to the Department of Industry and Commerce and to the Department of Finance and they have no idea what conditions or restrictions might be imposed at the time of the new application. I believe this position is entirely unsatisfactory. Shannon companies had been led to believe that legislation would be introduced which would automatically entitle them to operate under the 10 per cent tax regime post-1990 and that this move would end the uncertainty which has been a feature of their commercial life for some years past. Would the Minister consider introducing an amendment on Report Stage to bring about the change I am suggesting?
The net point is that these companies will have to re-apply in 1990 and this is causing them concern. There is no certainty that the Minister or his successor will actually accept the application and admit them to the 10 per cent regime.
Companies at present in the Shannon free zone are obviously making plans and arrangements for the future and any company would want to be planning in 1988 for what will be done in 1990. Some of these companies — and the Minister knows the type of companies I have in mind — are making plans for the mid-nineties. They need the certainty that no new conditions will be imposed either by the Department of Finance or the Department of Industry and Commerce when they apply for the tax concession. I would prefer if the Minister would consider changing the section so that these companies would move automatically to the 10 per cent rate if they are operating at present under the zero regime and that they would not have to re-apply, with all the uncertainty that gives rise to.
I wish to support my colleague, Deputy Noonan, very strongly in his plea to the Minister to introduce the amendment sought on Report Stage.
As I have said before, I believe the bias in favour of financial services in Dublin is doing untold harm to the industrial estate in Shannon where the off-shore banking idea originated. Previous Ministers, including Deputy Noonan, have been at pains for some time to assure the companies in the industrial zone that the regime operating from 1990 would be the same as that which operated prior to that date. This legislation which gives additional powers to the Minister for Finance and the Minister for Industry and Commerce puts the whole matter in doubt. What amazes me is that the Department of Industry and Commerce who seem to be so caring about the Shannon Free Airport Development Company and gave them a new role, do not seem to have advised the Minister for Finance that these changes will have a definite effect on companies in the industrial zone.
As I have said, superior grants and aids are being given to the Custom House Docks site in the financial services area. Maybe this word is being over-used at present but the Taoiseach, Deputy Haughey, has hijacked this whole idea for himself. He said, as did the Minister for Finance last year, that Shannon would get the same treatment as the Custom House Docks site. Nothing could be further from the truth. In this Finance Bill the Minister is seeking to give greater relief to companies setting up in the Custom House Docks site against those already in existence in the Shannon free zone. As far as I can see the Taoiseach and the Minister for Finance will not rest easy until they have Guinness Peat moved from Shannon and into this infamous site, the Custom House Docks site.
One thing came from the meeting in Killarney: we have a lot of confidence in the economy. All the leaders of industry said that changes had taken place but one thing they were all agreed on was that the Custom House Docks site is not getting off the ground, that it is very slowly creeping into existence. I am sorry to be so parochial about this matter but when you come from the west, and the Minister will understand it, you have to defend against the big boys in this big city. Companies want to get into the docks site and the Minister wants to put them there. Even the Minister for Industry and Commerce does not seem to be aware that he is taking onto himself new powers under the Finance Bill in order to give licences to the industries already in existence in the industrial estate in Shannon. I support very strongly the appeal to the Minister by Deputy Michael Noonan to put down a suitable amendment on Report Stage. Nothing will convince me but that the good companies that are in Shannon and the mid-west region will be transferred to this unholy docks site just to prove that it has the right origins, that it is 1,000 years old, and maybe poor Clare will be the sufferer.
There is nothing about the poor Clare people living in Dublin.
They come back down to Clare fairly quickly.
I would like the Minister, in the interests of creating business confidence and certainty, to transform, in so far as he can, this section from being a discretionary section to being an automatic process.
I am sorry but I cannot agree with that. Under section 39A a company had to fulfil a condition with regard to initial investment, broadly new investment, expansion or substantial reorganisation of its business before the Minister for Finance could issue a certificate to enable the business to qualify for relief under the 10 per cent scheme. This condition is deleted by this section with effect from 6 April 1988. All Shannon relief companies may now apply for manufacturing relief which will be available until 31 December 2000, in place of Shannon relief. The old licences will be done away with in 1990 and companies will apply for the new 10 per cent licences. It would be most unusual for anyone to be refused those licences. All we are asking is that when that is being done we would review each company and get them to agree to performance criteria, in the same way as is done with any new application in any part of the country, whether in Shannon or in the Custom House Docks site.
(Limerick East): What the Minister has said is the difficulty. Section 32 as drafted is a line and a half and simply takes out section 39A of the Finance Act, 1980. In doing so it leaves the company in the position of a new company coming into the country. The uncertainty that has hung over the existing companies has been as to what would happen post-1990. Would they have to go from zero rating to 47 per cent or 43 per cent as it will be in 1990?
The fear now is whether they will get in at all.
(Limerick East): I acknowledge the good work done by the Minister and his colleague, the Minister for Industry and Commerce. This is a matter that I had set in motion and I am glad to see it has reached a satisfactory conclusion in Brussels. I congratulate the Minister on what he has done.
The Deputy knows how difficult it was.
(Limerick East): I accept it was quite difficult but having friends out there was a help. Whether they will be there next year or who will be there is another question but we might have some friends there. I would have thought that zero rated companies in Shannon would have automatically gone onto the 10 per cent regime once the Minister had concluded successfully the negotiations with the Commission. That is not now to happen. The manner in which this is being achieved now is by deleting the section. Zero rated Shannon based companies will be treated like new applicants, like new industries being set up, and an application will have to be submitted to the Minister and the Minister for Industry and Commerce for a licence before the 10 per cent tax regime applies to them. The Minister has now indicated that the reason it is being done in this way is so that he can have the opportunity of putting performance criteria on companies. This is the net issue. As soon as the Minister starts talking about imposing performance criteria on existing companies, on how they will operate post-1990, and making this a condition of the benefits of the 10 per cent tax regime, a question mark is put over the future of the company and over their relationships with their future customers and trading partners.
I cannot see why the Minister, rather than just deleting the section, would not introduce an amendment on Report Stage which would positively state that all companies at present operating in the Shannon Free Zone that have the zero status would automatically be issued with licences to enable them to operate under the benefit of the 10 per cent tax regime. Instead of being helpful the Minister has confirmed the doubts that have been voiced and has made it more difficult for the companies to operate. I strongly urge the Minister to consider an amendment on Report Stage and to be helpful about this matter. Will the companies be in a position next week, when this Bill goes through the Seanad, to apply for licences? It would be helpful if the Minister gave a commitment that licences would be issued over the next couple of months. By doing so, companies would know now what their position would be in 1990. If the Minister keeps them on the promise and takes them up against the wire in 1990 there will be a bit of a shake-out and there will be a real problem. They will not make any decision which involves expansion or further investment in the zone until the uncertainty is removed.
In relation to the proposal to impose performance criteria on these companies, is that function one which was part of the deal done with the European Communities or is this our own idea? If it was part of the deal done with the European Communities there is no point in us debating it.
(Limerick East): It is our own idea.
If it is our own idea I want to know what is the purpose behind it. It is fair to distinguish between the two because if it is part of the deal with Europe there is no point in us wasting our breath on it now. If it is the Minister's idea, I would like to know what kind of performance criteria he has in mind.
The main problem, as the Deputy rightly referred to in his capacity as Minister in dealing with this issue in Brussels some time ago, was the difficulty about getting them to agree to drop this condition of initial investment. That is gone. That is what we are doing here. The performance criterion is that there should be at least 15 jobs. That is not too unreasonable. We have performance criteria for the 10 per cent companies in Shannon, and these have not been applied to exempt companies. When the 10 per cent is applied so also must the criteria be applied. That is the position. I do not think it is necessary to consider any Report Stage amendment. Companies can apply now if they so wish but, when they get their licence, they will go on the 10 per cent rate. They can do it now or wait until 1990.
(Limerick East): Will they have to apply for their licence now or wait until 1990?
They can make applications now, be considered and take them up straightaway or, I presume, they can extend them until 1990. They are operational until 1996.
I think the Minister is being wrongly advised in this case. There are already in existence in Shannon at least half a dozen companies employing fewer than 15 people.
