Finance Bill, 1989: Committee Stage (Resumed).

Question proposed: "That section 9 stand part of the Bill."

(Limerick East): This section deals with stock relief provisions for farmers, whereby an individual farmer or farming company is entitled to a deduction of 110 per cent of the increase in stock levels. That has been extended for individual farmers up to 1991 for farming companies for the accounting period ending on 5 April 1990. It is a two year extension rather than the normal one year which occurred in the past. Is it simply the intention to extend it for two years rather than one?

Yes, the period will be two years,

(Limerick East): In regard to the ten year period where stock levels fall, does the position remain for this accounting period? Does it come in for the next accounting period? What dates are involved?

What is the Deputy's question?

(Limerick East): At present there is a ten year period in which stock relief granted may be clawed back. Does the position remain the same for the accounting period ending 6 April 1989 and will the change take place for the next accounting period?

It increases after 6 April 1989.

(Limerick East): The ten years is being moved back to seven years. From what date will that become effective?

Only for increases incurred after this year.

(Limerick East): I have no difficulty with this section.

Question put and agreed to.
SECTION 10.
Question proposed: "That section 10 stand part of the Bill."

This section deals with the taxation treatment of motor cars. I welcome the increase in the limit to £7,000, which is sensible, and I do not want anything I say to be taken as critical of an upward movement in that limit. However, I notice that it applies to cars provided after 25 January 1989 other than cars which were contracted for before that date but supplied within 12 months of that date. If that is true in relation to capital allowances, is it really workable? It is putting it up to a lot of businessmen and companies to be very honest in their affairs since they can retrospectively say when they agreed or they can break one contract and substitute another. They could say they wanted a blue Ford instead of a pink Ford, or whatever, and get around the Act. Should that provision be left there? It is a bit daft really and only the most lily white businessmen will not be tempted to get around it some way.

The figure of £7,000 means that effectively a new car of whatever kind — except the most modest — will be allowable for running expenses and capital purposes only, at a modest guess 70 per cent, of its value of £10,000. That is a very artificial basis on which to cut off tax relief in respect of motoring expenses. I have some personal experience of this because I know what it is like to have been stuck with a £3,000 limit and the kind of things that occur in those circumstances, where people tend to buy big old "bangers", which nobody else can afford, to get around the limits provided. I ask the Minister to indicate that although this is the second year in succession that that amount has been raised, it is his policy to continue raising that limit until such time as it gets to a reasonable limit. In that context I ask the Minister to take a jaundiced view of the advice he receives in Merrion Street. The reason I suggest that is that there seems to be a notion in the Department of Finance that a car is a luxury. This stems from a thirties view of the world when a car was a luxury. Cars are treated for tax purposes in every way as if they were a slightly morally doubtful commodity. The time has come to admit that in terms of their significance for the economy cars are no more damaging than, say, white goods in the form of fridges, freezers and washing machines. In fact, they create far more employment than the white goods. It is time they were taxed on a basis which reflects the reality of the motoring industry which is an employing industry. Cars should not be taxed as some kind of luxury, which ought to be kept to a minimum as far as consumption is concerned, in the interests of the balance of trade and all the rest of it.

I should like to ask the Minister to indicate that the benefit-in-kind provisions in relation to the taxation of cars will be reviewed. The Society of the Irish Motor Industry made their case very forcibly in years gone by and on this occasion have been less clamorous in relation to the Bill because they have seen progress on the £7,000 limit. However, it seems to me that the historic basis for valuing cars for benefit-in-kind is wrong and it should be substituted by some kind of replacement value assessment or a system based on the capacity of the car. I should like to ask the Minister to indicate ministerial thinking in relation to these issues because the motor industry is a potential employment growth area. Our fiscal policies in relation to cars which singles them out as a luxury that must be oppressed by the tax system has singled out one of the most likely to yield employment areas of imported goods. It is wrong in principle to maintain that policy of fiscal winter as far as the motor industry is concerned.

This capital allowance was introduced in 1973 and lay dormant until 1976 when the first adjustment was made. It lay dormant for ten years after that and in 1986 the allowance was increased. I accept what the Deputy has said, that it is out of line in real terms when one looks at the cost of cars and so on. The allowance was improved last year and improved again this year. I had pre-budget meetings with representatives of the motor industry and they recognised that I have to move along pretty slowly, that I do not have all the money in the world to do all the things people ask me to do. If one were to contemplate increasing it to £10,000 one would be talking about an additional figure of £13.4 million. The taxation of cars for business purposes is complex involving a number of interlocking tax arrangements for things like the level of the capital allowances, the extent to which business motoring expenses are tax deductible and the way the benefit-in-kind can be used. Certainly, it was left too long without being updated. We have moved on this in the last two years and we will certainly review it again for the 1990 budget. However, I am not prepared to go any further than that at this stage. To my knowledge the motor industry accept the position I am in and are happy that I am progressing in the right direction. The motor industry will have a very good year in 1989. I should like to tell the Deputy that the provision has been framed in the normal way such provisions have been handled over the years. We have not encountered any difficulties with them. I take note of the points raised.

