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Dáil Éireann debate -
Tuesday, 18 Apr 1989

Vol. 388 No. 8

Finance Bill, 1989: Second Stage.

I move: "That the Bill be now read a Second Time."

This Bill provides a statutory basis for the taxation provisions which I announced in this year's budget and for other tax changes which the Government now consider necessary.

The measures in the Bill are an essential part of the Government's overall strategy for economic and social development.

Everything we are doing is aimed at increasing growth and jobs in our economy.This applies as much to the tax measures we have before us in the present Bill as it does to the expenditure side of the budget, the ongoing implementation of the Programme for National Recovery and the recently published National Development Plan.

All these elements are meshed together in a coherent overall strategy. The problems and development needs of the economy are such that there can be no question of double think or lack of consistency between the different parts of that stragegy. Everything must hang together in a consistent and carefully-targeted approach aimed at securing more growth and more jobs.

In view of last week's comprehensive debate in the House on the National Development Plan, I do not propose today to deal at any great length with the economic situation. Before turning to the main provisions of the Bill, however, I would like to comment briefly on recent trends, to underline again some of the points touched on in last week's debate, and to review the Government's approach to tax reform.

This year's budget won widespread support throughout the community. Developments since the budget suggest that the strategy on which it was based is firmly on course. The Exchequer returns for the first quarter were very encouraging.They support the view that the strengthening in economic activity which was projected in January is in fact taking place. There is a strong recovery in consumer spending. Retail sales in January were up by 7 per cent in volume on the year before. Unemployment in the first quarter of this year was substantially lower than in the first quarter of last year. Manufacturing employment in the final quarter of 1988 — the latest period for which figures are available — shows a year to year increase for the first time since 1980. In the building industry, employment in the larger firms in January and February was some 7 per cent higher than in the corresponding two months of 1988. This, together with the increase of 30 per cent in housing starts in the first two months of the year, is an indication of the substantial recovery which is now under way in the building industry after several lean years.

The trends so far support our expectation of a further substantial balance of payments surplus this year, of broadly the same order as last year. Exports have risen by 24 per cent in value year to year in the first two months of this year. This reflects the continued buoyancy of our export markets and the all important improvements in competitiveness which have been made here. There has also been strong growth in the value of imports. Imports of capital goods are up by 20 per cent — a good omen for investment and future output. As expected, imports of consumer goods are also strong in response to the recovery in private consumption. The challenge to domestic producers is to capture a growing share of this recovery in consumption and not to lose out, through price increases, to overseas producers selling into the home market.

The overall prospect for 1989 remains, therefore, one of strong economic growth. I am confident that the budget time prediction of a 3½ per cent increase in real GDP will be realised and might be bettered.

Everybody is taking heart from these developments. There is a new air of confidence around. It is good to see new investments and projects springing up all around the country. While the problems are still formidable, people now see that the earlier pattern of despondency and economic decline can be broken.

It is no part of my task to dampen down this new enthusiasm — the opposite is the case. I must underline again, however, that in taking satisfaction from the progress made to date we must keep our feet firmly on the ground. Easy options must be avoided. An increase in costs and inflation — even from the low base we have achieved — is no substitute for higher productivity and efficiency. Jobs will be lost, not made, if we do not continue tight control of costs right across the economy.

For this reason it bears repeating that much of the rise in prices in the three months to February — over 1 per cent, leaving aside non-recurring budget effects — originated within our own economy rather than from abroad. If we are not to put at risk our hard-won success in getting inflation down, all sectors must continue the restraint in evidence up to recently and avoid rekindling domestic inflation pressures. Renewed inflation can only do harm to our international trading prospects, diminish our growth potential, and ultimately inhibit the recovery in employment now under way.

The improvement in the public finances over the past few years has been dramatic. The trends so far this year suggest that, yet again, the budget targets may well be bettered. In this area too, however, we cannot allow our guard to slip. The annual addition of new borrowing is still too high. The exceptional overhang of debt still constrains our economic progress and eats up large resources that could be put to much better use. I wonder if this House realises that to secure our national debt involves £40 of every working person's salary or wages. The Government are determined, therefore, to press ahead with the reduction of borrowing and debt.

We are already considering how best to achieve necessary further savings in expenditure in 1990, so as to make room for new investment within an overall improving budgetary trend. This work will be advanced in the coming months. It must take account, among other things, of the fact that the carry-over costs from the 1989 budgetary concessions on social welfare and personal taxation alone will add some £160 million to the opening position for next year.

One of the key elements identified by the Government in their strategy for bringing order to the public finances was the absolute necessity to control the growth in the public service pay bill, which accounts for such a large proportion of total Government expenditure. For this reason, the position that is developing on special increases in the public service is of particular concern to the Government.

It should be borne in mind that already this year I had to provide an extra £70 million for the cost of the general pay increase under the public service pay agreement, £28 million for increments, £12.5 million for the Defence Forces' special increases plus £15 million for the carry-over cost of increases from the 1986 pay agreement. In addition to these very substantial amounts, I provided £30 million for special increases this year as the Government accept that there are legitimate expectations that some payment will be made in respect of certain special increases processed under the current pay agreement.

However, the number and cost of the increases which have been processed, or are being processed under the agreement, to say nothing of further claims which may be made, is a cause of serious concern. The Government are determined to take a resolute stand on this issue. This means, first, that the £30 million provision cannot be exceeded this year and, secondly, that commitments cannot be made which would increase the pay bill in 1990 and subsequent years to such an extent as to place in jeopardy the considerable progress which has been made under the Programme for National Recovery.

I announced in my budget speech my intention to invite the Irish Congress of Trade Unions to discussions on the whole issue of special increases. I met with Congress on 8 March and informed them of the financial and budgetary problems which the Government face in relation to the build-up of special increases in the public service. I asked them to consider the issues involved and to meet with officials to see if a mutually acceptable solution could be reached. Since then, a number of such meetings have been held and talks are continuing. It is my earnest hope that the good sense and concern for the national interest which was so evident in the discussions which led to the Programme for National Recovery will also inform these talks and that a satisfactory solution will emerge.

Much progress has been made in the past two years in the reform of the tax system. Talk of reform could only be talk so long as the public finances were in such disarray. The actions taken in the past two years have created scope to make a significant start on the process of reform and we have availed of this to the full. As is indicated clearly in the National Development Plan, the process will be pushed forward until we have a fairer and effective system with a considerably lower burden of personal taxation.

The phased programme for tax reform has been pursued by the Government without compromising the overall reduction in Exchequer borrowing which has been so crucial to economic recovery. The programme last year included sizeable reliefs in personal tax; major improvements in tax assessment and collection arrangements, such as the introduction of self-assessment and the hugely successful amnesty to clear arrears of tax; a sustained attack on the tax evasion which for so long has exploited the general body of taxpayers, and a major revamping of the corporation tax system in line with international trends and to remove the bias towards investment in machinery rather than jobs.

The programme of reform continues this year, as is reflected in the present Bill, with further sizeable reductions in personal tax including a highly significant cut in the actual rates of tax; new development incentives and, at the same time, measures to ensure that earlier incentives are not abused; and further improvements in tax administration and reasonable measures to counteract transactions which are aimed primarily at tax avoidance and which, if not curbed, could prove so costly to the Exchequer.

It is only by effective tax administration and a broadening of the tax base, combined with savings on Government expenditure, that we can achieve the lower level of personal tax that we all want.

Finally, I should mention the implications for tax reform of the 1992 indirect tax harmonisation proposals. There are now clear indications, confirmed by the proceedings at the EC Finance Ministers meeting that I attended yesterday in Luxembourg, that the earlier set of proposals put forward by the Commission will be revised. I expect those revised proposals will be put on the table next month by Commissioner Schrivener. This confirms the wisdom of the Government's approach in not rushing to implement the earlier proposals. We have, of course, taken the prospect of harmonisation into account by reducing our reliance on increases in indirect taxes so as not to worsen the problems we face. I stressed again at yesterday's meeting that the process of harmonisation will involve a huge tax revenue loss for this country and that the Commission must address this problem as part of its revised approach.

The ongoing discussions in the Community on the question of introducing a common withholding tax on interest payments is also something that we have to take into account in our work on tax reform.

I would now like to turn to the approach underlying individual sections of the Bill and to draw the attention of the House to the more significant items. Full details of the individual sections are contained in the Explanatory Memorandum which has been circulated with the Bill.

The early sections of the Bill deal with income tax and provide for implementation of the package of tax reliefs announced in the budget.

Section 1 increases the general and age exemption limits. The general exemption limit is being increased from £2,750 to £3,000 in the case of a single person and from £5,500 to £6,000 in the case of a married couple. For single persons aged 65 years or over, the new limit is £3,400, and for single persons aged 75 years or over, £4,000; these limits are of course doubled as appropriate for elderly married couples.

The section also provides for the introduction of the addition of £200 per child in conjunction with the exemption limits. This addition is aimed specifically at improving the position of low-income families and its impact on the tax burden faced by such families can be dramatic. To take one example, a married couple with three children, one spouse working with an income of £6,600 and taxed under PAYE, will save up to £495 compared with their 1988-89 tax bill. Of course, this exemption and child allowance also applies to people in small businesses and indeed to the small farmers.

Section 2 provides for the changes in income tax rates and bands. The top rate of tax is being reduced to 56 per cent and the standard rate to 32 per cent. This reduction in the standard rate, which is the first for over 20 years, also applies to the deposit interest retention tax and to the withholding tax on professional fees. The income tax bands are also being widened: the 48 per cent band is being extended to £3,100 for a single person and £6,200 for a married couple, while the standard rate band is being extended to £6,100 for a single person and £12,200 for a married couple.

These income tax changes have three objectives. The increase in the exemption limits and the introduction of the child addition of £200 per child is aimed, as I have said, at improvement of the position of low-income families. The extension of the standard and 48 per cent rate bands is aimed at reducing the progressivity of the system and maintaining, at nearly 63 per cent, the proportion of taxpayers paying tax at no more than the standard rate. Finally, the reduction in the standard and top rates underpins pay moderation in the economy and begins the process of driving down income tax rates and fully restoring the incentive for enterprise and effort.

The Government have thus given a clear signal of the direction in which we wish to go in future reform of personal tax. The overall cost of this year's income tax package is over £200 million in a full year. Taken together with the concessions introduced by my predecessor in 1988, reliefs costing well over £700 million on a cumulative basis over the period of the Programme for National Recovery have been provided by the Government, compared with the commitment of £225 million contained in the programme.

Section 3 of the Bill continues the £286 PRSI tax allowance for the current year, while section 4 deals with the benefit-in-kind taxation of preferential loans. Following the fall in interest rates in the past two years it reduces to 10 per cent the specified rate which is used to assess the benefit-in-kind charge on preferential mortgage loans; it also provides that, where an employer makes a loan to an employee at less than the specified rate, the loan will not be regarded as a preferential one provided it is made on an arm's length basis at normal commercial rates.

Sections 5 and 6 deal with the restrictions on life assurance and mortgage interest relief which I announced in the budget. Life assurance relief is being confined to 80 per cent of its previous levels, while the percentage of mortgage interest within the relevant ceilings which will qualify for relief is being reduced to 80 per cent from 90 per cent, at which it has stood since 1987. The yield from these measures is £16.8 million in 1989 and £27.9 million in a full year. This has met part of the gross cost of the major package of personal reliefs.

Section 7 makes significant changes in the business expansion scheme. As Deputies are aware, there has been widespread concern in this House and elsewhere at recent developments in relation to this scheme. The original intention was to encourage the provision of equity capital for high-risk companies which offered the prospect of substantial gains to the economy in terms of output and jobs. In return for the provision of risk capital to these companies the general body of taxpayers made available an attractive relief for investors. The recent developments to which I refer have been diverting the scheme away from this very desirable objective.