They are not exempt companies if there was no performance criterion.
Be fair Minister, Eighty jobs in County Clare and Shannon town, where there is very high unemployment, would be as welcome there as they are in the Dublin Docks site. I hate to come back to this point, but I want to comment on the way the officers of the Department of Finance advise successive Ministers, and I am not excluding this Minister. In the case of the off-shore banking, they could not accept the proposal from the Shannon Development Company unless 40 jobs were guaranteed. When the pressure was put on and we had a local Minister for Industry and Commerce, that number was reduced to 20 and financial service companies agreed this was a reasonable performance criterion. With the transfer of the financial services to the Custom House Docks site, instead of requiring a performance criterion of 15 people, I understand from the Minister and the Taoiseach that companies with just two employees will be accepted. The Minister has it in his power in this instance to make a reasonable change in the legislation, as requested by Deputy Noonan to give the companies already in existence the confidence to go forward.
That is exactly what we are doing here. We are clarifying the matter. It is nonsense for Deputy Carey to suggest that something different is being done here from what is being done at the Custom House Docks site. The 10 per cent companies anywhere have to comply with this performance criterion.
It is different.
It is not different. There is no point in trying to bring red herrings into the debate.
There is no red herring.
The same criteria will apply here as in the Custom House Docks site. There is no way a company employing two people will get a licence.
(Limerick East): I will have to check the details between now and Report Stage, but I know there are companies operating in the Shannon free zone under the zero tax rate regime which do not have 15 people employed. The expectation was that all companies operating in the Shannon free zone would move to the 10 per cent regime in 1990. Subsequent to the announcement by the Minister for Industry and Commerce that negotiations had been successfully completed with the Commission, this was widely believed. The Minister has opened our debate by suggesting that performance criteria will be required. Initially he seemed to indicate that there would be no problem because if the companies are there they will be licensed. It now transpires that that is not so, but that companies will be closed down.
The Deputy is saying that——
(Limerick East): The Minister has suggested that the 10 per cent regime will not apply but he will not close the companies. What will happen is that the corporate tax rate which will apply in 1990 will be 43 per cent rather than zero. These companies are there because of the tax incentive and they will not pay a rate of 43 per cent. The Minister knows that as well as I do.
They will pay 10 per cent.
(Limerick East): They cannot pay 10 per cent if they do not get the licence and the Minister will not give them the licence if they do not provide 15 jobs.
I said that was the performance criterion that is usually applied.
(Limerick East): I will give the Minister an opportunity to reply again, because I have obviously misunderstood him. If the Minister is saying something different I would like him to put it on the record of the House.
I am not saying anything different. I said a performance criterion was necessary for 10 per cent companies. That is the position now and it will be no different when applied to companies in Shannon. Normally the performance criterion is that 15 jobs be provided. The Deputy tells me there are some exempt companies with fewer than 15 jobs. When they apply to get into the 10 per cent tax rate, I am sure special consideration will be given to those companies. It will not be the intention of anybody dealing with this issue to have tax exempt companies, which are applying to get into the 10 per cent tax regime, closed because they do not fulfil the performance criterion. What we are trying to do for Shannon is to increase the number of jobs and to ask companies to co-operate because, as the Deputy rightly said, if we had the situation which Brussels was requesting, it would be a totally different ball game. They have moved quite a bit of the way and it is only right when we are going to have the 10 per cent rate — not 43 per cent as the Deputy suggests — that we should have some criteria applied before licences are given.
(Limerick East): That is a more satisfactory position than I understood the Minister to say earlier, but it still does not meet the original objection. The Minister has gone so far as to give assurances on the record of the House and is saying, more or less, that existing companies will be allowed to continue. If they do not fulfil the 15 employee rule, they will be treated on a case by case basis and the nod is that they will be looked after and they will be admitted.
We will look at their plans and help to bring them up to that criterion.
(Limerick East): Since the Minister has gone that distance he should go a little further and frame an amendment on Report Stage which would remove the uncertainty because he has as good as said it will be automatic. Why not move an amendment on Report Stage and put the section beyond doubt? If the Minister did this, he would not be creating a precedent because there are no zero companies anywhere else. He can quantify the number of companies to which this would apply. There is no question of precedents or tax avoidance schemes being created. It is a quantifiable number of existing companies and the Minister is moving them from a zero tax rating to a 10 per cent tax rating. I appeal to the Minister to take the uncertainty out of this and to frame an amendment for Report Stage.
Deputy McDowell raised an issue which has not been answered. I believe that the performance criterion was not a condition of the European Community Commission sanctioning the 10 per cent tax regime for companies. It is my belief that the performance criterion is being added locally. I do not believe it was a decision taken in Brussels at all. The Minister should go the whole way, remove the uncertainty, because undoubtedly there is uncertainty being created. It is not a big issue either for the Revenue Commissioners or the Department of Finance and it would be helpful.
There can be no question of lack of control. There has to be some control. However, there have been abuses perpetrated in regard to these companies. The Government must maintain and exercise control over any exemption or relief they give. This constitutes substantial relief. Indeed, we were very fortunate in having succeeded in getting the approval of Brussels for it and for the financial services centre at the Custom House Docks site.
I do not share Deputy Noonan's concern. I have no doubt whatever that the companies involved in the Shannon area, effecting this change between now and 1990, will be in a position to come forward, agree a business plan with the Exchequer or the Revenue Commissioners, get their licence and go on to the 10 per cent rate. It is in their interest to do so because, as the Deputy rightly said, if they do not do so they go on to the 43 per cent rate. We must endeavour to avoid such an occurrence. We must have some control along the line, some performance criterion, so that we do not have 15 individuals running into any place, whether it be the Custom House Docks site or the Shannon Free Airport Development area, setting up companies with one person employed in an office with a telephone. Nobody wants that and I am sure the Deputy does not want it either.
(Limerick East): I accept that absolutely. In the context of new companies the Minister is absolutely right and I am very glad he has taken that line. One of my concerns is that the performance criterion which might be applied to companies in, say, the Custom House Docks site, would not be firm enough. I am glad of the Minister's assurance on what is the policy in this connection. What we are talking about in the Shannon area are existing companies, operating under one tax regime, that will be moving to another tax regime. These are not new companies coming in. They are there because it is a tax haven; that is why they set up there in the first instance. If there is any doubt about their future — many of these could as easily be located in the Channel Islands, The Bahamas or wherever — it is not the company about which I am thinking but the individuals they employ. Fifty, 60 or 70 jobs, if one is talking about Dublin city, might not amount to an awful lot. When one is talking of a rural constituency, especially in County Clare, 60 or 70 jobs amount to an awful lot. I do not think they should be put at risk.
I do not think there is any diminution of Government responsibility or control for ensuring that there is no tax avoidance in suggesting that companies operating under one regime at present could automatically go onto the other. If there is to be any expansion thereafter, which requires fixed assets grants or other subvention, obviously they will have to submit a company plan or profile and the Minister will have a chance to deal with the matter. I contend there should be an automatic transfer from the zero to the 10 per cent rate. To be truthful, I do not think it was even a policy decision. It is my belief that this was the easiest way to draft it because all the parliamentary draftsmen had to do was introduce a section, a line and a half long, to remove section 39A from the Finance Act, 1980, and that would do the trick.
The reservations I have in regard to this section and indeed the debate itself arise from the incoherent tax incentive components we are now institutionalising. I should like to ask the Minister: when will we get a 10 per cent tax rate in the Sligo Industrial Estate? Presumably, that will be contained in next year's Finance Bill. If we wanted to be really clever, we could build a little tax haven, say, for Ringaskiddy, on the grounds that it is virgin territory. Where are we going to stop? Simultaneously we claim to be an Irish region for European Community purposes. Let us get some more brilliant ideas and, say, apply a 15 per cent tax rate to areas covered by the western package. At the rate we are going, we should not experience much difficulty in giving the tax harmonisation bureaucrats of Europe a succession of nervous breakdowns because, by the time they disentangle what we are proposing here, by 1992, the Department of Finance, the Revenue Commissioners, the EC and the politicians of the day will have had a collective breakdown. It is becoming ridiculous. A little bit of Dublin is now a tax haven, carrying a rate of 10 per cent, ringed by Sheriff Street, the Custom House, the Departments of Health and the Environment, Irish Life and Aras Mhic Dhiarmada owned by the State. I can think of an even more brilliant idea, since we own Aras Mhic Dhiarmada, why not have a 10 per cent tax rate applicable within that building?
