Deputy Noonan dwelt on the harmonisation of VAT and excise duties, particularly as they relate to the transport and tourism sectors. The Deputy should be aware that VAT is a recoverable expense for most businesses, so the effect of VAT rates is of a cash flow nature only. Excise duty on articulated trucks, to which he specifically referred, is as low as 6.5 per cent. In regard to tourism services I am glad to say that our rates compare very favourably with those of our European partners. Hotel accommodation, meals, car, boat and caravan hire and tour guide services all benefit from our low 10 per cent rate and I know from my own dealings with tourism interests that they fully appreciate this favourable VAT treatment.
I accept that trade distortions have arisen on either side of the Border, and that these have been due in part to differentials in taxation. What the Government have been doing on the taxation front is well known to all — since 1987 increases in indirect taxes have been kept to a bare minimum. This, as well as the 48-hour rule, have improved the position greatly. Deputies will have read in recent days of the survey taken on the price differential that now exists between North and South and will have seen that the gap has narrowed right down, as a result of the progress we have made over the last two years.
The excise licence increases proposed in the Bill with one or two exceptions, are generally in line with inflation, calculated by reference to the last increase some years ago, with a small degree of rounding up to avoid awkward fee levels. As I have already said, this opportunity is being availed of to create a petrol dealers' licence as an aid to combating the smuggling of petrol from Northern Ireland. There is already in existence a hydrocarbon dealers' licence which covers auto-diesel.
In relation to Deputy Noonan's comments on the provisions in the Bill which increase the livestock rate of VAT and the farmers' flat rate refund I would refer the Deputy back to the Taoiseach's statement on this matter on budget night when he explained that, as the farming sector still owe a certain amount of health contributions and levies, the move towards restoration of flat rate refund should only be partial. Nevertheless, this year's adjustment is significant in that it involves a transfer of £12 million to farmers in 1989 and £17 million in a full year.
Deputy Noonan asked whether the proposed limit of £2.5 million on the amount a company or companies can raise under the business expansion scheme was an annual or a once-off limit. The limit is in fact a once-off limit — no company will be able to raise more than £2.5 million under the scheme. This figure will take account of amounts raised before the date of publication of the Bill: in other words, where a company has already raised BES funding and is proposing to raise more, it will only be able to raise under the scheme the difference between what it has raised and the £2.5 million limit. The Deputy also asked about the justification for removing leasing from the coverage of the scheme. The reason for this exclusion is the fact that the benefit of a substantial proportion of the tax forgone on investment in equity in such companies would flow abroad. In other words, the benefit of our tax foregone would flow elsewhere.
Deputy Noonan had a number of queries about the restrictions in section 19 regarding section 84 loans. First, he asked about the cost involved to the Exchequer. The cost to the Exchequer of domestic-sourced section 84 loans has greatly increased in recent years. According to the Revenue Commissioners, the estimated net cost has increased from about £58 million for 1986 to about £80 million for 1988. This increase in cost is due to two factors, namely, the increase in the volume of these loans and the increasing use of loans in high-interest rate currencies. The total amount of domestic-sourced section 84 loans as of last February was almost £1,300 million, an increase of about 65 per cent over the corresponding figure for February 1986. Also, the high-interest rate type of loan in currencies such as the Greek drachma and the Australian dollar has become much more common in the last two years. These loans are much more expensive to the Exchequer than the normal Irish pound section 84 loans because the bank involved borrows the funds at interest rates of between 14 and 23 per cent as against about 8.25 per cent for an Irish pound loan. This results in the bank receiving a considerably higher amount of tax-free section 84 interest as well as having much higher funding costs for offsetting against the taxable income from other lending.
Secondly, Deputy Noonan referred to the effect of the proposals on Shannon companies. Manufacturing companies in the Shannon Airport zone will still be allowed to borrow domestic-sourced section 84 loans. Non-manufacturing companies in the zone, who in fact borrow the bulk of the high-interest rate loans I have spoken about, will not be able to borrow new domestic-sourced section 84 loans from 12 April. They will, however, have until 31 December 1991 to phase out their existing loans, which is a very generous phasing out period. In addition, they will still be able to borrow foreign-sourced section 84 loans, of which they already make considerable use. The leading leasing company in Shannon are reported in the press to have indicated that the changes will not impinge on their business. The effects on two of the other main leasing companies have been described as minimal and not serious respectively. The changes in section 19 will put such Shannon financial companies in the same position as companies in the International Financial Services Centre which are already debarred from borrowing domestic-sourced section 84 loans.