The Government had to weigh the position carefully so as to ensure that action taken to restrict relief under the scheme would not interfere with BES funding for deserving projects.

Section 7 is intended to redirect the scheme back to its original purposes. The section introduces five measures, as follows: it provides that, where BES money is being used for the purchase of a ship, that ship must represent a beneficial addition to the Irish shipping register; it imposes a limit of £2.5 million on the amount of money a company or group of companies can raise under the scheme; it excludes from the scheme international leasing and related financial services; it also excludes self-catering accommodation in the city or county of Dublin and the urban areas of Cork, Waterford, Limerick and Galway; and finally, it provides that BES relief will not be available on shares in relation to which options or guarantees are held which provide for sale at other than market value at the end of the five-year period for which shares must be retained under the scheme. I am satisfied that these provisions will help to restore the scheme to its original purposes.

Under the section the new measures will apply in respect of shares issued on or after the date of publication of the Finance Bill.

Deputies will recall my budget announcement that annual accounting for PAYE-PRSI and VAT would be introduced for small scale employers and traders. The change in relation to PAYE-PRSI has been given effect through regulations already made by the Revenue Commissioners on 23 March under existing legislation. The change in relation to VAT is provided for in section 52 of the Bill.

I want to stress that the purpose of the annual accounting facility is to ease the administrative burden on small traders and to release resources in the Office of the Collector General for other purposes. Moving to the new arrangements is an option for the traders and employers concerned — it will not be obligatory and they can stay with existing periodic payments if they wish. Even for those wishing to change, the final decision will rest with the Collector General who will have regard to the track record of the traders concerned and can if necessary impose a procedure for payments on accounts within the 12-month period. The amounts of revenue involved in these cases are not significant. I believe that the new facility will be useful one but the Revenue Commissioners will of course closely monitor how it operates in practice.

Section 8 is a consequential provision arising from the introduction of annual accounting for PAYE. It relates to Revenue preference for PAYE in a company liquidation. The intention is simply to retain the existing Revenue entitlement in the event of a company on an annual accounting basis going into liquidation. The opportunity is also taken in section 8 to put beyond doubt the Revenue Commissioners' entitlement to take into account PAYE deducted by the company for the income tax month in which liquidation occurred.

Section 9 gives effect to the measures on stock relief for farmers, which were announced in the budget, by extending the scheme for a further two years and reducing the clawback period for destocking in respect of stock increases occurring from 6 April 1989 onward. This will help to promote the build-up of the national herd.

Section 10 increases from £6,000 to £7,000 the threshold applied to capital allowances and deductible running expenses for cars.

Section 16 and 17 introduce new taxation arrangements for unit trusts and similar investment funds. Fund management activity represents an area of great opportunity for this country. This opportunity and job potential will be focused in the International Financial Services Centre in the Custom House Docks Area and the Government are confident that a significant number of quality fund management projects can be attracted into the centre. The Government have already announced the special tax régime which will apply to funds which establish in the centre, and section 16 gives effect to this.

In line with the position in certain other countries competing for the business these funds will not be subject to taxation on their income or capital gains provided that they are under management by a company in the centre, are established for the benefit exclusively of persons resident outside the State and are subject to the new regulatory régime for such funds which is being put in place by my colleague, the Minister for Industry and Commerce, on foot of the EC UCITS Directive.

I am happy to inform the House that the same tax arrangements are being made in section 16 for funds which locate in the Shannon Airport Zone.

Section 16 also introduces new tax arrangements for domestic Irish funds of this kind so as to ensure that the tax treatment of these funds will be broadly consistent with the tax treatment of funds in the IFSC and with continental European practice in the taxation of these funds. The changes will help the funds in question to maintain a competitive position vis-á-vis foreign funds selling into the Irish market. Such funds will no longer be liable to tax in their own right, but Irish-resident unit holders in a fund will be taxed on income and gains of the fund.

Section 17 deals with the acquisition by Irish residents of units in a fund established in another EC country under the UCITS Directive. While welcoming this development as positive progress towards a single European market in financial services, it is necessary to safeguard against possible infringements of our taxation system. Income received from the foreign fund by an Irish resident is, of course, subject to tax in Ireland and to facilitate the collection of this tax, section 17 provides for disclosure to the Revenue Commissioners of information in relation to the acquisition by Irish residents of units in a foreign investment fund. The information is to be provided by persons acting in the State as intermediaries between the Irish investor and the foreign fund.

Section 19 restricts the cost to the Exchequer of domestic-sourced section 84 loans. Despite the measures taken in the 1984 and 1986 Finance Acts, the cost of these loans to the Exchequer has increased considerably in the last three years. This increase is due both to a 60 per cent rise in the overall volume of these loans over this period and to the increasing use of high interest rate section 84 loans. These loans are taken out in currencies such as the Greek drachma and the Australian dollar and are much more costly to the Exchequer than normal section 84 loans.

The section limits the cost to the Exchequer of domestic sourced section 84 loans in three ways. First, no new section 84 lenders will be allowed on and from 12 April, the date of publication of this Bill. Secondly, existing section 84 lenders will be allowed to increase their total loans volume only by a maximum of 10 per cent in the case of each lender and provided that such an increase is solely for loans to manufacturing companies.Thirdly, non-manufacturing companies located in the Shannon Airport Zone will not be allowed to borrow any new domestic sourced section 84 loans as from 12 April 1989. These companies, which borrow the vast bulk of the very costly high interest rate loans, will be allowed until 31 December 1991 to phase out all their existing section 84 loans. The changes will put these Shannon companies on the same footing as companies in the International Financial Services Centre in regard to section 84 loans. Finally, it should be mentioned that the provisions do not affect foreign sourced section 84 loans, which will continue to be available to Shannon and other companies.

Given the escalation in the cost of section 84 lending, these restrictions are necessary and reasonable. The Government will be monitoring carefully future developments in this area.

Sections 21 and 22 amend the new rules introduced last year for the distribution by companies of dividends from different types of profits. There is no change in regard to the key rule that dividends are treated as coming proportionately from the mix of profits of the year or years in question. This rule reflects the underlying commercial reality of companies with a mix of profits. The main change is that a company will now be able to pay the dividends out of the mix of profits of any one or more preceding year in the past nine years. Where such profits are exhausted, the company can go back earlier than nine years. A company will, consequently, have much more flexibility in regard to dividend distribution as compared to the previous proposal which obliged companies to pay dividends in the first instance out of the mix of profits of the immediately preceding year.

The Bill contains a number of new or improved incentive measures to help build up various sectors of the economy.

Section 15 introduces a major incentive for private sector investment in toll road projects. The existing 50 per cent capital allowance relief for expenditure on such projects, which expired recently, is now being replaced by a provision to allow the write-off in full of this expenditure against toll income. In addition, pre-trading interest which arises on capital borrowed to fund this expenditure will also qualify for relief. The new concession will run for a period of three years and will encourage the active participation of the private sector in a significant way in the future development of toll roads.

At present, data-processing and software development services qualify for the 10 per cent rate of corporation tax. In order to reflect recent developments in the computer industry, certain related consultancy and technical services will also qualify in future. This extention is provided for in section 20.

Section 25 contains measures specifically designed to increase the overall investment in film projects, to maximise the initial investment in an individual film project and to encourage reinvestment in such projects. The existing ceiling on investment of £100,000 in one year is now being increased to £600,000 for a single production and this total amount may, alternatively, be spread over three years, at £200,000 per year, as an investment in one or more productions. In addition, as a further encouragement to corporate reinvestment in the industry, the concession on capital gains tax, which allows deduction of the full purchase price before tax relief, for shares held for three years in a film production company, is being extended.

These enhanced incentives will apply up to 9 July 1992, and, together with other incentives already in place, will provide significant and substantial assistance to the film industry in attracting investment.

Section 27 extends for a further three years the special rate of capital gains tax which applies in respect of certain shares, including those dealt with on the smaller companies market of the Stock Exchange. This concession was introduced in 1986 when the smaller companies market was first set up. The smaller companies market is still a relatively new market which has yet to realise its potential in terms of a capital raising facility for small growth-oriented Irish companies. The Government believe that the extension of the special capital gains tax rate for a further three years will prove to be a very useful boost to the smaller companies market.

Section 29 of the Bill provides that future contracts based on Government securities will not be chargeable assets for the purposes of capital gains tax. Gains on Government securities are already exempt from capital gains tax. As the law stands, this exemption would in all probability be held to extend to future contracts based on those securities provided that delivery of the underlying security is an unconditional requirement of the contract. In order to remove any ambiguity on this point, section 29 makes it explicit that this will be the case.

In addition to providing for the excise duty increases announced on Budget Day, Part II of the Bill also makes provision for the rationalisation and updating of some 50 excise licences. In general, the level of licences/fees payable is being increased in line with inflation. A small number of redundant licences are being terminated. I am also taking the opportunity to create an excise licence specifically for dealers in petrol, whether wholesale or retail, at an annual rate of £20. There already exists a hydrocarbon oil vendor's licence, to cover dealers in auto-diesel, which is being increased in the Bill to £20 also. I am providing that a single payment of £20 will cover both the petrol and the auto-diesel licences. The purpose of the new licence is to equip the customs and excise service more effectively in the fight against petrol smuggling.

There is also provision in section 47 for the introduction of a ten year driving licence at a fee of £20. The three-year licence will continue, at least for the present, and there will also be provision for a one-year licence in certain cases.

Deputies will be aware that there is no reference in the Bill to the scheme of refund of VAT and excise duty on vehicles purchased by disabled drivers. I am anxious to make a further attempt to ensure that obvious anomalies in the operation of the scheme be minimised and, if possible, eliminated, and I propose to discuss with Opposition spokesmen the possible terms of an amendment which I might introduce on Committee Stage of this Bill. I would welcome any suggestions the main Opposition spokespersons may wish to make. We will probably then sit around the table in an effort to work out an acceptable amendment. I do not think anyone is interested in seeing the abuses which are taking place continue. Last year my predecessor made an attempt which proved to be unsuccessful. Therefore let us hope we are more successful this year.

Part III of the Bill gives effect to the VAT changes announced in the budget as well as a number of further measures. The budget measures comprise the increase from 1.4 to 2 per cent in the farmers' flat-rate refund and the related livestock rate, the introduction of the annual accounting option to which I referred earlier and the reduction from 25 per cent to 10 per cent in VAT for works of art. In regard to this latter provision I have gone further than my budget day announcement by extending the lower rate to works of art regardless of their age. Literary manuscripts are also covered by the concession. It was pointed out to me, that because of the 50 year period laid down, the works of some very well known Irish artists were excluded. Consequently, I have made this change.

Section 49 is a technical amendment affecting legal services supplied in insurance-related cases involving businesses.Until a recent High Court judgment the position was that such services were regarded as being supplied to policyholders who, in most instances, were able to recover any VAT charge. The court adjudged that the services should be regarded as being supplied to the insurer who, being VAT-exempt, would not be able to recover the tax. As the effect of this would have been to increase the cost of insurance premia, and also to introduce an element of distortion of competition between Irish and certain foreign insurers, I am restoring the previous position.

Section 53 is a technical amendment which empowers the Minister for Finance to set appropriate conditions when concessionary VAT refunds are being made under section 20 of the VAT Act.

A change in the VAT treatment of optical services is provided for in sections 54, 55 and 56 (b). The supply of spectacles and contact lenses by opticians has been treated as exempt from VAT on the basis that it was an integral part of the optician's professional service which is free of VAT. The European Court held in 1987 that this practice was erroneous: their view, which is of course binding, was that while the professional service of eyesight testing is properly exempt under EC law, the supply of the spectacles or lenses must be taxable. In accordance with this judgment I am imposing the 10 per cent rate of tax on these goods but, in order to allow opticians time to make the necessary arrangements for this transition, the provision will not take effect until 1 November next. I do not expect corresponding increases in the cost of spectacles since, as a corollary of taxation, opticians will become entitled to reclaim input VAT on their purchases of equipment and other goods and services.