I might remind Deputy Desmond that we are dealing with section 32 which relates to the Shannon Free Airport Development area. The Dublin docks area is covered in the next section, 33. Let us debate it section by section.
The only advantage that this section has is that Shannon has water attached to it although, equally, the Custom House Docks site has a river attached to it.
We are at present dealing with Shannon. We shall come to the Dublin docks area in the next section.
I am dealing entirely with it. I regard the way in which the State and successive Ministers for Finance have approached this question as bordering on industrial incentive farce. In terms of promoting industry here, it would be far better to have a uniform tax rate applicable throughout the country, albeit a low tax rate, and not have the kind of circumstances prevailing now in which we are pumping artificial millions into Shannon, basically on transfer pricing, not on a 10 per cent tax rate, with the Revenue Commissioners looking in the other direction. We are endeavouring then to build up another new regime at the Custom House Docks site, with all the licensing, special assessments, special committees of the Department of Finance and the Revenue Commissioners trying desperately to ascertain who will qualify for this or that bit of a certificate, with the accountancy and taxation professions enjoying themselves no end.
One might well ask: for what purpose? The purpose is one of employment, industrial development, the rejuvenation of certain areas. That can be done without getting embroiled in a 10 per cent tax rate. Indeed the scheme of relief for Shannon has outlived itself in many ways and should be absorbed into a broader, regional, national framework within which it would have a real impact. Then the Dublin position and the other special areas incentives would not be of such great import.
We have gone down the road to virtual nonsense in refinement, in a small country with the number of people employed in the industries themselves being capable of being contained on three A4 printouts which would show the companies' names and the bulk of their employment content. There is no real rationale behind this further refinement. I suggest to the Minister that, instead of this, he should have a uniform tax rate and give other reliefs, for example, the rates relief which is given in relation to the Customs House Dock site. That could act as an incentive for inner city development. Some other form of relief could be given in Shannon which would not be related to specialised 10 per cent schemes of this nature.
We are now in a farcical situation and the more it is elongated the more pressure there will be from other parts of the country for special reliefs and special consideration. I could name a half a dozen places, for example, Waterford and Cork which equally feel they are entitled to the same specialised tax consideration which, of course, we cannot apply because we would make even bigger fools of ourselves if we were to develop that structure. The Minister should consider this seriously because he purports to be a reforming Minister in terms of public finances and if he is he should equally be a reforming Minister in terms of taxation reliefs. In any event, I believe the European Community will get sick to death of us by 1992 and thereon because already our special pleading in a whole range of areas is becoming, to say the least, rather tiresome to the Community and the submissions we make for regional aid are very confusing. It is time the Minister took a long hard look at the real impact of what is before us today in this section of the Finance Bill.
Deputy Michael Noonan made a plea for existing companies and, in particular, he wanted the Minister to introduce an appropriate amendment on Report Stage. I believe this is the correct course to take in order to maintain confidence in employment. For that reason I make a special plea.
I have already said on numerous occasions that the companies concerned will be dealt with on the same basis as any other service company applying for a 10 per cent certificate.
I move amendment No. 39e:
In page 39, after line 45, to insert the following subsection:
"(4) (a) In this subsection——
‘the Area' has the same meaning as it has for the purposes of the said section 39B;
‘foreign life assurance business' means relevant trading operations within the meaning of the said section 39B consisting of life assurance business with policy holders and annuitants who reside outside the State;
‘foreign unit trust business' means relevant trading operations within the meaning of the said section 39B consisting of the management of the investments of one or more qualifying unit trusts;
‘qualifying unit trust' means a unit trust scheme——
(a) that is a registered unit trust scheme within the meaning of the Unit Trusts Act, 1972,
(b) the business of which——
(i) is carried on in the area, or
(ii) is not so carried on but is carried on in the State and would be carried on in the area but for circumstances outside the control of the person or persons carrying on the business,
(c) as respects which all holders of units in the scheme are persons resident outside the State;
‘tax' means income tax, corporation tax or capital gains tax, as may be appropriate.
(b) Notwithstanding any other provision of the Tax Acts, the rate at which any tax is chargeable (before any credit is allowed for foreign tax) in respect of income arising or chargeable gains accruing from securities or possessions in any place outside the State that are investments of a foreign life assurance business or investments managed by a foreign unit trust business shall not exceed 10 per cent.".
The amendment of section 33 provides for the insertion of a new subsection (4) in section 33. The existing section 33 provides for certain amendments of section 39B — inserted by the Finance Act, 1987 — of the Finance Act, 1980, which provides for the extension of the 10 per cent scheme of relief from corporation tax — Chapter VI of the Finance Act, 1980 — to financial services carried on or to be carried on in the Custom House Docks site.
The new subsection (4) provides for a 10 per cent rate of income tax, corporation tax, or capital gains tax, as the case may be, in respect of investments held outside the State which are funds of a foreign life assurance business in respect of which a certificate has been given under section 39B, that is, it is life assurance business with persons outside the State, and investments held outside the State which belong to unit trusts, all of the unit holders of which reside outside the State where the business of managing the investment is covered by a certificate under section 39B, that is, the business of managing the investments is relevent to trading operations under section 39B.
The provision is designed to allow for an effective 10 per cent rate of income tax in respect of investment income and gains which, since they would not be trading income for tax purposes, or since they would not be chargeable to corporation tax, could not qualify for the 10 per cent rate provided by Chapter VI of the Finance Act, 1980. I announced this amendment in my Second Stage speech as part of the packet of measures to help to promote the financial services centre and create employment in it.
I am opposed not only to the amendment but also to the section. In a desperate effort to convince anybody and everybody who might call themselves a financial trader to go down to the Custom House Docks site every conceivable incentive is being held out to them. Previously a company had to carry out their trading operations on a premises occupied on an arms length basis under the arrangement with a non-connected person. That requirement is now being removed. The question arises: why is it really being removed? Will any costing be done in relation to the impact of this section? Have any costings been done in relation to the addition of dealings in commodity futures or commodity options to the classes of trading operations which may be certified by the Minister for Finance for the purposes of relief? What is the revenue foregone for next year and the year after on the basis of the further incentive that it is now being brought into operation in this area?
It has reached the stage where, under virtually any pretext, you can get into the site and if you pay your 10 per cent you get your rates relief and every other relief. I do not propose to go back over the other reliefs but there are no less than 13 incentives being offered. This is a new incentive which is now being built in to encourage people to move down to the Custom House Docks site. I am opposed to this kind ofad hoc arrangement of the worst kind. I should like to point out to the Minister that, apart from a very attenuated comment justifying the introduction of this amendment, there will be no indepth explanation giving any logical reason why this amendment is necessary. I suspect that representations were made directly to the Minister by a few people who said they were anxious to go into the site but they could not and they wanted another amendment. The next Finance Bill, if there is one and if the Minister is in charge of it in 1989, will contain further amendments so we might as well give 10 per cent relief to anything and everything that moves on the site. We should ask the medical profession to go down and pay 10 per cent.
It does not have to move.
We could even transfer the headquarters of the IRFU and the GAA down there and give them 10 per cent relief. Just about anything and everything can get onto that site for 10 per cent relief. Where is this going to stop? I would go down there tomorrow morning and build a cottage on the seafront if I could get 10 per cent relief. Where is the Minister going to stop?
We will give it to the Deputy free.
I could even have a little private marina down there and get a 10 per cent relief.
We could not get a better caretaker for that whole institution. The Deputy could get a free house.