Thirdly, the Deputy asked about the implications of the changes for the IDA and SFADCo incentive packages. The key taxation element in these packages is the special 10 per cent rate for manufacturing and Shannon services companies and this, of course, is unaffected. In addition, manufacturing companies will still be allowed to borrow domestic and foreign-sourced section 84 loans for manufacturing. All licensed services companies in the Shannon Airport zone were specifically exempted from the reduction in the 1988 Finance Act — in the first year 100 per cent capital allowances in plant, machinery and industrial buildings, and this relief is particularly valuable to the leasing companies located there. Finally, as well as tax reliefs, the IDA and SFADCo packages also contain important grant and other non-tax elements.
I would like now to turn to the points Deputy Yates made last night about the disabled drivers' scheme, and about my reply to a parliamentary question about a particular case tabled yesterday by Deputy Yates. I said in my reply to the Deputy, and I quote:
I am having the legislation looked at again and will be in touch with Opposition spokesmen with a view to including a possible amendment in the Finance Bill at present before the Dáil. The question of a refund of excise duty in the case in question will be sympathetically reviewed in the context of any resulting amendment to the disabled drivers' scheme.
As the foregoing reply demonstrates, I am most anxious to reach an amicable solution to this issue. There is no question of the Government or I wishing to prevent change in unsatisfactory aspects of this scheme. This is proven by the fact that it was my predecessor who last year initiated a move to have the existing taxbased scheme replaced by a new expenditure-based scheme. In the event agreement to this move was not forthcoming.
In any change in a scheme of this kind, it will be necessary to ensure that those who in medical terms require this assistance are properly targeted while avoiding the possibility of abuse. To this end, and in proof of my good faith in this matter, I have already undertaken to arrange discussions with Opposition spokesmen on possible changes to the existing disabled drivers' scheme and have invited suggestions as to how our objectives can best be achieved. My aim will be to arrive at an agreed change to the terms of the existing scheme which will make it more humane and effective.
I welcome the support in principle expressed from all sides for a general anti-avoidance provision. It is quite clear that, with the ever-increasing sophistication and complexity of schemes to avoid payment of tax, something has to be done to retrieve the balance in favour of the general body of taxpayers. This is the motivation behind the provision in section 76 of the Bill.
A number of Deputies — notably Deputy McDowell, Deputy Noonan and Deputy O'Malley — raised specific points and worries which they have about the section as drafted. I will be happy to discuss the issues raised when we go into detail on the Committee Stage. At this juncture I would just like to underline again some of the procedures and safeguards which are built into the section.
The Revenue Commissioners will be required to act in a reasonable way. They cannot move to disallow a tax benefit under the provision until they have given the person concerned adequate time to challenge, through an appeal, the Revenue opinion that a transaction is aimed primarily at tax avoidance.
In hearing an appeal the Appeal Commissioners or the Circuit Court, as the case may be, will be able to look at all the facts relevant to the case, including the form and substance of the transaction and its final outcome and any information not previously made available to Revenue, to see if, on all the facts, the Revenue Commissioners' opinion is correct. Only when this process is concluded, and provided the outcome of the appeal is in their favour, can the Revenue Commissioners take action to follow through on the opinion they had formed.
As I mentioned in my opening address there are other specific safeguards built into the section for genuine business transactions and the taking up of recognised tax reliefs. These safeguards would explicitly limit any use of the section by Revenue to interfere with bonafide transactions and would represent a very definite direction from the Oireachtas to the Revenue Commissioners in this regard. The discretion given to the Revenue in this area would extend only to action against tax avoidance based on an abuse of relief provisions. This degree of discretion is necessary if the whole purpose of the general anti-avoidance section is not to be nullified.
As regards, the effective date of operation of the section, I would stress that there is no question of going back to reopen tax settled many years ago, as some Deputies have suggested. Our concern is just to ensure that tax avoidance schemes entered into before budget day will not affect the Exchequer for many years to come. This whole section is an important one and I look forward to returning to it and discussing its scope in detail on Committee Stage.
Some Deputies expressed concern about the introduction of the annual accounting option for small-scale employers and traders. Deputy Noonan was worried about the cash flow effect on traders and Deputy Mac Giolla was concerned about possible abuse by employers.
I would like to stress that only very small-scale traders and employers will be involved in this scheme and the amount of revenue involved is only a minute fraction of the overall yield from the taxes in question. In relation to the concerns expressed by the Deputies, I would emphasise again that the scheme is optional and traders can still opt for periodic payments if they wish to preserve their existing cash flow arrangements. Deputies can also rest assured that the Collector-General will closely monitor the scheme to guard against any abuses. In my view Deputies should focus on the positive elements of the scheme, namely, that it will reduce the administrative burden on certain small-scale traders and employers and will release more resources in Revenue to pursue evasion, default and better collection.