As announced in the budget, the bank levy is being renewed at last year's level of £36 million and section 57 gives effect to this.

Since the middle of 1987 the Revenue Commissioners have operated a pilot scheme for the voluntary assessment of capital acquisitions tax. This scheme involved close co-operation between the Revenue Commissioners and the legal profession. In view of the success of the pilot scheme and the potential gains in terms of additional yield and greater administrative efficiency, I announced in the budget that the Government had decided to introduce self assessment of the tax on a mandatory basis. Legislation to give effect to this and to a number of other matters in relation to capital acquisitions tax is contained in Part V of the Bill.

Section 65 is the principal section. It provides that mandatory self assessment will take effect from 1 September 1989. Because of the "grace" periods allowed for the submission of returns this means that self assessment will be fully operational on 1 January 1990. Under the present legislation the Revenue Commissioners assess tax directly on the basis of information provided in returns completed by taxpayers or their agents. Under the new procedure the taxpayer or his agent, usually a solicitor, would complete the return, assess the tax due and forward this to the Revenue together with the payment.

If a self-assessment system is to work it is critical that taxpayers disclose fully the assets which are subject to tax and compute their liabilities correctly. The Bill, accordingly, provides for increased penalties and powers of enforcement. Section 68 increases the statutory penalties for non-filing or late filing of returns from £500 to £2,000 and the penalty for fraud from £1,000 to £5,000.

In order to ensure that the new system will not be abused it is also considered necessary to introduce a surcharge for significant under valuation of property. This is provided for in section 70 and will operate so as to increase the tax payable in such circumstances by a surcharge ranging from 10 per cent to 30 per cent depending on the extent of the under valuation. This type of surcharge represents a new development. It is modelled on US Federal estate duty. Normal appeal procedures will of course apply both in relation to the original tax and to the surcharges.

There is a number of other changes which the Government have decided to introduce this year. The main one of these concerns what is known as the "favourite" nephew relief. A nephew or niece who takes a gift or an inheritance of business assets from his uncle or aunt is treated as a child of that uncle or aunt and so has a tax-free threshold of £150,000 instead of £20,000 in relation to those assets. In order to benefit from the relief the nephew or niece must have worked "substantially on a full-time basis" in carrying on the business of the uncle or aunt in the five years prior to the date of the gift or inheritance. This concession is being retained and the opportunity is being taken to set out more clearly what constitutes "working substantially on a full-time basis". The concession is being extended also by section 74 to gifts or inheritances involving trusts.

Parallel with the introduction of increased penalties and powers of enforcement section 75 contains a particular measure designed to facilitate those who wish to make provision for a future charge to tax. Since 1985, it has been possible to take out special insurance policies to provide for payment of inheritance tax. The proceeds of these policies are exempt from inheritance tax in so far as they are used to pay that tax. The relief applies at present only to policies in a sole name. Representations have been made by the Irish Insurance Federation that the relief be extended to policies in the joint names of husband and wife and payable on the death of the survivor. Because of the spouses exemption, tax does not normally arise until the death of the surviving spouse. Section 75 extends the relief for qualifying insurance policies in the manner suggested by the Irish Insurance Federation.

In my Budget Statement on 25 January this year I announced that the Government had decided to introduce measures to counter the avoidance of tax. Part VI of the Bill contains the Government's proposals in this regard. Section 76 contains a general anti-avoidance provision. This represents a new development in Irish tax law but is by no means a new development in the international context.The need for a general provision here was highlighted by a decision of the Supreme Court last July in what has become known as the "McGrath case". It was clear following that decision that the means to counter tax-avoidance schemes had to be fundamentally reviewed if the Exchequer were not to incur a major loss of tax revenue.

Numerous provisions aimed at curtailing tax avoidance have been introduced in earlier years. These provisions have been of a specific nature — that is, aimed at particular abuses — rather than a general nature. While specific provisions have a continuing role to play, and the Bill indeed contains a number of new specific provisions, experience shows that they can be circumvented by elaborate tax-avoidance schemes. In addition, with a specific provision the loophole is closed only after it has already been exploited. It is clear, therefore, that as well as specific provisions there is a role for a general provision to help safeguard the revenues of the State.

The general provision in section 76 is a carefully balanced one which has been drawn up by the Government in close consultation with the Attorney General and taking account of the Supreme Court judgment in the case to which I have referred. The purpose of the general section is to counteract certain transactions which have little or no commercial reality but are entered into primarily for tax avoidance purposes. The intention is to enable the Revenue Commissioners, subject to specified procedures and safeguards, to disallow the benefits of such transactions.

The provision applies basically to transactions carried out on or after Budget Day, when I indicated the Government's intention to legislate in this area. Transactions carried out before that day are affected only if they would result in the avoidance of tax arising on or after Budget Day. In the absence of this latter provision tax deductions and reliefs engineered artificially before Budget Day could adversely affect the Exchequer, and thus the general body of taxpayers, for many years to come. In simple terms I am saying if somebody following the McGrath type case avoidance scheme had set up his or her losses in advance of Budget Day and the profits had not come through but might come through in future years that would stop from Budget Day. I must stress that this provision is aimed at transactions which set out purely and simply to avoid tax. There is no question of trying to create uncertainties for genuine business transactions or normal use of recognised tax reliefs. The section contains explicit safeguards in this respect.

Under existing arrangements the Revenue Commissioners are prepared in certain circumstances involving incentive reliefs to give an opinion in advance on the possible tax consequences of a proposed activity. In addition the Revenue Commissioners will give, within the limits of their resources, opinions on the tax position of actions which have already taken place. These procedures will not be affected by the new provision. I know that the Revenue Commissioners will continue to be anxious to help to the maximum extent possible in dealing with approaches from business or other interests about genuine transactions. What they understandably must be wary about is a request for an advance opinion on a hypothetical or artificial proposition which is aimed at constructing a tax avoidance scheme.

I would also like to draw attention to the procedures which must be followed before a benefit can be disallowed under section 76. The Revenue Commissioners must first from an opinion that a transaction is a tax avoidance transaction. Having formed such an opinion, they must then notify the tax payer concerned who has 30 days in which to contest it by appealing to the Appeal Commissioners. There is provision too for the rehearing of an appeal by the Circuit Court and the stating of a case for the High Court on a point of law.

There is, therefore, no question of giving an unfettered general power to the Revenue Commissioners. At the end of the day, an appeal to the courts is available and, in the case of dispute, it will be the judgment of the courts and not the opinion of tax officials which will finally determine the outcome.

In addition to the general provision, specific anti-avoidance provisions are being introduced to counter a number of known avoidance schemes. Section 77 counters tax avoidance devices designed to create allowable losses for set-off against chargeable gains. Section 78 counters arrangements designed to enable shareholders to extract profits from a company without becoming liable to income tax on the receipt of those profits. Section 79 combats the avoidance of capital acquisitions tax by the use of arrangements involving private company shares.

In this opening address I have dwelt on some general economic issues and the approach to tax reform as well as outlining the more significant elements of the Bill. I look forward to the opportunity on Committee Stage to discuss in more detail the individual sections of the Bill.

I commend the Bill to the House.

(Limerick East): Sometimes the Second Stage of a Finance Bill has a sense of occasion. That is certainly not the case today. This Finance Bill is more remarkable for its size than its content.It is more an accountancy document than a political one. It seems to legislate to implement the provisions of the budget, as indeed do all Finance Bills. It also introduces new measures to deal at a very late date with problems of tax avoidance which were brought to the attention of the Minister before, during and after the budget. As an instrument of economic policy, this Finance Bill is as inadequate as the budget from which it derives.

It is remarkable that after spending almost two years as Minister for Industry and Commerce, the Minister for Finance took up his portfolio without a shot in his locker and, despite his responsibility for industrial development and the creation of jobs as Minister for Industry and Commerce, he introduced a budget which contained not a single serious idea which would contribute to economic growth and job creation. The paucity of policy has been reconfirmed in the Finance Bill.

Despite the favourable economic background at home and abroad and the fact that he inherited a good set of books from his predecessor, the Minister has chosen not to act to correct the serious problems in our economy which inhibit growth and job creation. He seems to rely on public relations rather than action and has coined anodyne phrases such as "Steady as she goes" to suggest that inactivity is a policy. Try arguing with those on the dole queue — at present over 240,000 persons are unemployed — or with the 100,000 persons who have emigrated since the Government came to power that "Steady as she goes" is a policy tailored to their needs. Try arguing with the one million citizens who struggle below the poverty line that "Steady as she goes" will take them out of poverty.

The Government by turning their back on their platitudinous solutions and adopting the policies presented to the people by Fine Gael in the last election have succeeded in improving the fundamentals of the economy, but for the Minister to pretend that no further corrective action is necessary and that we will all glide together through untroubled seas towards prosperity could, at worst, be a recipe for economic disaster and at best bring about a situation where the future of two-thirds of our people is secured and the rest of our people are written off as surplus.

The Government must govern in the interest of the people. They must shape policy which enables all our citizens to aspire to happiness and prosperity. They cannot stop now and shout "Success" when only a little ground is gained and there are so many victims not only of the economic blunders of the late seventies but of the corrective action of the eighties.

We have a small population. Much of what we produce must be sold abroad, and all our people can be gainfully employed only if we organise our economy to produce and sell far more than can be consumed by us. We must export to live. All economic policy in this country should be addressing the problem of how we can produce more goods and services and sell them more competitively at home and abroad. We must produce to the point where all our citizens available for work are working. Then we could afford to relax and say, "Steady as she goes".

It is evident there are many factors which inhibit our economic growth. They have been recited by me and others, in particular Deputy McDowell, on numerous occasions in this House. A Minister for Finance who does not acknowledge the existence of these obstacles to growth and does not seek to remove them is not doing his job. A Minister for Finance who in his first year fails to use the primary statutory instrument available to him to shape the nation is a disappointment.

The factors which inhibit growth in the economy are well known. They are not mysteries found at the far end of a telescope, at the bottom of a well or at the back of a cave. Nowhere have the structural problems of the economy been recited more succinctly in recent times than in the introduction to the national plan. Having identified the problems, however, the Government have failed to act — rather the Civil Service have identified the problems and the Minister has failed to act.

I would like to look briefly at the economic and social analysis contained in chapter 1 of the plan which illustrates the problem in the context of this Finance Bill. Let us look at the policy decisions arising from this analysis which the Minister for Finance could have incorporated in this Finance Bill but did not do so. No progress will be made unless policy is coordinated to achieve recognised, agreed, attainable objectives. The Minister for Finance, who had available to him the economic and social analysis in chapter 1 of the National Development Plan 1989-1993, could have asked himself and his officials a simple question: “What decisions could I incorporate in the Finance Bill which would remove some of the weaknesses identified?” This did not happen.

I wonder if the Government are serious about the economic analysis in chapter 1 of the plan or do they intend it as a series of mea culpas to soften the hearts of the Brussels bureaucrats, an exaggeration of our difficulties to loosen the European pursestrings in a pathetic belief that the biggest mí-ádh will get the most potatoes and that we must portray ourselves as Europe's misfortunates to get an adequate share of the Structural Funds. If there is a belief in Government circles that the economic and social analysis in the plan is a ploy rather than a depiction in the starkest terms of a weakness of our economy, they should disabuse themselves of the thought. The economic and social weaknesses identified in the first chapter of the plan are real; the solutions proposed later in the plan are unreal and inadequate. The Minister for Finance in this Finance Bill had the first opportunity to act but he has not done so. It is not a case of not doing enough. He takes no action at all. One wonders if chapter 1 of the plan, like the 1977 manifesto, is a document he never read.