It would be great to be a caretaker in the Customs House Docks site if one could get 10 per cent. It is farcical. Is there anybody left who cannot get in there? I suspect that there is not a postmistress in the country who, if she made a decent application, could not get in there at this stage. The Irish Life across the road have their filing cabinets lined up to move 50 yards across to the site to go from a 50 per cent tax regime down to a 10 per cent tax regime. Bringing this brainwave into operation will lose us about £25 million on the ordinary taxation basis to have a very exceptional tax haven for a very few financial companies who have decided that they are going to throw their lot in with the Government. These few companies who are in this in a big way, American, Japanese and particularly Irish companies, see themselves making a killing. They will not have to go to the Isle of Man any more. They just have to go to the Custom House Docks site to get a straight 10 per cent because that, in effect, is what we are providing. Any of the financial services people I have met around this city are enormously critical of this because it involves the loss of revenue, the total loss of control over what is going on there, and now the criteria for getting a licence to get in there are so loose that anything and everything can get in there on a general 10 per cent basis.
The Minister has further opened the door in section 33, in a way which I find objectionable, at a time when we are desperately trying to conserve and maintain ordinary State revenue for essential social and public expenditure, and when the Minister finds it desperately difficult to succeed in keeping a few hundred thousand pounds together on rod licences. What is he doing now? He is handing back about £2 million in taxes on this thing in the Custom House Docks site. There is no consistency. It is not creating jobs. The Government approached one of the American banks and were almost prostrate on the ground to get them to put down five jobs, even on paper, and the Government would give them a certificate. Whether the jobs will ever materialise does not really matter. This is nothing but a contrived tax haven dreamed up in the dining rooms of Government Buildings with a few stockbrokers getting into the buzz words of developmental structures and international financial services. It would be wonderful for these people to pass it on the way to Government Buildings in the morning and say that this is their creation. For what? Every pension fund manager, every financial services operator in Dublin will be laughing all the way to the bank.
I am sad that I have to be so critical of it because we need responsible financial services in operation, not this touting around of further relief to people in a desperate bid to get them to move down to the Custom House Docks site. I say that as one who, in Government, totally supported the rejuvenation of that area and totally supported the substantial reliefs that we gave, notably the ten year rate reliefs and the further major reliefs on capital investment in the area. We were very careful about messing around with tax structures. We did not fall for that kind of special tax haven proposition which is now being further developed in section 33.
I listened to this speech, or a variant of it, for the fourth or fifth time. There is a certain inconsistency in Deputy Desmond's contributions on these occasions. On one side of the long playing record on the subject of the Custom House Docks site we have the rip-off tune played, and the rip-off tune is that the Minister is giving a whole load of pals, and institutions who are in his pocket politically a tremendous break from which they are supposed to benefit and for which they are to be eternally grateful and thereby secure his poltical future for ever.
I never said any such thing.
That is the theme trotted out on every second day. Every other day we hear the exact opposite theory — and it amuses me because it is entirely inconsistent — that this is such a dumb project that no amount of incentives would persuade anybody to go near it. One thing I would like to get across if I can to Deputy Desmond in particular, and to Deputy Mac Giolla, is that when one gives a tax break to an activity which, if it were not for the tax break would not occur, one does not lose money. If nobody is going to come to Ireland and set up an international futures market in Dublin, any tax break that is given is no loss to our Exchequer. If nobody is going to trade here in foreign unit trusts, any tax break given to anybody to do that here is no loss to our revenue. The sooner the left wing parties get it firmly in their heads that tax breaks on activities which would otherwise not occur are not moneys lost, the sooner we will have a rational debate in this House.
I believe Deputy Desmond would not know the difference between an offshore bank and a delph piggybank lying on a marina if he saw it. His attitude in all of this seems to be based on a very primitive economic theory, that is, that if one decides on some entirely artificial basis that there is a revenue loss in relation to an activity, that is somehow a rip-off on the people. Let me say clearly — and I wish the parties on the left would get this through their heads — if an activity is not going to occur here unless there is some special tax concession given to it, there is no point in mouthing about the cost to the Exchequer of any tax break given to that activity. It is simply dishonest, illogical and self-contradictory to keep on making these speeches because they get us nowhere. We have heard Deputy Desmond's view. It is based on a fallacy and, as far as I am concerned, the sooner Deputy Desmond accepts the proposition that there is a legitimate role for giving a tax break to foreign investment to come to this country, that tax breaks such as the Shannon Free Airport Zone and the International Financial Services Centre are there because the activities in question would not otherwise occur, the sooner we will have some rationality in this debate. If we continue interminably on this notion that every penny given by way of a tax break to every activity, whether or not it would occur irrespective of whether the tax break it is given, is a penny lost to the poor of Ireland, we will never address development here rationally or honestly and we will surrender completely to what I believe is the worst form of demagoguery, with the greatest of respect to the former Minister.
Could we please apply our minds to section 33, certain trading operations carried out in the Custom House Docks area?
That is precisely what I want to address myself to. I would remind our legal colleague, whose brilliance in legal affairs I would in no way dispute, that in terms of financial Bills going through this House I have had the experience of being involved in no less than 30 over a period of 20 years and can, therefore, claim to have some rudimentary and somewhat extensive knowledge of those financial Bills. His remarks about piggybank economics sound rather hollow. If you add together the assets of Allied Irish Banks, of the Bank of Ireland and of the building societies what would you get? You would get half the asset value of one building society in the UK, the Halifax. That is just to give the Minister a little bit of perspective about the relative weight of the Irish economy and its totally profound impact on——
The Deputy should get back to the section under discussion, to the Custom House Docks area. Deputies are engaging in second reading speeches. This is not the time for that.
We are a small economy and we have a small financial base. We should not have pretences within that framework. I believe that within this country, in all areas, we should have a common financial taxation system in operation. We should not have presumptions and we should not have specialised Mickey Mouse havens within a small country of 3.5 million people with a relatively tiny financial structure. We should not go down the road of mammoth financial structures of attractions of that nature. I believe that only causes amusement outside this country and I say that as one who is desperately anxious——
I am afraid I must insist on Members relating their remarks to the amendment under discussion and to the section under discussion.
My remarks in relation to the proposed amendment are that far from developing financial services and international respect for those services which we must have, both within the European Community and in our interlocked relationship with the sterling area — totally profound in many ways — the reactions I have had from reputable economic and financial sources are that they are not at all impressed. I regard them as no more than a contrived minor tax haven effort which will not have any real effect in terms of the relief offered. It should be discarded. There is nothing particularly rhetorical in my comments on it. There is nothing particularly objectionable in it. Those with whom I have spoken at accountant level, at economist level, at public service level and at Revenue level have not been impressed with what we have come up with in this Custom House scheme. The Minister may hold otherwise but I believe that half a dozen people came together and codded the Government into that particular concession. They are still at it because they are seeking to extend additional classes of trading operations which will be certified by the Minister. The Minister might as well certify all and sundry because it is having no impact other than that.
I agree with everything Deputy McDowell has said. While Deputy Desmond might have 20 years' experience he did not acquire much knowledge about international and financial services on the way. He may have the experience but he does not, seemingly, have the knowledge. He is inclined to forget that this kind of business in general is not being carried out in Ireland. We are trying to attract it in here and create thousands of jobs which I thought would be of interest to a representative of the Labour Party but apparently it is not. Perhaps it is because of where he lives. The fact is that this adds no cost whatsoever to the Exchequer. This kind of business is not carried out here at present. We would like to see this kind of business being established here and making profits so that the Exchequer gains by getting the 10 per cent rate.
International financial services will be carried on in foreign currency, dealings in puts would not qualify for the 10 per cent rate. Regarding the general issue which we discussed in relation to nonexempt companies in Shannon and the approval of companies for the Custom House Docks area, each company will have to go through, before it gets approval, an examination of certain criteria, mainly a performance criterion — as I said earlier to Deputy Carey and to Deputy Noonan — on the number of jobs that are of benefit to the economy. In instances where there are some — and they are very few — companies carrying on a business here of an international nature who move to that area they will only get a licence on the basis of the incremental value to this economy. What is being done here — unlike what Deputy Desmond has said — is being welcomed almost everywhere. I do not know where the accountants, bankers or public servants are that Deputy Desmond has been speaking to because I have not heard or seen any of their comments but I must say the opposite is the case. Almost everywhere you go particularly when you meet people who understand what is being done, and they are in the majority, have nothing but welcome for this project. That is why I have no hesitation in recommending all that is contained in section 33 and the amendments I have proposed.
