asked the Minister for Finance if he will make a statement regarding the progress and implications for Ireland of discussions and negotiations in the EC relating to the introduction of a community deposit interest retention tax.
Ceisteanna — Questions. Oral Answers. - EC DIRT Proposal.
1.
On 10 February 1989, the EC Commission addressed to the Council of Ministers a proposal for a directive on the introduction of a Community withholding tax on certain interest income. Following an initial exchange of views in the Council the proposed directive is being examined in detail by a Council working party. In accordance with Article 6 of Council Directive 88/361 EEC on capital liberalisation, adopted in June 1988, the Council is required to take a position on the proposed withholding tax directive by July next.
The implications for Ireland of the proposed directive are under examination at present. The issues involved are, however, complex and much remains to be clarified about the precise scope and feasibility of the proposal put forward by the Commission.
The proposal attempts to respond to the real concerns expressed by various member states, including Ireland, in the discussions last year on the capital liberalisation directive. The process of liberalisation may well give rise to distortions in capital flows in view of the differences in the tax treatment of interest income in the member states of the Community. A minimum withholding tax in certain circumstances throughout the Community may be a reasonable way to tackle this problem if a satisfactory scheme could be agreed.
I should point out that the draft directive must be adopted unanimously if it is to come into force.
Arising from the Minister's reply I wish to ask him a number of supplementaries. Is there any indication of strong opposition to the idea of a uniform retention tax throughout the Community? In particular, is there any indication that the United Kingdom at this early stage is opposed to such a principle? Would the Minister agree that for Ireland at any rate the implications of the absence of a uniform agreement among the member states could be very serious indeed in terms of budgetary policy?
The answer to the second part of the question is yes, it could be serious from a budgetary point of view if nothing was agreed. In relation to the first part, strong opposition has been expressed at the meeting from the UK and from other member states also.
Would the Minister agree that if unanimous support for such a directive is not forthcoming the likely implications for our Exchequer would run to hundreds of millions of pounds in any given year? There is no practical way, in the context of free movement of capital, of ensuring that there would not be wholesale evasion of income tax if capital could be put in any bank anywhere in the member states without being subject to some form of basic retention tax.
There are many implications in the proposal as it stands for Ireland and indeed for the Irish Exchequer apart from those the Deputy mentioned. It may be a little simplistic to say that to transfer funds abroad in general terms influences the continual liability to Irish tax on interest on such funds in the hands of an Irish resident wherever he is. It would have implications, for instance, if the present proposal was to be implemented in that it would suggest at this stage that interest on Irish gilts would be subject to it, but that is not altogether clear. A wide range of exemptions is provided for in the draft proposal and many of these may be relevant to the purchase of gilts. That is why it has been referred to an ad hoc, high level committee. I have put down a marker in relation to existing Irish gilts indicating that this is not acceptable to us. We have contractual agreements with Irish Government stockholders at present and we would not be prepared to breach them. There has been quite a lot of opposition to the proposal in its present form, although it was only presented to the Council in an oral fashion at the last meeting of ECOFIN in February. That is why it did not go any further than an initial response but the response from some member states was fairly trenchant.
Could the Minister confirm that the oral presentation that was made to ECOFIN included a suggestion that a rate of 15 per cent might apply? Secondly, would the Minister agree that there would have to be a uniform agreement in relation to banking confidentiality throughout the member states? If one country operates a confidential system of banking, any efforts to find out about tax liability in respect of Irish residents in that country would be completely frustrated.
One member state took the view the Deputy is talking about. That country believed it might not be necessary if every member state committed itself to getting away with banking confidentiality. That member state was alone in that view.
Was that Luxembourg?
The United Kingdom took the view that it was not necessary at all. I do not think I have to remind the Deputies about the approach of Luxembourg where it would have very serious implications for their Exchequer and economy. The proposal of 15 per cent was part of the presentation that was made to ECOFIN on 13 February. Of course this is one of the areas where there has to be unanimous agreement.
If there is not agreement there will be problems for us.
This is an area where the veto operates.
The veto cannot stop capital moving out of the country.
That is true but a more worrying aspect might be what will happen in the areas outside the Community, such as the Isle of Man, the Channel Islands and Switzerland, without prior agreement. There are a lot of areas to be thrashed out before the matter is finalised.