Our peripheral location has resulted in major cost disadvantages. The plan states that transport costs for Irish exports to Europe account for between 9 per cent and 10 per cent of export sales values. Much of this additional cost arises at home. There are three reasons for this — our inadequate road structure, the high level of VAT and excise duty on articulated vehicles and motor cars, and the high cost of fuel due in part to high levels of excise on auto diesel and petrol. The Minister could have acted in this Finance Bill to remove the competitive disadvantages arising from domestic transport costs. He had announced the Government's intent in relation to the harmonisation of VAT and excise duty and he could have begun the harmonisation by lowering VAT and excise duty on articulated vehicles and by reducing the excise on auto diesel and petrol. Instead of doing so the Minister in his budget increased the excise duty on petrol by 6p per gallon and promised that a reduction in the cost of petrol at the pumps would cancel out this increase. It did so for two weeks. Then the price went up and the pressure has been upward since.

The action of the Minister for Industry and Commerce in recent days has added further to the shambles. A mock battle will not bring down transport costs. Major increases are on the way and the Minister for Finance stands idly by giving little lectures on the evils of inflation and doing nothing, although he has the solution in his own hands. He is reaffirming the Financial Resolution on excise duties on petroleum in the text of this Bill. I call on the Minister today to reduce the excise imposition on petrol and auto diesel and to state his policy on the harmonisation of excise duties on petrol and diesel and on lorries, cars and vans as we approach 1992. Let us have a real policy to reduce transport costs and compensate for our peripheral position in Europe and not proceed as if the inadequacies of our main roads was the only factor contributing to costs. When will the roads Authority be put on a statutory basis and will it be given the right to toll roads?

Paragraph 1.1.18 of chapter 1 of the National Development Plan states that trade distortions and anomalies have been caused by differentials in tax and excise duties on either side of the Border Could the Minister inform the House if he is doing anything about removing these problems?

Ireland's dependence on agriculture is illustrated in paragraphs 1.1.21 and 1.1.22 of chapter 1 of the plan. Has the Minister any proposal whatsoever in this Bill designed to improve the efficiency or productivity of agriculture?

Paragraph 1.1.23 states:

The traditional indigenous industries are small, and are generally characterised by significant deficiencies in essential business functions — finance, marketing, production, technology, management and business planning.

In this Bill there is not a single incentive to encourage small businesses to improve their performance under any of those headings.

In paragraph 1.1.25 low investment levels are identified as seriously inhibiting economic growth in Ireland. It is stated that the relative level of investment per capita is not sufficient to allow real progress towards convergence. The whole basis of the plan is to enable us to converge towards European living standards, European growth rates and levels of GNP. There is no measure in this Bill to rectify these matters. We have a multiplicity of tax incentives to encourage investment in the building industry but very few incentives to encourage direct investment by the taxpayer in manufacturing industry. The best incentive, introduced by Deputy John Bruton, was the business expansion scheme which has been virtually wrecked by the maladministration of the scheme by this Minister.

In two months?

(Limerick East): Yes. The Minister has foregone about £50 million of taxpayers' money. Most of it has gone into areas which will have no effect on job creation. It is not going into manufacturing industry at all. The Minister has succeeded in bringing about a situation, despite the fact that we reminded him about it on budget night and before, where money which could have gone into manufacturing industry for job creation is being drained off into areas for which it was never intended.

The Deputy is the most simplistic man I have ever heard. He wants a budget a day.

(Limerick East): I am sorry if I am getting under the Minister's skin. He should relax because I have a few more things to say.

The craziness of what the Deputy is saying is what gets under my skin.

(Limerick East): The best incentive, the business expansion scheme introduced by Deputy John Bruton, has been virtually wrecked by the Minister, who has not administered it correctly since he took over the portfolio.

In part 2 of chapter 1 of the plan there is a sectoral analysis. It refers to the traditional sector of Irish industry. The Minister lays claim to understanding industry. Paragraph 1.2.4 states:

The performance of the traditional sector of Irish industry has, in general, been extremely poor over many years. Employment in the sector is over 25 per cent lower than in 1980. Investment levels have fallen as has the share of the domestic market accounted for by domestic industry. Less than one firm in four is engaged in overseas sales and, in those that are, there is an undue reliance on one overseas market — the UK. Profitability has been poor and in recent years has been running at less than 2½ per cent of sales. While there are significant exceptions, which indicate a real potential for improvement, the sector generally is characterised by major scale diseconomies, poor capability in general management, in marketing expertise, technology and quality control. The sector suffers from a general lack of competitiveness illustrated by the substantial loss of domestic market share suffered since Ireland joined the EC. Some 90 per cent of Irish industrial firms employ less than 50 people and the weaknesses of Irish industry are generally more intense in these small-scale enterprises.

That is the economic and social analysis of the traditional sector of Irish industry, but the Minister proceeds in this Bill as if it has never been stated. There is not a single measure in this Bill to cater either for the strengths of the modern sector of industry, which is identified in the analysis, or the weakness of the traditional sector. This Minister has spent two years at the Department of Industry and Commerce and should know the weaknesses of the traditional sector in Irish industry.

In paragraph 1.2.11 and subsequent paragraphs the weaknesses of the tourism industry are identified. Many of them relate to the imposition of VAT and excise duty on motor cars, self-drive cars and petrol.

A lovely shopping list. Just tell me where I get the money.

(Limerick East): The Minister will have to harmonise.

I know what I have to do. Not the crazy things the Deputy would like me to do.

(Limerick East): I am not a bit crazy. I am arguing the case using the National Development Plan. There is an economic and social analysis there, put together by very competent people, and I do not think the Minister has read it. If he had done so he would realise his responsibility to implement in this Finance Bill some of the decisions and strategies suggested.

I will do it over five years, not in one Finance Bill.

(Limerick East): The Minister has ignored it completely in this Bill and there is no attempt to remove the structural weaknesses in the Irish economy which are illustrated in this plan. The Minister is failing to use the power at his disposal to cure the problems of the economy. He has been carried on the wave of opposition support and the fact that he inherited a good set of books from his predecessor. The Minister is not sailing the ship but is being carried on the wave.

Many of the inadequacies of the tourism industry relate to VAT and excise duties and the Minister should state what he is going to do about harmonising them. If there is any sector in our economy that has proved to be inadequate it is the tourism industry, and much of this is due to the high prices of the kind of consumer goods that tourists indulge in when they are on holidays. I think we should call a minute's silence in the House to allow the Minister to reflect on the effects of lower excise and VAT on the tourism industry.

I could go on. There is scarcely an economic or social weakness identified in chapter 1 of the plan which could not be remedied to some degree by an appropriate taxation response. There is no response. The Finance Bill is not merely a vehicle to enshrine in statute the rise and fall of tax rates; it is an essential weapon in the armoury of a government to make the economy grow. This Minister has failed to use it as such.

Let me now turn to the area of personal taxation and state again, as I have repeatedly done, that radical reform of personal taxation is a prerequisite for the kind of growth rates we need. This Government seems to see a reduction of taxes as the fruits of success in the economy. Fine Gael regard radical reform of personal taxation as the foundation stone on which to build that success. The tax system is not the result of our lack of economic performance; it is, to a large degree, the cause of it. Successive Governments here have organised a most benign tax regime for capital investment and manufacturing industry, but have coupled it with a most malign PAYE and PRSI structure. When it costs and employer £3.30 to put £1 in the pocket of a person on the average industrial wage, is it any wonder that the dole queues stretch to the horizon? When a single person on little more than the average industrial wage has to bear the top marginal rate of income tax, is it any wonder that highly skilled single people are voluntarily joining the thousands of involuntary emigrants leaving our shores? Is it any wonder that skill shortages are now emerging even though 18½ per cent of the population is unemployed, when 100,000 have emigrated in the last three years? Over the last two years we have pressed the case on this side of the House. I want to acknowledge that the Minister has moved a little. He has reduced the top rate and the standard rate. He continues however to substitute minor reductions in rates for fundamental reform of the system and is failing to do the job that is necessary. Fine Gael appreciate the difficulty of tax reform. We have offered to approach the problem as we have approached the problem of debt control. I would like to repeat that offer today but I know it will be rejected.

Let me now comment briefly on a number of sections of the Bill. What I shall say is by way of preliminary comment.I will address each section at lengthy on Committee Stage and table a lengthy list of amendments.

First I would like to look briefly at the Minister's decision to increase by £200 in respect of each qualifying child the exemption limits for taxpayers with children I still cannot understand why the Minister approached that poverty trap in this fashion rather than using the family income supplement or a form of it. That, in my opinion, is a far better method of targeting the people he seeks to target by this measure. The Minister, by eliminating one poverty trap for married couples earning between £6,000 and £7,500, is opening another poverty trap when the clawback takes place slightly above that level.

I would like to welcome the Minister's action in section 24 in reducing from 12 per cent to 10 per cent the benefit-in-kind for preferential mortgage loans. I had an agreement with his predecessor that that should happen and I am glad to see that it is contained in the Bill.

Section 5 provides for a reduction in mortgage interest relief. I will be tabling an amendment to the effect that the reduction in relief should be tied to the level of interest and that if mortgage interest rates go back up the relief should go back up. I do not think it is beyond the capability of the Minister and his officials to have a situation where if mortgage interest rates go back up again the relief would go back up towards 100 per cent.

Section 7 contains the Minister's corrective action in respect of the business expansion scheme. On Committee Stage I would like the Minister to deal with this at more length. I would like to know in particular why he pitches the upper limit of £2.5 million on the amount of shares issued by a qualifying company in respect of which relief can be claimed. Is this £2.5 million a year or is it a total of £2.5 million? The way it is drafted it looks as if it is something that could be repeated from year to year. I would like the Minister also to justify the total elimination of leasing activities from this scheme. In relation to an aspect of the business expansion scheme which I drew attention to on budget day, the operation of self-catering tourist facilities, I would like the Minister to tell us if he is completely happy with the operation of another incentive for self-catering schemes where at least 75 per cent of the capital cost can be written off against personal taxation. I presume subsection (d) is intended to remove those BES schemes which have a guarantee in place which would be other than the market value of the shares, and again I would like to explore that at greater length on Committee Stage.

I have no difficulty with sections 9 and 10. I welcome them and have some questions to raise. In regard to section 13, I am not sure if it is for the purposes of clarification or intended as a new measure.I understood that when changes were made in corporation tax the write-off on farm buildings was to be treated differently from the position in industry. I see now that the Minister is proposing that up to 50 per cent can be written off in the first year as terms of accelerated allowances. The balance of the expenditure would be written off at 10 per cent a year over the following five years. I will be looking for clarification on this also.

I have already raised the issue of the tolling of roads. I would like the Minister to throw more light on his decision to increase from 50 per cent to 100 per cent the allowance on capital expenditure on toll roads. Maybe this is justified; I am prepared to listen to the arguments. A greater difficulty at the moment is that the tolling of roads is a function for local authorities. We have had the experience already in regard to the Naas by-pass where the intent of the Government of the day and of the Department of Finance was that the road would be tolled, and the local authority refused to do so. It seems to me that even though some local authorities have already stated that certain stretches of road would be tolled, the decision will be taken by a majority vote of the local authority meeting. I do not think that provides the kind of certainty a private company needs when getting involved in the type of scheme the Minister seems to believe they will get involved in as a result of the improvements in section 15. We need a firm statement on the establishing of a national roads authority on a statutory basis and on whether or not they will have the power to impose tolls on roads rather than the local authority. Certainly it would provide greater certainty, if that were the case, to those who want to invest private capital in the building of motor-ways, bridges, roads, etc. here.

Section 16, First Schedule, deals with the taxation of UCITS, a new word that we have to become familiar with, the undertaking for collective investment in transferable securities. On the face of it, it is something that I would agree with, but I find it quite complex and I will be looking for quite a lot of explanations from the Minister. Let me start with one question. Does the Minister envisage a situation whereby companies outside the Custom House Docks site and the Shannon area would be involved in UCITS activity and if then there will be a power by the Revenue Commissioners to disentangle contributors to the UCITS so that foreign nationals will be exempt from tax and Irish citizens will be taxed? Will that apply outside the centre as well as within the centre?