The House agreed that we would discuss all sections. We have dealt only with three sections and we have some 15 others with which we must deal before 7 o'clock.
I will be very brief. I understand that the Minister is anxious that additional jobs be provided in the economy. I appreciate that very much. The State must provide the circumstances in which these jobs can be made available. In that regard section 33 and the following sections should have applied to the Shannon Free Zone as well as to the Custom House Docks site to give us a reasonable opportunity.
Regarding the section and the amendments a point was made that because of the smallness of our economy this project might not be wise. Because of the fact that we are a small economy and our business in this area is limited, to say the least, we need to make some effort to expand into that type of business. The Minister, his staff and all the relevant people attached to the Revenue Commissioners should ensure that companies which are already in existence and trading here would not be allowed the opportunity to move in and conduct business which is already being conducted in this city.
It could not, by any stretch of the imagination, be classified under this heading as a financial services sector area. There may be a danger of movement of firms and corporations in existing businesses into the area and merely transferring jobs from one area to another. People in specially designated areas have the idea that they are well placed as far as existing financial institutions are concerned. However, I accept that there is a need for some development of this nature and I am in agreement with this amendment to the section.
The concept of a national financial centre is a good idea provided that it attracts major business. We need people with expertise and financial muscle but I am afraid that there will be a transfer of financial institutions within the State to the Custom House Docks area which will cost the taxpayer £100 million——
Did the Deputy mention a figure of £100 million?
Yes, perhaps the figure is not correct but it was mentioned to me by somebody who is not considered a fool in financial circles. If that is the case, we are not going in the right direction because the poor, unfortunate taxpayer will carry the can. The principle is right but we must attract the right people. In this regard, we may be wiser this time next year or the year after. It is important for the Opposition to point out that this can happen. I do not wish to be a scaremonger or irresponsible and I hope that the area will attract the people which the country needs to generate the kind of financial development which I should like to see and which would create jobs. However, the financial institutions must not use it as another means of avoiding their responsibilities in regard to paying their fair share of tax. If there is any danger of this happening, the Minister should examine the matter again. If firms in Baggot Street, Ballsbridge or other places move their offices to the Custome House Docks area to deal with foreign trading, it will not create employment. However, we must try to attract major international pension and insurance funds into this country and give the companies concerned tax incentives. However, these incentives should not be paid for by the PAYE taxpayer.
Existing companies can only move into the Custom House Docks area on international business and they will only get a licence if activity is substantially increased, which means that they must produce additional jobs. That is the real benefit to the economy and many firms who do that business and have it based abroad at present — Irish companies — will move that business back to the financial services area, thereby creating extra jobs and they will pay tax of 10 per cent, which we do not get at present, from the profits arising from the activity located here instead of abroad.
In regard to Deputy Carey's question about extending the provisions of amendment No. 39e to Shannon, there has been no request to date for similar reliefs in respect of Shannon Airport, which can offer 10 per cent relief in respect of a much, wider variety of services than the Custom House Docks site which has been directed solely at financial services. Accordingly, it is appropriate that the new relief should be introduced in respect of the Custom House Docks only. If it directed solely at financial services. Accordingly, it is appropriate that the new relief should at introduced in respect of the Custom House Docks only. If it becomes apparent that such reliefs would be taken up if they were available to foreign life assurance or unit trust businesses located in Shannon Airport, the matter will be reviewed in relation to next year's Finance Bill.
The Bank of Ireland spent £375 million in acquiring an American bank and Irish Life spent £75 million in buying into the United States. If they decide to base that financial trade in the Custom House Docks area, they stand to operate on a 10 per cent basis on their returns. This is far from the great bonanza we were led to believe it would be, it is virtually a "Fortuna" for existing Irish financial institutions to move a few treasury managers — there are not many in Dublin — from Baggot Street or Ballsbridge and send them to the Custom House Docks area. They will not create employment, they will merely handle their overseas investment from that area——
They will not have a licence if there is no creation of employment.
They do not pay 50 per cent CPT, not even the new reduced rate of 43 per cent and they laugh all the way back to the next directors' meeting. There need not be, as the Minister is aware, the slightest growth in employment because they will qualify on a certified basis. The certification structure is quite loose despite the rigorous verbiage the Minister has surrounded it with. When the pressure was put on in regard to the group relief, when the developers and banks said to the Government that they would not invest their money in the development of this site unless they were given group relief, the Government caved in like a pack of cards overnight contrary to the best advice of the Department of Finance. That cost the State another £10 million.
The Deputy was a member of the Government that gave that relief in 1986.
The Government suffered that loss of revenue overnight without a block being put on a block on that site.
The Deputy is apologising for it now.
He was a member of the Government at that time.
The Minister is aware that there has not been peep from the banks about the extra £6 million on the levy. They are now paying £12 million. They are full-time at this — we are part-time — and they know what is going on. They can manipulate the politicians and we have all seen how successful they were in doing that in relation to one crisis. We were lucky to get out of that without the whole country being brought down around us in the process. We succeeded, in the public interest, in keeping the structure intact. I should like to ask the Minister if the two most recent investments, £375 million and £75 million, and the management thereof, qualify on a transfer into the Custom House Docks area for a 10 per cent rate? What revenue will be foregone?
I should like to put it to the House that we have 15 amendments to be dealt with. This matter was being discussed before I left the Chair and the House should accept that undue repetition, dissertations, hypotheses, predications and so on about the Custom House Docks area might not be the best employment of the time that remains. I should like the House to consider that and suggest that after dealing with the amendments we might move on to the other sections that must be dealt with before 7 p.m.
I appreciate what the Leas-Cheann Comhairle has said but we are dealing with vast sums of money.
The entire Finance Bill deals with vast sums of money.
We need a good banking system here and it is incumbent on everybody, irrespective of their political views, to give the banks a certain amount of commonsense support. I am concerned about the international financial services sector and what strikes me as interesting is that Allied Irish Banks, the Bank of Ireland, and other large companies, have bought into big international companies and corporations. Will the Minister say if international financial dealings at the financial services sector will be processed through our normal exchange control regulations? How will those dealings be examined? How will those transactions be monitored? Is the Minister in a position to say if the Central Bank will be permitted to examine those dealings?
Some of the financial institutions who have decided to set up business at the Custom House Docks area have been carrying on business here for decades and it would worry me if they have joined big international corporations with the intention of availing of facilities there to reduce their contribution to our revenue. My reason for raising this matter is because of the huge amount of money that leaves this country in the form of profits, through the black hole. It is important that we establish safeguards in regard to this area. I accept that we must see to it that our financial institutions are allowed complete with international financial institutions on an equal basis and we should give them every facility.
The normal exchange controls will apply.
I accept the Minister's goodwill in offering to extend this facility to the Shannon Free Zone next year, if the matter should arise. Two financial centres exist in the country and both should enjoy the same reliefs. There should not be a bias shown to one area. I appeal to the Minister to make the simple addition I have suggested to him to the Bill. There is no doubt that he, or his successor, will be making the addition next year.
That may not be the case. I have already replied to the Deputy on this issue.
I do not agree to this section but I will not be calling a division.
I would not continue to highlight this discrimination but for the fact that the Minister has disappointed me in his response to my request. I am not being niggardly about this. In regard to off-shore banking, officials from Shannon had to trek to Dublin with their hands outstretched to the Departments of Finance and Industry and Commerce but they got no succour. However, when an effort was being made to sell the Custom House Docks area in London, Mr. Ó Cofaigh and other big wheels in the Irish banking industry were flown to London and many doors opened for them. That does not indicate equal status between Dublin and Shannon. What does the Minister mean by being fair to Shannon?
On a point of order, is this not more relevant to amendment No. 41?
I was hoping that Deputy Carey would accept that he has already established the merits of the Shannon as against the Liffey and that, in the circumstances, with no amendments down and with an indication from the Minister that he has not received any request from Shannon, he would be happy in the thought that he has expressed himself freely and well on behalf of Shannon.
Amendments Nos. 40 and 41 are related and may be discussed together, by agreement.
I move amendment No.40:
In page 40, line 43, after "of" to insert "section 39A (inserted by the Finance Act, 1981) or".