The second point I would like to raise refers to section 17 which is the anti-evasion section. It would be extremely difficult to actually work that section in practice. If we have free movement of capital in the Community it will be difficult for anybody to know the identity of the investor who puts his money into the Custom House Docks site; and, whether it is sourced from London, Amsterdam, Luxembourg or wherever, if he is an Irish citizen that will be fairly easy to disguise. The anti-evasion section seems to envisage a responsibility on the agent of the management of the fund operating in this country if someone invests abroad but I am thinking of a position where an Irish citizen channels his investment through an agent abroad back into a fund operating, say, in the Financial Services Centre. Is there any provision in the sections to deal with that situation? There is always a problem with tax breaks and it is very hard to ring-fence them completely.It might be possible to do that in a closed economy but once there is free movement of capital, labour, services and so on without let or hindrance across a community which will be moving towards various forms of unity after 1992, then the traditional coach and four will be driven through many of these provisions.

I would like the Minister to cast more light on section 19 and the restrictions on the section 84 loans. While he dealt with it at considerable length in his Second Stage speech he did not attempt to quantify the tax foregone by what he said is the extending use of these provisions, particularly for high interest loans drawn in Greek drachmas and Australian dollars.I would just like some information on the amount of money that is foregone and what the implications of the section are in terms of the package of incentives available to the agencies, the IDA and SFADCo, in attracting industry to the country. I would like also if the Minister would comment on the effect as he sees it on Shannon-based companies. After 1991 they will not be able to source section 84 loans domestically but will continue to be able to source them abroad. We do not have that information at our disposal on this side of the House. It would be of interest to all of us, and especially to those of us who live in the Shannon region, to be put in a position where we could measure the possible fall-out from this restriction.

I would like to ask the first constitutional question in this debate. Is it constitutional to treat lending agents differently and will it be a subject of challenge that only those lending institutions which are at present involved in section 84 lending will be allowed to continue it, especially against the background of a Central Bank Bill which will empower the Central Bank to issue licences to many other people who want to engage in banking activities? I would like the Minister to comment on that when replying to the debate.

Section 20 is a further extension to the 10 per cent regime. There is very little left now that is not included in the 10 per cent regime if it has anything at all to do with the manufacturing industry. I have no particular objection to it but it will put a further strain along the margins of corporate taxation. I wonder if we are far from the day when the accountancy firms of the city and the country will be looking for the 10 per cent tax regime. Since so many of them are involved in consultancy work it will be difficult enough to draw the line where a 10 per cent regime applies to consultancy in technical services relating to software development and data processing and where consultancies in other areas are subject to a rate of, I understand, 43 per cent.

Section 25 which provides some relief for the film industry seems to be a welcome move and I accept that. I have already commented on Part II, customs and excise, and on the price of petrol and the harmonisation of excise duty. There is a multiplicity of increases in licence fees over a multiplicity of licence provisions and that is something that can be dealt with on Committee Stage. It seems that most of the increases are more or less in line with inflation but I would like the Minister to go through them briefly on Committee Stage and point out if any change of significance has been made in any particular area. I would like to ask the Minister in that context if the petrol retailers' licence is a new imposition or if it is an addition to some provision that existed previously. In regard to the value-added tax provisions in Part III I would like to ask the Minister why he did not state his position on the harmonisation of VAT. That will be crucial to the collection of taxes and also to economic development in the country over the next couple of years.

I welcome section 50 and in particular section 51 which fulfils the commitment made previously by the Minister. I think the figure concerned could have been brought to 2.5 per cent or 2.6 per cent. The advice from independent sources was that the appropriate rate would be 2.6 per cent in regard to the VAT refund to farmers. I may be putting down an amendment along those lines so I would ask the Minister to comment on this point in his reply to Second Stage.

I find section 52 disturbing. It allows small traders the option of paying VAT at 12 month intervals rather than periodically.I know it will be welcomed by many small traders but I think it will get many of them into frightful trouble.

Many of their accountants will be advising them to continue to pay periodically. This seems to run counter to the kind of trend which we have seen in Finance Bills in the last few years. It seems to be an invitation to people to get into difficulty when they have just come out of it as a result of the tax amnesty.

The provisions relating to VAT on spectacles are technical in nature. I think they derive from the European Court of Justice decision and certainly I cannot see any significant basis for controversy about them. I welcome the fact that the Minister has gone further than his commitment on budget day in regard to section 56 and the reduction of VAT on works of art. He has extended the commitment to apply to works of art not only over 100 years old but regardless of age and has extended it to manuscripts as well.

In section 58 there is a further concession to the Custom House Docks Development Authority. This has become a feature of Finance Bills. We are at the stage now where we would be disappointed if a further concession or two, three, or four were not given in a Finance Bill to the financial services industry on the site or to the site itself. In Chapter II the arrangements with regard to returns and assessments on capital acquisition tax and especially the arrangements for self-assessment, are matters which I will be raising again.

I would like to move now to the anti-avoidance provisions in Part VI of the Bill. This is a section on which I intend to spend some time on Committee Stage. Obviously when gaps open up and when there are so many experts in the country and in the city who spend their time in identifying gaps, one needs to close the gaps, to protect the Revenue. I accept what the Minister says, that after the McGrath case the wisdom of the Revenue Commissioners and the officials of his Department is that particular anti-avoidance measures of closing the door when the horse has bolted, are no longer adequate and a general tax avoidance measure is required. This measure is very wide in its scope and will operate on the basis that any transaction which, in the opinion of the Revenue Commissioners, is a tax avoidance transaction rather than a business transaction will be dealt with under the section.

My concerns are threefold. First, will genuine business transactions be caught? The explanatory memorandum states that genuine business transactions, even if carried out in a manner which is intended to minimise the tax chargeable on the transactions, cannot be regarded as tax avoidance transactions. It gives the Revenue Commissioners the power to look behind every business transaction and form an opinion as to the motive which caused the transaction in the first instance. I do not think it is enough to say that because there is an appeal to the Circuit Court and because that can be taken on a point of law to the High Court it will be the judgment of the court in the final analysis and not the opinion of the Revenue Commissioners that will be the deciding factor. Of course, on appeal it will be the opinion of the court that will be given and that will be based on the terms of the section. The court will not be looking at it independent of the section. If a Circuit Court judge finds that the Revenue Commissioners have con-formed with the terms of the section the Revenue Commissioners will win the argument. That is a very wide power for the Revenue Commissioners. Instinctively, I would prefer taxation measures being a matter of statute law rather than a matter of opinion on anybody's behalf, whether it is the Revenue Commissioners or the appeal from the Revenue Commissioners.Somebody must interpret what the law is but this section goes beyond simple interpretation.

Under the terms of the section the Revenue Commissioners, or officers thereof, are entitled to form an opinion that a transaction is a tax avoidance transaction and if they form that opinion within the terms of the section I believe that a Circuit Court judge can only evaluate the formation of that opinion within the terms of the section. The protection of the court, which the Minister has stressed, is more apparent than real.

Secondly, this is retrospective to a large degree. The Minister should have moved quickly when the Dáil resumed last October — the decision of the Supreme Court was announced during the summer — to introduce emergency legislation. I do not think there would have been any difficulty in the House if he wanted to close the gap on that occasion. There is a retrospective element in this, the degree of which I am not in a position to judge. I would like to be advised by the Minister on it. Certainly, transactions carried out before the day of the budget, in so far as they would avoid tax due on or after Budget Day, are caught within the terms of the section. It seems to me that for schemes put in place after the judgment in the McGrath case in July the liability for the tax would more likely accrue at the end of the tax year, towards 5 April. Consequently, there may be a major element of retrospection in this.

If that is so, well and good because I do not think anybody should be in a position to exploit a loophole in the law to enable them forego the payment of taxes which they are legally obliged to pay. However, there are problems about retrospective legislation and I am sure Deputy McDowell will deal with them. There are problems about measures which operate in this way and I would like the Minister in his reply to deal with the constitutional difficulty of retrospection.I have dealt with the major portions of the Bill and, naturally, I will be tabling a series of amendments on behalf of my party. I should like the Minister to take the opportunity when closing the debate on Second Stage to reply in detail to the questions I have raised on the different sections.

This is the third Finance Bill introduced by the Government in this Dáil and, in terms of the life of the Government and the Dáil, it marks more than the half way stage. Seen in that light the Finance Bill, in my view, is not a milestone for those who had hoped that the Government would avail of the uniquely favourable consensus that exists in the House for radical tax reform. On the contrary, the introduction of the Bill is more akin to a tombstone than a mile-stone because it marks the end of any hope that the Government have any view, any wish or any appetite for radical tax reform based on the consensus which exists in the House.

Why is it that the Government have failed to spell out a programme on tax reform? Why is it that the Government have failed to set themselves any targets for tax reform? Why is it that the Government, while able to make projections and plans for expenditure, for borrowing, for job creation and for a myriad of other things, cannot spell out even the vaguest plan, programme or strategy for reform of our tax system? In that context I was slightly bemused by what was contained in the Minister's speech. We are told that he intends to pursue a phased programme of tax reform. A phased programme of tax reform, we are told, has been pursued by the Government without compromising the overall reduction in the Exchequer borrowing which has been so crucial to economic recovery. Last year we were told what the programme included.

With the greatest respect, the Minister has a neck as hard as certain portions of the anatomy of an equestrian gentleman. All I can say is that a programme, as now enunciated by the Minister, is something one finds out after it has happened. We do not know what the programme is going to bring about next year, the year after or the year after that. We do not know where tax rates are destined to be under this programme in two, three, four or five years time but what we do know is that the Minister is following a phased programme.That means that things happen by bits and pieces. We will find out afterwards what the programme meant the previous year. That is a new form of programme. The whole idea of prospective programming is gone, one only finds out afterwards what has happened, that it fit, retrospectively, into some scheme of things that the Minister calls a programme.

I have to compliment the Minister on his dexterity in the use of the word "programme" and, in his budget speech, for formally abandoning the Government's previously stated position that their tax programme was aimed at putting two-thirds of taxpayers on the standard rate of income tax. That was enunciated by his predecessor, Deputy MacSharry, when Minister for Finance at great length both in the context of the last general election and after. We were told that this was the aim of the Government. It could have been achieved by changing the marginal tax rates of one in ten taxpayers. It did not carry with it any notion of tax reform. It was very nearly achieved last year. In fact, it was abandoned this year when it could have been put in place, but that is because it was a nebulous target. Changing the marginal tax rate paid by one in ten taxpayers never amounted to a programme of tax reform.

Why are all these things happening on a basis that will not be spelled out? Why are clear policy objectives not made known so that people can decide if the Government are adhering to a programme?The answer is complex. Perhaps, the chief reason is that the Government, like no other, have been the mental hostage of what I term the mandarins of Merrion Street and Dublin Castle. The tight grip exercised over Government spending in the last two years has succeeded except in one vital area, public sector pay, where we have a Pandora's box of special pay claims now bursting open. The Minister admitted on Budget Day that it amounts to £150 million.That is frightening enough but we do not have any clear view how public sector pay is to be controlled. On other occasions I pointed out that public sector pay in absolute terms has increased each year for the last five years at a rate in excess of the rate of inflation. That public sector pay bill is being paid by a bankrupt Exchequer. It is extraordinary that we should be facing into £150 million worth of special claims and that there was no effort made to publicly mobilise opinion to say that we cannot afford in the foreseeable future to concede claims of that magnitude.

The Department of Finance, despite whatever they can achieve in controlling public expenditure, are not, never have been and never will be a power house of radical fiscal reform. For that one needs a Government, as opposed to the permanent government of the Civil Service, which is driven by a sense of determination, regulated by a sense of direction and fired by an ambition and an appetite for reform, not a mere set of fiscal caretakers, watchmen and checkers who, I think, in many respects the Government resemble.

Anyone who cares to look at the five Reports of the Commission on Taxation will see a consistent vein of cynical opposition on the part of the State's fiscal establishments in Merrion Street and in Dublin Castle to any radical departure from their tried and tested methods. The problem is that, though the present tax system has been tried and tested, it has also been found wanting. The Minister's advisers in Merrion Street and the Revenue Commissioners — who, in substantial form, draft many of the clauses of these Finance Bills — prefer to leave the present tax system largely in tact. They always warn against the unpredictable effects of any disruptive change. They are the harbingers of gradualism and creeping reform. Now they have the Minister coming into this House, I regret to say, announcing that he is pursuing a programme but it is one which must be kept a State secret because it is one he cannot publicise in advance. In any given year the advisers in Merrion Street and Dublin Castle are happy to close a few loopholes here, simplify a few procedures there, complicate a tax concession here and gratify the Government of the day by experimenting with some tax incentives there, but all the time resisting any changes of substance. The crucial test for the permanent Government — as I call them — is to prevent change unless that change comes from them, is consistent with their underlying aims and does not appear to contradict too blatantly their recent departmental policy. Nowhere is that more obvious than in the area of tax reform.

The business expansion scheme, with which this Bill is concerned to some considerable extent, is a prime example of the interaction of permanent government with the Government of the day. Instead of radical tax reform, on which political agreement was impossible for the last Government, when Deputy John Bruton introduced the business expansion scheme, it was decided to give an incentive to certain forms of investment in business. The scheme, as introduced, was cautious, mean and ineffective I do not say that with any malice towards Deputy John Bruton — because I think it was well meant — but it was always destined to fail. Since then it was widened to the point where it became not only ridiculous but scandalous. When townhouses in the heart of Donnybrook became, for tax purposes, thatched cottages in high amenity tourism areas the monstrous nature of leaving high tax rates as they were but giving tailormade tax breaks for limited purposes became apparent to everyone; it was nonsense.

Now we have nonsense on stilts because the Minister proposes that the tourism concession is to be determined by geographical criteria. For example, Lucan will be out for such absurd tax relief for townhouses but socialist Leixlip will be eligible. The reason is that the county boundary runs between those two suburbs of Dublin. The suburbs of Dublin will be divided on an Alice in Wonderland style basis between tax allowable tourist areas which lie within the city and county boroughs, and places which lie outside. The same applies to Cork and Limerick. The Corporation bailiwicks in those two cities will be ineligible but Shannon Banks, over the river in Clare — which is a suburb of Limerick for all purposes — will be eligible for this kind of scandalous relief to continue in relation to townhouses which are built there.

I just do not accept that that is a proper way to deal with this issue. If the Minister really wanted to narrow down this concession to genuine holiday/tourism facilities in high amenity areas the idea of doing so by reference to Victorian county and city boundaries is so ludicrous as to call into question whether anyone is making a serious effort to control this abuse. I ask: is there any distinction between Leixlip and Lucan for the purpose of that concession? Is it not absurd, whatever about its other merits, that Leixlip should be eligible to have townhouses described as holiday villages for the purposes of taxation whereas Lucan cannot? That just makes nonsense of what we are trying to do.

I also believe that the grotesque use of the business expansion scheme to capitalise leasing operations ought to be curtailed.I welcome the fact that the Minister is curtailing it. But what is the justification for business expansion schemes in which banks guarantee the performance of an investment? With such blue chip guarantees does not the business expansion scheme cease to be an incentive to risk-taking and, instead, become an out and out tax hedge? As the Minister has pointed out, where there was not risk involved, was the business expansion scheme not a tacit admission that, because marginal rates of tax were too high, ways would be found and devised for the wealthy and well-advised to avoid those tax rates? That is what the business expansion scheme had become. In the last month everyone who even looked half well off, or half comfortable including, somewhat wrongly, myself, was inundated with scheme after scheme, devised on some kind of mailing lists of, I suppose, potential plutocrats and professionals in Dublin who are imagined to have huge sums of money which they could plough into these things, suggesting that by 12 April they should invest in these schemes because the guillotine was going to come down on them. The idea that I, or anybody else in this House, was to make an investment in a scheme which was designed to promote risktaking and, at the same time, have an associated bank guarantee my investment just makes nonsense of the whole philosophy of the concession to start with. I want to say this, that in so far as a number of large financial institutions have offered guarantees of that sort, they are in danger of being found to have strayed into the insurance area. Some of those investors may well find themselves, in the fullness of time, having their guarantees set aside or invalidated by the courts, with a lot of these schemes also giving the financial institutions recourse to the assets of a company in respect of guaranteed performance in relation to the shares. On my understanding of the law, that is an unlawful, invalid and worthless guarantee.When the whole matter shakes out there may be a great many disappointed investors. Some people who think they are getting away with murder may find that they have not, that they have been a victim of a bit of financial mugging.

But what about the ordinary person weighed down by tax, struggling to survive to make ends meet to pay for food, housing, clothing, education and health? For them there was no orgy of tax breaks, no retinue of clever accountants, or greedy entrepreneurial parvenues with dubious ethics and financial projections offering instant wealth. No, for Joe Soap, there were no tax reforms, no tax breaks and there still is no mercy. The contrast between the new clique of tax break tiros, of get-rich-quick, fiscal child magicians, engaged in frenzied exploitation of tax concessions and the average industrial worker, who pays out 65 per cent of every hour's extra pay he can get to the State, for whom every pound of take-home pay costs his employer £3.30, is nauseating to behold.

The fact remains that Ireland has the highest employment tax wedge of the OECD countries and, as a result, the worst employment situation. I reiterate that radical tax reform of personal income tax is needed to change that, not business expansion schemes which I call fiscal cocaine for the economic glitterati. We need a fusion of income tax and employee PRSI. We need a 25 per cent rate over the range of incomes up to the average industrial wage for a single person and up to £16,000 for a married taxpayer. We need to introduce tax credits in substitution for tax allowances. Real steps need to be taken to tackle tax evasion involving I think, cards with employment and tax numbers which everyone must use for every transaction. We need to finance local government separately and not out of income tax. We need a top rate of tax that gives the worker, investor and industrialist a reason to try harder.

All of these things are possible if there is the political will. In the most comprehensive tax reform programme ever published by any party in this State, the Progressive Democrats have shown that there is a way. The way is there but where is the political will? I suggest that one should not look to Merrion Street, to Dublin Castle or to any other mullahs of the present orthodoxy because they will never deliver radical tax reform. It is our conviction that we cannot afford to wait for recovery before we tackle tax reform. Radical tax reform is part of the process of recovery, not just its possible reward.

The proposals in relation to tax avoidance in this Bill are like the rest of it, drafted by the Revenue Commissioners. I welcome in principle a statutory scheme whose purpose it is to disregard wholly artificial transactions aimed at reducing tax bills and which have no independent justification or motivation. I accept that the proposed clauses attempt to achieve this end and to introduce genuine tax efficient means of achieving genuine commercial ends, but the text of the Bill is drafted in a way which does not even attempt to strike a proper balance between the legitimate purpose of anti-avoidance and the equally legitimate purpose of having certainty in laws relating to tax in which taxpayers and those who advise them can act with some degree of certainty as to the law. I am surprised at that and that it has been done with the advice of the Attorney General.

The part of the Bill which deals with tax avoidance needs very close scrutiny.

It would be wrong to get stuck into a line by line analysis at this stage.

The Deputy's interpretation of the role of the Chair in this matter is exemplary.

There are some particular principles which are inextricably bound up with the provisions of this Bill as drafted to which I would draw the Minister's attention now, lest he think that I left the matter too late on Committee Stage. Tax for the purpose of tax avoidance is extended by Section 76 (1) (a) to cover any interest, penalty or other amount so that a transaction which had no legitimate purpose other than to avoid interest or a penalty can be a tax avoidance measure under this provision. If the Revenue Commissioners form an opinion that a certain transaction was done not simply to avoid ordinary tax but to avoid a liability to a penalty, they can disregard the transaction involved and bring about a situation whereby somebody who through an artificial procedure had avoided a penalty would become liable to a penalty. Undoubtedly this provision will be scrutinised by the High Court, because it will end up before the courts. It is a remarkable state of affairs that somebody faced with a penalty cannot within the law adopt a scheme or a transaction to save himself from being penalised.That is a most remarkable provision and it is wrong. If tested it will be found to be invalid constitutionally.

More alarming is the whole purpose of intentionality as to the purpose of various tax arrangements and the meaning and purpose of various provisions of statutes. This principle of intentionality, as I call it, is set out in section 76 (3) (a) and (b). This is the saver clause which effectively says that the Revenue Commissioners will not regard a transaction as being a tax avoidance transaction in certain circumstances.

It is very necessary to study section 76 (3) (a) carefully to see exactly what it means. The Minister's speech reflects its exact meaning in terms which — although I hesitate to say are dishonest — would give one a false sense of security about the extent of this safeguard. The Revenue Commissioners under that subsection are required not to regard a transaction as a tax avoidance transaction if they are satisfied that it was undertaken or arranged by a person with a view directly or indirectly to the realisation of profits in the course of the business activities of a business carried on by the person. This relates to business but not to an ordinary person in relation to his own affairs. That is of very great significance because it means that an ordinary person who goes through some kind of an arrangement, say a family rearrangement of assets which is not related to business, cannot avail of that section. That clause is combined to transactions which are not undertaken or arranged primarily to give rise to a tax advantages, but section 76 (3) (a) relates only to business.

The ordinary citizen uninvolved in business has no safeguard at all under paragraph (a) but is included under paragraph (b) which is even worse, because paragraph (b) would oblige the Revenue Commissioners not to regard the transaction as a tax avoidance transaction if it was undertaken or arranged for the purpose of obtaining the benefit of any relief or allowance or other abatement provided by any provisions of the Tax Acts, and that the transaction would not result directly or indirectly in a misuse of or an abuse of the provision, having regard to the purposes for which it was provided. That is the first case I have ever seen of the Revenue Commissioners being allowed to take a look at the whole corpus of tax law and form opinions as to what this House intended when it introduced a particular concession.

The Revenue Commissioners are entitled to categorise certain activities as an abuse or a misuse of a tax break created by this House. We are now proposing to give to the Revenue Commissioners the role of interpreter of statute. They are to look at the Tax Acts, and perhaps there is something to be said for that because they draft all the Acts, but the constitutional fiction at the very least, is that we are supposed to form the opinions and have the intention. This Bill, for the first time, gives the Revenue Commissioners the right in relation to any tax provision to look to what they consider to be its purpose and to regard any use of it for a thing that they do not consider to be its purpose, to be an abuse or a misuse. That is an unconstitutional delegation by this Oireachtas of the power of interpreting its statutes not to the courts but to the Revenue Commissioners.

The Revenue Commissioners are now obliged to serve notices in relation to transactions they see to be tax avoidance transactions unless they in their judgment having formed a subjective view about the purpose of a given tax break given ten, 20 or 50 years ago, decide that it is not an abuse or misuse of that tax break. They have an awful cheek to seek that power. For the Revenue Commissioners to draft a clause and put it before this House via the Minister, which in fact gives them the right to look through the statutes and make subjective decisions about the purpose and intent of the law of the land and to disallow people tax breaks on that account, is a piece of the greatest legislative arrogance. They are taking to themselves the role of legislature and judiciary together. They are now claiming the right to look at laws and say what their purpose is, to say what amounts to an abuse or misuse of the law and to determine what they will do accordingly. That whole notion is wrong in principle. It does not necessarily follow that it is unconstitutional although it may well be, but it is wrong in principle to make a series of laws which determine people's tax liabilities by reference to the views of other interested parties as to what the intention of this House was in any given case. That is bad drafting and very ropey from the point of view of constitutionality.