Section 35 of the Finance Bill enables companies carrying on international financial services activities in the Custom House Docks area and qualifying for the 10 per cent rate of corporation tax to pay interest to non-residents without deducting tax. The purpose of this amendment is to extend the same concession to 10 per cent companies at Shannon in the interest of greater equality of treatment as between Shannon and the docks area. Shannon companies which are at present exempt from corporation tax will not qualify for this concession. Such companies, having no liability to corporation tax and being in a position to distribute tax-free dividends, have enormous advantages over 10 per cent companies and it is not necessary to give them further benefits. By virtue of section 32 these companies can now qualify for the 10 per cent rate of corporation tax. When they opt to avail of the 10 per cent rate they too will enjoy the proposed exemption from withholding tax on interest paid to non-residents.
The opening statement by the Minister introducing an extremely important amendment to this section was somewhat derisory. What exactly are the financial implications of this measure? Will the Minister elaborate? If this exemption in terms of interest is being given, how much is estimated to be involved? What exactly is being instituted? We are in effect saying: pay the interest and it will not be subject to withholding tax. Many people throughout the country are experiencing problems in paying such tax. Why this exemption? What will it cost the State in terms of existing financial services activities going to the Custom House Docks area? What will it cost by way of revenue foregone? What representations did the Minister receive on the matter? We are entitled to know the answers to these questions before we givecarte blanche to the introduction of yet another exemption.
I am waiting for questions to be asked so that I can respond. I said at the outset I would refrain from intervening unless intervention was warranted.
Many non-residents can obtain interest paid by individuals or companies resident in the State free of tax under existing tax treaties with the country of residence of the recipient of the interest. In relation to relevant trading operations in the Custom House Docks area, this section extends the facility to all non-residents, irrespective of whether there is a treaty which provides for withholding tax on interest. The general treatment of interest payments under double taxation conventions is that interest is not taxed in the paying country but is subject to taxation in the country in which the recipient is resident.
It is essential for the effective operation of the international financial services centre in the Custom House Docks area that companies providing financial services from the centre to non-resident clients should be free to pay interest without deduction of tax, regardless of the country of residence of the recipient. The centre is entering into a highly competitive arena with longer and better established competitors and it is critical that this real obstacle to its trading activities, which may be carried on with non-resident persons in any part of the world, should be removed.
Regarding the question of costs, as the international financial services activities being carried on in the Custom House Docks area will consist mainly of newly generated business and as existing double taxation conventions enable interest payments to be made gross from Ireland to a considerable number of countries, there is not substantive cost to the Exchequer occasioned by this measure.
The Minister would agree that where a double taxation convention does not apply this exemption will be of particular benefit.
Yes, in the Custom House Docks area.
We have established that.
I have already said that.
Therefore, we transfer some of our resources to an area where a double taxation convention does not apply. We have double taxation agreements with many countries but there are a number of others with whom we have no agreement. Some of them are tax haven areas. We transfer our resources there, re-invest into the Custom House Docks site and the interest paid out there from has a total exemption because of the absence of a double taxation agreement. The withholding tax is quite substantial and I ask the Minister to indicate the safeguards which exist to prevent this form of evasion. Large amounts of money are leaving the country as a result of evasion, apart from straightforward transfers of manufacturing profits. A lot of money is leaked out or filtered out and this could become another mechanism. I seek the assurance of the Minister as I am still not satisfied as to the precise import. This is another incentive for people to come in, but what way do they come in? If they come in by the back door and there is no double taxation agreement with the country in question, is there, in effect, avoidance of the withholding tax in relation to such interest paid?
The whole purpose of the exercise is to exempt such people from that tax, to attract them in here. For the information of the House, there are double taxation arrangements between Ireland and the United Kingdom with respect to tax on income, capital gains, stamp duties and capital acquisition tax. There are double taxaction agreement arrangements in operation with Australia, Switzerland and Sweden covering taxes on income and capital gains. There are arrangements between the Government of Ireland and the Governments of Austria, Belgium, Canada, Cyprus, Denmark, Finland, France, the Federal Republic of Germany, Italy, Japan, Luxembourg, The Netherlands, Norway, Pakistan, the United States of America and Zambia, respectively, for the avoidance of double taxation with respect to taxes on income. Arrangments are also in force with South Africa, Spain and the USSR for the avoidance of double taxation on profits from the business of sea or air transport.
The Minister has said that the whole purpose of the exercise is to attract these people in, and in particular from areas where we do not have double taxation agreements.
With regard to those countries which have such agreements with us, their employment opportunities will be something that we must look forward to in due course. I accept the Minister's explanation, but certainly do not accept that this will ensure an attraction of what I will call legitimate treasury functions into this country.
It removes an obstacle to those people who many consider coming in here and that is the purpose of the exercise, to get them here. Section 35 amends section 31 of the Finance Act of 1974, to enable companies carrying on international financial service activities in the Custom House Docks area of Dublin to pay interest to non-residents without deducting tax.
If the Minister goes over to the World Bank, as he will in due course, or to an IMS meeting, would it not be wrong for him to say, "in Ireland, we have a little place comprising a couple of acres on the sea front and if you have no double taxation agreement with us, bring your money in because there will not be such an agreement and the money will be very welcome"? If I were an American financial consultant, with whose country we have a double taxation agreement, I would look upon that statement with a great deal of jaundice. I leave it with the Minister, but it shows up my fundamental principle that when you try out this kind of exercise on a refined basis, the more you go down the road the more it unravels and the more you try to circumscribe it and give exemptions, the less satisfactory it is. In this country everybody pays withholding tax except some shyster with whom we do not have a double taxation agreement who sends in £20 million or £30 million to be manipulated within the Dublin Financial Services Centre and the interest is sent out without application of the withholding tax. I give up. I am exhausted.
Deputy Desmond, notwithstanding your exhaustion and these alleged oddities, I take it that you are agreeing that section 35, as amended, stand part of the Bill?
With the return of the Fine Gael Front Bench, I do not have to go any further.
(Limerick East): I move amendment No. 41:
In page 40, before section 36, to insert the following new section:
"36. — The provisions of sections 33, 34, and 35 will apply to companies carrying out business in the Shannon Free Zone."
This amendment is self-explanatory. Certain concessions are given to the Custom House Docks site for industry under sections 33, 34 and 35. I am proposing in this amendment that the same benefits be applicable to the Shannon Free Zone.
We have discussed this amendment in the absence of Deputy Noonan. In relation to two of the issues, we have, in sections 33 and 34, said that we do not see the necessity for these now but that if we do, we shall look at them again. In relation to section 35, we have done what was asked in so far as we can.
(Limerick East): I am sorry that I was unavoidably absent. Would the Minister explain his own amendment to section 35, please?
I have explained it already. It is on the record. If the Deputy likes, I shall go through it again.
(Limerick East): I am sure that Deputies Carey and Enright looked after my interests in my absence. I shall talk about this again on Report Stage when I have read what is on the record of the House.
We were painfully sitting here.
I take it that Deputy Noonan is not pressing the amendment?
Could the Minister enlighten me a little with regard to the exemption from corporation tax under this section, which will be in operation for only 12 months? Apart from Nítrigin Éireann Teoranta to what other companies does this refer?
(Limerick East): This, I presume, arises from the arrangements made between NET and ICI. If I understand it correctly, NET are now a holding company which, in effect, have certain contractual rights from Bord Gáis to get gas. They are on-selling it to the new company and the Government are not applying corporation tax on the on-sale of the gas. Is that not the position?
The Deputy has stated the matter exactly. It is part of the arrangement for NET. This section provides for a temporary exemption from corporation tax for NET on their trading profits from the business of selling gas purchased from Bord Gáis Éireann to Irish Fertiliser Industries. The exemption is being granted for five years from 1988 to 1992. The exemption is intended to help the restructured NET to stabilise their finances and bring their debt problem under control. It was part of the arrangement during the negotiations at that time.
Are there any other companies involved in this?
Yes, there are other companies whose profits accrue fully to the State, anyway, Bord Gáis, NBA and the Central Bank are three.
This does not apply to any others?
To the VHI.
Bord na Móna are not mentioned.
Among companies in the energy producing business, are there any others exempt?