I note the involvement of the Attorney General in this, but it has been clear from the phraseology of the entire section 76 that the one thing that has been avoided throughout is the use of the word "determination".The Revenue Commissioners do not determine that something is a tax avoidance scheme; they form an opinion. The grotesque fiction that that really represents shows through at the top of page 74 of the Bill in subsection 5 (e), where we are told that for the purposes of this subsection an opinion of the Revenue Commissioners that a transaction is a tax avoidance transaction shall be final and conclusive in certain circumstances.

Opinions never become final and conclusive.That is nonsense, a perversion of ordinary English. The only sense in which something becomes final and conclusive is that it is a determination which affects the rights of others. If this use of the word "opinion", presumably on the advice of the Attorney General's Office — that one should never mention a determination by the Revenue Commissioners because that would involve an administration of justice and an invasion of the monopoly of the Judiciary — is designed here to mask a process which, in fact, is a determination process, then you are again into big difficulties with the legality of this provision. Anybody who uses the phrase that "the opinion of the Revenue Commissioners shall be final and conclusive" actually is using code and somewhat disingenuous and obvious code for the proposition that a determination has been made which will become final and conclusive.There is a huge vulnerability to any proposal which will try to mask a determination as a mere opinion which has been notified to the other side.

The Minister has made some considerable mileage of the rights of the courts in this matter to supervise the whole process. On the face of the Bill there is not a process of determination by the Revenue Commissioners with the right of appeal. There is right of appeal from an opinion of the Revenue Commissioners, which is remarkable in itself. Normally one does not have to appeal from an opinion, one can only appeal from a determination. The safeguards suggested by the Minister to be available for an appellant are very considerably less generous than have been suggested to this House by him.

The fundamental ground for upsetting the notice served containing this opinion — which I say is a determination — is that there were insufficient or no grounds on which the Revenue Commissioners could or would reasonably have formed the opinion that the transaction specified or described in the notice of opinion was a tax avoidance transaction. You are left with the situation that the taxpayer takes on the onus before the appeal commissioner or the Circuit Court, not of saying to that tribunal, whichever it is, "Here is what I did and here is what they say I did. I ask you to accept my view of the situation as more reasonable than theirs and that on the balance of probabilities I am more correct in my submission that it is not a tax avoidance transaction than they are when they submit to the contrary."

The taxpayer here must go one stage further as this section is drafted at the moment and say that if there were two conclusions, both reasonable, both even equally reasonable, one to the effect that it was a tax avoidance transaction and one that it was not, in those circumstances the appellate body, be it the appeal commissioner or the Circuit Court, is still not entitled to reverse the Revenue Commissioners' opinion, such as that is. They must form the view not simply that they would prefer the appellant's account of the transaction on balance but that there were no reasonable grounds, effectively, for the Revenue Commissioners to arrive at their estimate of the transaction.

That switches the onus of proof on to the taxpayer and leaves him in the potential position that he can go to an appellate tribunal and even have its sympathy in that if it were the Revenue Commissioners it would not have arrived at that opinion but, nonetheless, it would be taken as a reasonable view of the situation and the tribunal would not interfere with it. That is not simply reversing the onus of proof, which might be reasonable in this circumstance, but making the position of the taxpayer virtually impossible. It is equivalent, in a criminal case, to saying that the defendant is not there to prove his innocence to a jury but to prove that the guard did not have the right to arrest him on day one, that in forming his opinion as to whether an offence had been committed he acted unreasonably. That is pushing the boat much too far. If, coming into this drafting of the legislation, there were some balanced view from the other side not to push the thing over the edge or make it into a unacceptably draconian piece of legislation, then the right of appeal against the determination of the Revenue Commissioners — which I think it should be admitted to be — would not be confined to this very narrow ground.

I contrast the language used in this right of appeal with that used in another tax avoidance clause of this Bill, section 78, where, at the foot of page 79 at lines 50 to 53 a different onus of proof, is put on the appeallant because it provides:

This section shall not apply as respects a disposal of shares——

and this is a particular form of tax avoidance——

where it is shown to the satisfaction of the inspector or, on the hearing, or rehearing, of an appeal, to the satisfaction of the Appeal Commissioners, or the judge of the Circuit Court, as the case may be, that the disposal was made for bona fide commercial reasons and not as part of a scheme or arrangement the purpose, or one of the purposes, of which was the avoidance of tax.

There is a different system in that section, obviously drafted by a different hand or by the same person in a very different humour, a slightly more liberal humour. You can tell the appellate court that you want to satisfy it that on balance you are right and that you are not taking on the onus of proving that the Revenue Commissioners acted unreasonably but are saying that, bearing in mind all the facts, you are right. That is a simpler onus for the taxpayer to discharge. I suggest that section 76, which is an omnibus anti-avoidance provision, could be substantially rewritten. It could be rewritten with a view to making it fairer, clearer and less subjective. On all those grounds at the moment, in its efforts to be comprehensive and all-embracing, it is effectively giving the Revenue Commissioners a power which we as a Legislature should never delegate to them.

Deputy Noonan asked the Minister about the retrospectivity of this legislation.He kindly said that he thought that I would have some views on the matter. I have never personally taken the view that it is outside the scope of the Legislature to enact retrospective tax legislation. Perhaps it is outside the scope of the Legislature to impose penalties or to declare things retrospectively to be offences under the Constitution but I do not think it is outside our power to say in respect of a transaction that has long past that now, in 1989, it shall attract a particular rate of taxation.

Subject to reasonableness, I never thought that was a major problem, but the retrospection conferred on this section by section 13 (b) is, in my view, very dubious. It effectively means that this anti-avoidance section shall apply to any transaction undertaken before 25 January 1989 where certain tax consequences would flow from that transaction after that date. That is all very well if you put a limit on it.

With regard to transactions in the twenties, thirties, forties or fifties are we saying that if the Revenue Commissioners, think back on what the Earl of Iveagh did with his Guinness shares in the thirties — which was the subject of litigation in the courts in those days — or if that transaction had not been entered into by him, we would now have a very different tax situation? There must be some limit. This does not apply only to people who availed of the McGrath decision in the Supreme Court in the summer of 1988; it applies to people who engaged in transactions which had nothing to do with the McGrath case in 1976, 1978, 1983, 1985 or any time. It is not confined to the McGrath case and, in my view, it is wrong to see it as closing a particular loophole. It is of general application.

There are many cases where the Revenue Commissioners in the fullness of time will see a transaction which took place five years ago characterisable as a tax avoidance transaction in that certain consequences still flow from it. Transactions which are water under the bridge as far as the taxpayers are concerned will be investigated retrospectively on a selective basis by the taxman. I do not think it is right to confer such a wide power on him.

In section 76 the Revenue Commissioners are given a procedural leg up over the taxpayer, which I think is totally unconscionable. The taxpayer cannot widen the scope of the appeal, apart from the four statutory grounds of appeal given to him. The Revenue Commissioners, on the other hand, may at any time amend, withdraw or change any matters in one of these notices that has these effects. In effect, the Revenue Commissioners can keep moving the goalposts and changing even their own opinions and the consequences which flow from them. I believe section 76 (10) is grossly unfair. The ordinary taxpayer is confined to certain grounds of appeal and he cannot widen the scope of the appeal but the Revenue Commissioners, having looked at the notices they have served, can at any time in any way vary it as suits them. Of course, there is a proviso at the end of subsection (10) where something has become final and conclusive by way of a determination by a tribunal that they cannot reverse that. However, subject to that, the Revenue Commissioners can keep shifting the goalpost and keep changing their opinion at any time whereas the taxpayer is nailed by his feet to the floor when he goes before the appellate tribunal to appeal under one of the four statutory grounds of appeal.

I believe a far better job could be done. The idea of intentionality, which gives the Revenue Commissioners the function of deciding what was the purpose of any tax break and then determining whether a transaction is an abuse or misuse of it, is unnecessary, unconstitutional and grossly unfair. The same purpose could be achieved by more simple legislation. I want to reiterate, in case I am misunderstood, that I welcome in principle the purpose of section 76, but in taking on board Canadian and other precedents, I think the Revenue Commissioners have been over-ambitious and have effectively tried to give themselves the power of provisional legislators and judicial powers to interpret legislation. The limited right of appeal conferred on the taxpayer, with limited statutory grounds of appeal and the onus of proof cast on him, is unnecessary and endangers the viability of this section as far as the Constitution and judicial acceptance is concerned.

I think the Revenue Commissioners have gone too far. They have been too greedy and they have disregarded what should have been a balanced approach by a Legislature dealing with tax avoidance.If this section were enacted in its present form, they will have left a great deal of uncertainity in terms of what the tax law at any given time means, what can be upset and what transactions can be set aside that the subjectivity is not a matter for a judge, which would be bad enough but is a matter for one of the players in the contest, the Revenue Commissioners.That is the unnecessary draconian aspect of this provision.

I will confine my remarks on the other reforms in the Bill to Committee Stage. However, I do not accept the proposition generously stated by Deputy Noonan that all the excise increases were in line with the rate of inflation. They do not look like increases of 3 per cent to me; most of them are multiples of 50 per cent and 100 per cent, and some of them need explanation. In relation to intoxicating liquor and its sale the increases seem to be aimed at letting the publican off but they hit every other form of alcohol consumption, no matter where it occurs. Special extensions at clubs were hit but the publicans seem to be getting the easiest run from the increases in excise duty.

I would like to call the Minister's attention to the remarks he made on radio and television to the effect that he cannot undo the 6p increase in the price of a gallon of petrol because of a High Court decision which curtails his power in these matters. This is the first time a Minister has accepted so quickly a High Court decision which apparently went against the Government, and which I thought might be appealed. It seems that the Minister is not bound by this 6p increase because this Bill is the occasion on which this has to be copperfastened and made into law. If the Minister does not move a particular provision in the Bill, it will lapse and will not have effect as the law stands under the 1927 Act. Although I heard the Minister say these things on the radio, I did not quite believe him.

Since the Minister now pretends to have a phased programme for tax reform, I ask him to get up on his hind legs in some assembly, be it here, somewhere else or at a press conference and tell us what lies in store for us under the phased programme of tax reform, to fix himself targets, to tell us where he sees the basic rate of income tax in three years time, how he sees it comparing with rates in Europe, and where he sees tax allowances, the process of widening the tax base mortgage relief and a number of other things ending up. If he were to state this, curiously, I do not think it would be to my political advantage but it would copperfasten the sense of confidence the Minister has referred to. If people could see that the Government had a target for tax reform — even stated as loosely as the British Tory Party did when they said they intend to bring down the basic rate of income tax — then I believe we would have a much greater sense of confidence in the future. People who are now preparing to emigrate — and they speak of it constantly on the radio — because of the crippling rate of taxation might reconsider if this Government aimed to have our tax rate roughly the same as that in England and think it worthwhile to stay in this country. The Minister would create a sense of hope if he would spell out his phased programme of tax reform. The present system of simply making nibbling changes here and there is not an adequate substitute.

Many of the provisions of the Bill require closer scrutiny. I will put down amendments, not for the purpose of just making noises or simply to give me an excuse to exercise my right to speak. I would particularly appreciate if the Minister, in relation to local authority tenants on fixed mortgage rates — of whom there are many and for whom the reduction in mortgage rates has given no relief whatsoever because they are tied to fixed interest mortgages — would provide some relief for them as it would be a just change in the mortgage interest relief position. This could be easily done by providing for a certain class of mortgages, to be determined by regulation of the Minister, and that the 80 per cent rate would not come into effect.

It is very easy to cite reduced mortgage interest rates as the reason for reducing the mortgage relief from 90 per cent to 80 per cent of qualifying interest, but people on a fixed interest rate must regard such a justification for cutting back on their tax break — which is quite small at the moment — in a somewhat jaundiced light. I ask the Minister to at least examine the possibility of giving them some relief instead of doing what Deputy Noonan suggested, providing some kind of inbuilt accelerator clause when interest rates go up. Justice could be achieved by doing the former.

I look forward to participating on Committee Stage. The Progressive Democrats will not oppose Second Stage of the Bill.

I listened with interest last Sunday to the Minister for Finance giving the general economic background to the Finance Bill. He stated in the RTE interview that the cornerstone — to use his own phrase — of the Government's economic policy was the control of inflation and a dependency on low interest rates. I see considerable merit in a strategy of that nature, but it is indeed a strategy with a high risk content.

When the Minister said that imports of consumer goods are also strong in relation to a recovery in private consumption, I thought of the degree of imported inflation which this country suffered in 1984, 1985 and in part of 1986. When one recalls, as the Minister rightly stated last Sunday, that UK interest rates have risen no less than 11 times in the past 12 months there are ominous portents for us in that regard. This matter should be urgently addressed by Opposition spokespersons as well as the Minister for Finance.

There is a need to control inflationary trends at domestic level and I am not at all certain that there is a grip and a sense of sectoral urgency in relation to this matter in the handling of the economy. For example, I would have thought that the spiralling of private house prices in certain areas of the greater Dublin market would by now have been given a vicious kick in the groin by the Minister for Finance because they have an impact on the creation of inflationary expectations and an inflationary climate. The subject has not been addressed in the Bill and there is a great need for the Minister to get to grips with that situation.

It might well be intensely unpopular among certain sectors as we are now subsidising the private sector by about £155 million per year in mortgage interest relief. However, it might temper some of those who are contemplating taking out mortgages of £70,000 and £80,000, merrily trading up and driving up inflationary pressures in the market. These pressures could spread through the market and become a very serious impediment to our endeavours to retain a low level of inflation in our economy.

The Minister also said last Sunday that the price of drink had had an effect on inflationary trends. In the first quarter of 1989 it had an effect of 0.3 per cent on the consumer price index. Again there is a strong case to be made for a rigorous and tough attitude in relation to the price of drink because tourists are generally shocked by the price they pay for alcoholic drink — and even more shocked by the price of non-alcoholic drink — in this country. The Government should exert greater control in that area.

If we continue the rate of growth of imports of consumer goods we will, in the next 12 months, have a substantial input of imported inflation in our economy.The recent sham war between the Minister, Deputy Burke, and the oil companies is a classic example of the extent to which inflation can be imported as we face a very substantial increase in the price of petroleum products. There is a need for the Government to address themselves urgently to the inflationary drive in the economy. I very much doubt if there has been Government or internal Cabinet discussion on the matter except in regard to the question of public service pay to which I will refer in a moment.

The Department of Finance are worried and when they get worried their classic, Pavlovian response is to embark on another cutting exercise. I wish the Minister well on his first budget to this Dáil but I am afraid he may fall into the trap of spending from April to October driving himself quietly round the bend as memorandum after memorandum is flashed before him from the public expenditure division of the Department of Finance while they go on another campaign of cuts. When that campaign is over they will start the next campaign of cuts. In his speech the Minister said that the Government are already considering how best to achieve necessary further savings in expenditure in 1990 so as to make room for new investment within an overall improving budgetary trend. He went on to say that the increases in social welfare and personal taxation will add £160 million to the opening position for next year. That has an all too familiar smell about it.

We have to point out that the extent to which such major reductions in the current account can take place is extremely limited and was extremely limited in the budgets of 1988 and 1989. The rather raudous condemnation the Minister received from the chairman of the Southern Health Board, which I presume we all listened to with great interest, is an indication that the Fianna Fáil Party at local level are not immune from the effects of the cuts in the health service.

There is virtually no room for manoeuvre left in any of the major segments of public expenditure, be it in health or education. For example, we are going to witness the termination of the school transport scheme because of the deliberate underfunding of that scheme to the tune of £7 million this year. Certainly by the end of June the word will be out in no uncertain terms. I do not see any leeway for the Minister to go down the road of a further cutting exercise to the tune of £100 million or £150 million in 1989. It is a move we shall certainly oppose. In relation to public service numbers and the staffing of essential social services, there is no leeway left unless the Minister suddenly announces that he is going to provide another £100 million to pay for another round of public service voluntary redundancies, repeating the exercise of 1987 and 1988. It is highly unlikely he will do so. Indeed, it would be highly undesirable.

I now turn to the fresh statement the Minister has made in relation to the public service pay bill. In this year's budget the Minister provided £30 million to cover special pay increases. I pointed out at that time that this was an under provision, on my estimation, of around £29.5 million. I made this estimation taking into account the amount to fall due for payment under the current pay agreement under the Programme for National Recovery. It now transpires that my foreboding at that time was quite correct. The Minister provided £70 million to cover the general increase under the public service pay agreement, £12.5 million for the Defence Forces, £28 million to cover the payment of increments — I accept that that is the normal value of increment these days — and £15 million to cover the payment of increases carried over from the 1986 pay agreement.In addition to these substantial amounts the Minister said he was providing £30 million to cover special pay increases.

Inflation is now running at a rate of between 3 per cent and 3.5 per cent. It is likely to hit 3.5 per cent by mid year. The Minister estimated in the budget that the rate would be 2.75 per cent. In that context I am very taken aback that the Minister is now in effect saying to public servants that the already deferred payments under the public service pay agreement of the Programme for National Recovery are going to be rolled over into 1991. I understand that that proposal is that certain grades will receive their payments and that those on the higher levels will have their increases deferred and rolled over into 1991. Bearing in mind that the special increases were clearly outlined in a very specific section in the Programme for National Recovery I would be taken aback if there were to be another approach to the public service unions for a further deferment. I think this issue should have been faced up to in the budget.

The Government made some strange decisions at that time, largely because the new Minister, Deputy Reynolds, in fairness, had very little time to work himself into this new portfolio. For this reason the figure of £30 million was just knocked off and there was a very deliberate under provision to cover special pay increases to fall due for payment under the Programme for National Recovery. Given that the Government have been bragging, to say the least, about the extraordinary buoyancy in budget revenue over the first quarter of 1989, I am opposed to their turning round to the public servants and saying that the special pay increases to some grades which they were assured they would receive as and from July 1989 would be deferred until 1991 and they can like it or lump it. I do not think that this is acceptable. Between embargoes and deferments in promotions the public service has just about taken enough and if this strategy is enforced by the Government it will only result in demoralisation within the service. Unless remuneration, particularly from middle management upwards, within the public service is maintained at reasonable levels — there are no fancy salaries as we well know within the public service — we will see a decline in morale and a reluctance to take difficult decisions as well as a decline in the quality and content of the public service. Therefore I wish to express my serious concern at the Minister's statement made here today in relation to public service pay.

I now want to deal with the main income tax provisions of the Bill. Like Deputy McDowell, I also criticised the lack of reform. My colleague of the other Opposition party, Deputy Noonan, has been equally critical. I do not know how in God's name we are going to bring about a fundamental, radical reform of the taxation system, because we are now, after three budgets of this minority Government — in a sense that has not been a bad thing because they have been periodically hit over the head and obliged to behave themselves in terms of their approach to budget matters — finishing with another troika of income tax rates. We still have our 32 per cent standard rate; we still have a 48 per cent rate and we have a 56 per cent rate. I would have thought that by now the imperative need for simplification of our taxation system would be evident. Why not have two rates at maximum? What is wrong with two rates of income tax? This would provide enormous public understanding of what taxation is about. It would avoid public representatives being driven quietly out of their minds as they endeavour to explain to their constituents that the standard rate is 32 per cent up to X income, which is variable, per annum, that the next rate is 48 per cent variable on an annual 5 April basis, and that we have a new rate of 56 per cent, again variable. There is a great need for that system to be changed.

We look back at the Commission on Taxation reports as almost historical, archival documents at this stage, back into the seventies. There is a great need to introduce the simplified tax credit system into our system of income taxation.Then there is the imperative need to bring in a system of property taxation. After three budgets in this Dáil the Government are caught up in frozen immobility in terms of taxation reform. Despite the voluminous documentation available within the Department of Finance and equally substantial documentation available from the Department of the Environment, there is a determined reluctance on the part of the Government to grasp that nettle, a total reluctance, so much so that I think the only time the Cabinet got excited was when a few members of the Cabinet discovered they had property in excess of £68,000 value and then thought they might have a liability themselves and they worked themselves into a quiet frenzy——

The Deputy is not up to date. We had those liabilities long ago.

I am afraid myself because usually when I go in that direction I get myself into terrible trouble in this House. Even if the Minister becomes Taoiseach in due course, I wish him well in the interim ——

Up LongfordWestmeath.

—— but he should attempt some definite reform of the taxation system. In a subheading that the Department of Finance had the nerve to put in his script, there was reference today to "tax reform". All we have got is a reduction in the top rate of 56 per cent. That is no big cheese.

It is a phased programme.

Even here the Department of Finance suddenly got a blush of modesty and called it the phased programme.I quote: "The phased programme for tax reform has been pursued by the Government without compromising the overall reduction in Exchequer borrowing".

I think it is a fazed Minister rather than a phased reduction.

With due respect to the Minister, I think there is a great urgency for him to come into the Cabinet and say, "Look, we have two taxation rates, we are going to do something about property in relation to the taxation system, we are going to be quite serious about broadening the tax net and we will on that basis get enormous political support." There is scope for enormous political support in that regard. On that basis the Government should and must review their main tax system and should spend some time at it. I was appalled at the taxation bags the Government made of child benefit and the taxation relativity thereof.

So much for reform.

How different was it from the Deputy's own?

It was a glorious, classic example——

You would want to test the water. If you want reform that is not the way to do it. This is kite flying.

The kite never even took off. It got entangled in all sorts of Cabinet words on the way up.

You took off the kite yourself.

If the Government are going to show any seriousness about taxation reform they must spend some time at it and come up with coherent proposals and not get bogged down in the farce — it was a farce — of a proposal which came up on child benefit, with some Ministers saying, "We will get those over £35,000 a year" and then we are not sure whether that was family income or individual income and another Minister said that never happened, we never talked about that and then the Taoiseach turned around and said, "My God, what are they all up to now? Sure, we are not going to do it at all". In the end it brings political tax reform into disrepute.

What did the Deputy think of it? He never told us.

Will the Minister make up her mind about what to do?

I am asking the Minister and the Government to bring forward real and measurable changes in the overall situation.

I come to an equally serious matter which I hope will not deteriorate into the same shambles as other taxation measures, namely VAT harmonisation on the indirect taxation proposals side. I am glad the Minister confirmed yesterday at Luxembourg that the earlier set of proposals put forward by the Commission will be revised. As he knows well, the general report put before the European Parliament no longer favours a bludgeoning, exclusive, all embracing abolition of the zero VAT rate. Commissioner Schrivener, to whom I listened last week, is, I gather, bringing forward some revised excise proposals with the Commission. These are of great importance. We should take the question of VAT harmonisation at domestic level and we should take it out of the political lobster pot, boiling pot or whatever mess it tends to get into on an inter-party basis. I am sure my colleagues Deputy Noonan and Deputy McDowell will agree with me when I suggest there is a need for a consensus.This is the only time in the lifetime of this Dáil that I have used the word, a very dangerous word as we all know, but there is need at domestic level for a serious consensus on an all-party basis on the harmonisation of our indirect taxation system within the Republic. I do not think it is going to happen if the Minister comes in here in budget 1990, throws in a few fliers and talks about a loss of 552 billion ECUS if we adopt the old proposals of the Commission but saying that now we are going to adopt the new, revised proposals of the Commission the net Exchequer loss will be about 320 billion ECUS and that he is making proposals X, Y or Z and we all troop in one direction or another on budget night.

(Limerick East): We will fly away from Strasbourg on the night.

I very clearly suggest to the Minister——

(Limerick East): The Deputy is looking like a winner to me.

I suggest that Deputy Desmond might adjourn the debate.

Debate adjourned.
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