If there are any others, I shall give their names to the Deputy. Those are the four that I have been told of here.
I wondered if the ESB and Bord and Móna would have been liable for such corporation tax? Are they paying such corporation tax?
They are liable for it.
(Limerick East): Is not the position now that NET, in effect, for the purpose of on-selling the gas for which they have a contractual obligation are provided with this mechanism to ensure that the existing situation pertains?
(Limerick East): If NET were subject to corporation tax the benefits of the arrangements would evaporate very quickly.
It was part of the arrangement of the overall structure.
I move amendment No. 41a.
"In page 44, before section 39, but in Chapter IV, to insert the following new section:
39.—Notwithstanding any provision of the Corporation Tax Acts, profits arising to the Custom House Docks Development Authority in any accounting period ending after the 17th day of November, 1986, shall be exempt from corporation tax".
This amendment introduces a new section into the Bill to provide for the exemption from corporation tax of the profits from the Custom House Docks Development Authority. The authority are a body corporate established under the Urban Renewal Act, 1986, for the purpose of securing the development of the Custom House Docks area. The land situated in the Custom House Docks area has been transferred from the Dublin Port and Docks Board to that authority which is empowered under the Urban Renewal Act to manage and develop that land. The authority have entered into an agreement with the Customs House Docks Development Company Limited for the construction of extensive facilities in the area. The authority are in receipt of income on foot of the development agreement and will receive income in future from leasing of premises in the area. Such income would in the absence of this provision be within the charge to corporation tax.
I presume this will be separate from the financial services?
It is the development authority.
The development authority will be exempt from corporation tax?
Yes. The reason is that any income they have will go into the Exchequer anyway.
Is Shannon exempt?
This refers to the work carried out on the site itself?
Is the Shannon Development Company exempt?
It is not a trading company; therefore, there is no income. It is a development company.
It never made a profit.
Then there is no tax.
We did not think that the Shannon would be flowing into section 39. However, does section 39 as amended stand part of the Bill?
I move amendment No. a41b.
In page 44, line 39, to delete "(1)".
This amendment corrects a drafting error in section 41 as it appears in the Bill.
(Limerick East): This is one of the sections I find quite difficult. Will the Minister read his section note into the record for the benefit of people who will look at this subsequently?
Section 41 is not part of the general scheme of the reduction of capital allowances. It is an anti-avoidance measure designed to counter a scheme which has arisen in various quarters and which exploits the industrial building loans provision by avoiding a clawback of allowances granted through the balancing charge procedure when a building is effectively sold although the full title is not disposed of. Section 41 amends section 265 of the Income Tax Act, 1967, to provide for the application of a balancing charge where a consideration, other than a premium, falling to be treated as rent is received in respect of an interest which is less than a relevant interest as defined in section 268 of the Income Tax Act, 1967, in an industrial building.
In the absence of this provision it is possible for the owner of an industrial building to claim capital allowances and then realise a major proportion of the value of the building through the creation of an interest marginally inferior to his own interest, for example, if he owns a freehold interest, by creating a 999 year lease. Because he retains a superior interest, the amount of the value realised is not reflected by a clawback of any other capital allowances granted. This section ensures that from now on, such value received will be charged to tax so as to recoup capital allowances previously given.
(Limerick East): This practice was brought to my attention. Does the Minister have an estimated yield from this section?
No. One case has been brought to the knowledge of the Revenue Commissioners and it amounted to about £500,000. It is to avoid such things recurring in the future.
(Limerick East): Is the section being proposed on the basis of one case or is there a belief that the practice is widespread?
Some cases have been brought to our notice and, therefore, this section is necessary to prevent them recurring.
(Limerick East): This section has been repeated in the most recent three Finance Bills, including this. Could it be made a permanent feature of tax legislation? There is not much point in introducing a new tax break each year for multi-storey car parks.
This scheme of allowances was to go this year and in more normal circumstances it should have, for nobody used it for the three years. Now we understand there is the possibility of two schemes coming forward and, therefore, we are renewing it now. I do not know if it is necessary to have it as a permanent feature. Many of these allowances begin as temporary allowances and they become permanent and if they are let lapse they are renewed again as in section 33. We will have to reach a day sooner or later when a lot of these things will have to go.
(Limerick East): Is the termination date now the same date as that of the package of incentives in the designated areas of the cities?
It is, yes. It is 31 March 1991.
(Limerick East): That is satisfactory then, because I understand that the proposals that are around will be part of the development of the designated areas.
That is correct.
(Limerick East): I would again be grateful if the Minister would read his section note into the record.
This section continues for a further period of three years from 1 April 1988 to 31 March 1991 the availability for income and corporation tax purposes of certain capital allowances. The allowances involved are a 50 per cent initial and 4 per cent annual allowance for industrial buildings.
I call on the Minister to move amendment No. 41b. As amendments Nos. 41c and 41d are related, is it agreed that for discussion purposes amendments Nos. 41b, 41c, and 41d, be taken together? Agreed.
I move amendment No. 41b.
41b. In page 47, subsection (1), lines 36 to 41, to delete paragraph (d) and substitute the following:
"(d) machinery or plant provided before the 1st day of April, 1991, for the purposes of a trade or part of a trade of hotel-keeping carried on in a building or structure or part thereof (including machinery or plant provided by a lessor to a lessee for use in such a trade or part thereof) where a binding contract for the provision of the said building or structure was entered into after the 27th day of January, 1988, and before the 1st day of June, 1988."
This amendment is in respect of capital allowances for plant or machinery for new hotel projects. The overall objective of section 47 is to ensure that despite the general reduction in capital allowances which is taking place as part of the reform of company taxation 100 per cent allowances would continue to be available in certain limited circumstances. The exceptions include new hotel projects. The first amendment, amendment No. 41b, would ensure that the 100 per cent capital allowance would be available where a contract for the provision of a new hotel or a hotel extension was entered into between budget day and 1 June 1988. The original wording was too wide and might have allowed in existing hotels which was not the intention. The intention was rather to ensure that projects which were being planned at the time of the budget on the basis of unrestricted capital allowances would go ahead. To qualify, the machinery or plant must be brought into use under the contract by 1 April 1991.
The second amendment, amendment No. 41c, merely corrects a lettering error in the original draft. The third amendment, amendment No. 41d, would exempt new hotel projects covered by this section from the balancing charge which I have introduced under section 41 to counter abuses of the capital allowances system. I am satisfied that the hotel projects in question are not on all fours with the cases of abuse at which section 41 is directed and if section 41 were to apply it could interfere with certain contingent financial arrangements envisaged as part of the financing of the hotel projects. The exemption is justified to ensure that new hotel projects already in train at the time of the budget can go ahead in the interests of investment and employment in the economy.
Did the Minister state that this amendment relates to contracts entered into between budget day and 1 June 1988?
To 1 June 1988.
Does it relate to contracts for extensions to existing hotels or to contracts for the building of hotels?
To the building contract.
What I am trying to ascertain is whether work which commenced prior to that date is included.
What I said is that this amendment relates to the building contracts for new hotels or contracts for hotel extensions which were entered into between budget day and 1 June 1988.
Why is it so restrictive?
What does the Deputy mean by that?
The allowance is only being granted over a very short period of time.
It is to allow people who had entered into contracts or were in the process of taking final decisions on whether to enter into contracts around budget time to go ahead with those projects.
Is this allowance available to somebody in respect of work which had commenced prior to budget day?
They do not need it.
They were already entitled to it.
(Limerick East): Is the purpose of amendment No. 41b to restrict the section which had already been published in the Finance Bill?
It is to relax it.
(Limerick East): No. Deputy, I think its purpose is to restrict it.
The original wording was too wide and the purpose of this amendment is to restrict it.
(Limerick East): The original wording would have enabled hotels——
It would have allowed in existing hotels.
(Limerick East): And subsequently 100 per cent depreciation could be claimed in respect of hotel projects which do not fall between those dates. Is the Minister moving this amendment to restrict it to contracts for hotels which were signed between budget day and 1 June 1988?
(Limerick East): I have no objection to that. In respect of amendment No. 41d the Minister said——
Can I take it that amendment No. 41b is agreed?
The section relates to he payment of allowances in respect of certain areas. Can the Minister tell us whether these allowances will be paid in respect of all areas in the country or will their payment be restricted to specific areas?
It extends to qualifying companies in the Custom House Docks area, qualifying services activities at Shannon, special building incentives under the Finance Act for urban designated areas, contracts entered into on or before 27 January, projects approved for grant assistance by the Industrial Development Agency before 31 December 1988 and machinery or plant provided for the purposes of new hotels or hotel extensions where a building contract is entered into on or before 1 June 1988.
I move amendment No. 41c:
In page 47, subsection (2), line 45, to delete "(e)" and substitute "(b)".
I move amendment No. 41d:
In page 48, between lines 19 and 20, to insert the following subsection:
"(5) Section 265 of the Income Tax Act, 1967, shall have effect as respects the relevant interest in a building or structure to which subsection (1) (d) applies as if section 41 had not been enacted.".
(Limerick East): This amendment arises from the anti-avoidance measure which the Minister has already introduced under Section 41. I would like the Minister to throw a little more light on this subject. Does the Minister have in mind arrangements whereby hotels might be held in discretionary trusts and that this title would be inferior to freehold title and consequently this anti-avoidance measure would cut across hotels held in that way?
This amendment relates to one particular project because, as I have said, of the financial arrangements that have been made in respect of the financing for this hotel project. We are introducing an anti-avoidance meassure but we do not want that anti-avoidance measure to affect this hotel project. Certain financial arrangements have been made with financial institutions and because of this this particular hotel project will need to be exempt from the section 41 provision.
(Limerick East): I appreciate that, but the arguments which the Minister brought forward in respect of not applying section 41 to this particular project would be equally valid if applied to the hotel industry outside of these areas.
It applies to just one hotel. Section 41 introduced an anti-avoidance measure and this is contingent on that.
(Limerick East): Section 41 introduced an anti-avoidance measure and that gap has now been closed, but as I understand it the Minister is now reopening that gap in respect of one particular hotel project in one of the designated areas listed.
It is not in a designated area.
(Limerick East): I would agree with the case the Minister has made, but, although the loophole has been closed I do not think that section 41 should apply to hotels because of the manner in which they are held. What I want to establish is whether this amendment will apply to the hotel industry in general right around the country or will it apply only to hotels listed in the designated areas?
It applies to the hotels covered by the section.
(Limerick East): Does that mean that the hotels must be located at the Customs House Docks, at Shannon Airport or at a designated area on the list?
They can be anywhere, if they are covered by the section.
(Limerick East): That is the point I was getting at. I will agree the amendment on that basis.
(Limerick East): On the general section, I wish the Minister to put on record the reasons that accelerated capital allowances for machinery, plant or industrial buildings should continue in these areas. If tax reform along the lines on which the Minister has argued is the correct way to go, and if reduced accelerated capital allowances are to be traded off against lower rates of corporation tax, would it not seem valid that that should apply anywhere in the country? In view of the fact that in the designated areas the 10 per cent regime applies, and it is not a case of accelerated allowances being traded against corporation tax rates of 50 per cent coming down to 43 per cent, I do not understand the reason for excepting these areas. I do not see how they lie outside the scope of the Minister's arguments for general reform of the corporation taxation system, with which we agree, along the lines of trading these allowances for lower rates of corporation tax.
Deputy Noonan is saying that the argument for the reduction of the accelerated capital allowances was a jobs argument basically. These allowances are certainly not assisting job creation. In fact, there is a great deal of evidence to suggest that they assist job losses. The Minister accepted that argument on the issue of accelerated capital allowances and he is reducing them to 50 per cent eventually. The main objective of designated areas is job creation, and we see examples in the Custom House Docks site, the Shannon Custom Free Airport area, the urban designated areas, which were for urban renewal, in addition to job creation. However, to continue with unrestricted accelerated capital allowances in these areas seems to go against the whole purpose of designating the areas and the whole purpose of what the Minister is doing to assist job creation. This Finance Bill represents a radical step for an Irish Government though in any other country it would not be seen as radical. However having taken that step this section seems to remove that progress from a whole string of areas. As we understood it, one of the purposes of the Bill was to assist in the creation of jobs, but giving unrestricted capital allowances in these areas does not seem to be assisting in that purpose.
As I have said on a few occasions already, we are still allowing these unrestricted accelerated capital allowances for plant and machinery in the areas I have listed, the Custom House Docks, the Shannon area, and the designated areas and also in respect of any contracts entered into before 27 January. To give notice to projects approved for grant assistance by the industrial development agencies and not to have a cut-off point when people could be in the process of negotiations is the right way to proceed. Now we know that what is going to be approved before 31 December 1988 will be OK but from there on the new regime will apply. I think it is only right that we should have taken into account the policy of the Government in pursuing activities such as these areas allow, to have the unrestricted capital allowances in them.
(Limerick East): The problem arises, and I am sure the Minister has adverted to it, in the overall context of what the Minister is proposing companies which are liable to a 50 per cent rate of corporation tax can see that if they lose on the accelerated allowances side they will gain on the corporation tax rate side and their rate will go down to 47 per cent in the first instance and then to 42 per cent. That is fine. On the other hand companies paying corporation tax at the rate of 10 per cent — all manufacturing companies and the manner in which manufacturing is defined in our industrial policy means that it will extend to service companies——
It should not.
(Limerick East):——will lose the benefit of accelerated write-off. However, as the 10 per cent rate remains at 10 per cent, there is no roundabout on which they gain.
In the third element of the package there are going to be certain parts of the country in which the 10 per cent regime applies but where the benefits of accelerated depreciation will still apply. Now we have a new anomaly. It will be more attractive to go into the Custom House Docks site, into Shannon, and into the inner cities for manufacturing industry than to go anywhere else in the region. The whole area of industrial incentives is a minefield but it appears that there is an attraction to go into certain parts of Dublin, Limerick, Cork and Waterford. There is certainly an attraction to go into the Shannon customs free airport, not so much for the service companies but for manufacturing industry, because the full package of incentives, the 10 per cent corporation tax regime, the fixed assets grants and accelerated depreciation, will apply in these restricted areas but will not longer apply in the rest of the country. Has that point been adverted to? Has it been agreed by the Minister's colleague, the Minister for Industry and Commerce, because I know there will be some people contacting him who might not necessarily agree with that line.
It has been adverted to and you have adverted to it. I think you will still agree with what is being done.
Deputy Carey will certainly agree.
(Limerick East): Deputy Carey would but it is very difficult to organise incentives to match social needs around the country. It seems to me that the Minister is introducing the “Triple A” category to which the whole package of incentives will apply, including accelerated capital allowances which was always a significant item in the portfolio of the development agencies.
I support this provision of the Finance Bill. As I understand, we were offering a series of packages of incentives to certain areas in the country and the effect of another part of the Finance Bill will be to dilute certain aspects of that package of incentives and this is to save them from that happening. While Deputy Noonan was out launching the new politics, Deputy Carey was on his bended knees praying for this kind of thing to happen. With all due respects, I think Fine Gael should concede gracefully on this issue.
(Limerick East): I am trying to elucidate information and I do not think the point has been taken, by not applying accelerated allowances——
Are you trying to water down the package that is at present available?
(Limerick East): No.
I presume he is stopping that from happening.
(Limerick East): He is not, because he has watered down the package in the rest of the country already.
The designated areas around the country?
(Limerick East): I think I will get back to this point on Report Stage.
To ensure full clarity on this point, the special building incentives under the Finance Act, 1986, for urban designated areas will qualify for the 100 per cent capital allowances on buildings but not on plant and machinery. It is not right to say that the new regime has three different kinds of proposals therein.
(Limerick East): That is not what the Explanatory Memorandum states on section 47.
That is the position in relation to the urban designated areas anyway.
The House will recollect that, in accordance with the Order of the House of 3 May, proceedings on sections 30 to 48, inclusive, would have to be concluded by this time, 7 o'clock. We have reached that time and the only sections remaining to be dealt with are section 47, as amended, and section 48. The question, therefore, is that section 47, as amended, and section 48, are hereby agreed to.
(Limerick East): Agreed, subject to amendment on Report Stage.