(Limerick East): I welcome the section but I should like the Minister to give a further explanation of subsection (2). I take it that that applies to all cars, irrespective of when they were acquired? I take it that the running expenses incurred after 25 January will be calculated by reference to a maximum of £7,000. Subsection (1) deals with the capital cost of purchase while subsection (2) deals with the running expenses. What would be the capital allowance if the 1973 based figure of £2,500 was fully indexed? Alternatively, what would the capital allowance be if the 1976 figure of £3,500 was fully indexed?

The answer to the first part of the Deputy's question is "yes". I do not have the figures sought by the Deputy but I will obtain them for him. I would say that they would be pretty substantial at this stage. There were years of heavy inflation in between.

(Limerick East): Would they be more than the price of a car?

They could well be.

Question put and agreed to.
SECTION 11.
Question proposed: "That section 11 stand part of the Bill."

(Limerick East): I do not have any problems with sections 11, 12, 13 and 14 but, for the benefit of the people outside the House who will be looking at this debate, I should like the Minister to put more information about them on the record.

Section 11 amends section 251 of the Income Tax Act, 1967, to provide that, where an initial allowance is made in respect of expenditure incurred on or after 1 April 1989, in respect of machinery or plant, annual wear and tear allowance cannot be made in respect of that expenditure for the same chargeable period.

Section 251 of the Income Tax Act, 1967, provides for an initial allowance in respect of capital expenditure incurred on the provision of new machinery or plant, excluding road vehicles, for the proposes of a trade. The allowance is given for the chargeable period, a year of assessment in the case of a person liable to income tax and an accounting period in the case of a company liable to corporation tax, in which the expenditure was incurred.

Section 251 was amended last year to provide (a) for an allowance at the rate of 75 per cent in respect of expenditure on machinery or plant incurred in the year 1 April 1988 to 31 March 1989 and at a rate of 50 per cent in the period from 1 April 1989 to 31 March 1991, and (b) where the initial allowance was claimed a claim to accelerated wear and tear allowance was prohibited on the same machinery or plant. This provision was necessary to prevent the balance of the expenditure from being relieved under the free depreciation provisions and thereby circumventing the aim of the reductions. Free depreciation is given by increasing the annual wear and tear allowance under section 241 of the Income Tax Act, 1967, to a level specified by the taxpayer, subject to the rates in (a) above, under the provisions of either section 11 of the Finance Act, 1967, undeveloped areas, or section 26 of the Finance Act, 1971, the rest of the country.

However, it is still possible to escape the intended upper limitations on allowances by combining the initial allowance and annual wear and tear allowance, which varies from 10 to 25 per cent depending on equipment, in the one year.

This section corrects the position therefore by rewriting subsection (7) of section 251 of the Income Tax Act, 1967, which was enacted last year to provide for (b) above. The new subsection (7) provides that, in relation to capital expenditure incurred on machinery or plant on or after 1 April 1989, where an initial allowance is made for a chargeable period in respect of the expenditure, (a) no annual wear and tear allowance may be made in respect of that expenditure for the same chargeable period and (b) any annual wear and tear allowance due in respect of the machinery or plant for any subsequent chargeable period may not be accelerated, i.e. free depreciation may not be claimed for that chargeable period.

(Limerick East): The position, therefore, is that if somebody avails of the 50 per cent accelerated depreciation they cannot in the same year avail of a wear and tear allowance.

That is correct.

(Limerick East): They can write off the full 100 per cent subsequently over the normal life of the plant or machinery?

That is correct.

Question put and agreed to.
SECTION 12.
Question proposed: "That section 12 stand part of the Bill."

(Limerick East): Does the same apply to industrial buildings?

Precisely.

Question put and agreed to.
SECTION 13.
Question proposed: "That section 13 stand part of the Bill."

(Limerick East): Will the Minister clarify what difficulties existed with the interpretation of section 22 of the Finance Act, 1974, which caused him to introduce this amendment.

This section clarifies the extent to which allowances in respect of capital expenditure on farm buildings may be taken in the form of accelerated allowances. Following the enactment of last year's provisions, in which farmers were put on the same footing as other taxpayers, it has been suggested that the expenditure could be written off in two years by accelerating the annual farm buildings allowance to 50 per cent in each year. This was never the intention. The section, accordingly, provides that, in respect of expenditure incurred on or after 1 April 1989, only one measure of accelerated allowance, whether taken in one year or over a number of years, may be granted. The balance of expenditure may be written off at the normal annual rate for farmers of 10 per cent on a straight line basis.

Did the Minister say that the balance could be written off up to 10 per cent?

The balance will be written off over a number of years on a 10 per cent straight line basis.

Will the 50 per cent be on top of the 100 per cent? Can you get 150 per cent?

(Limerick East): The cost of a farm building can be written off over six years.

Precisely.

Question put and agreed to.
SECTION 14.
Question proposed: "That section 14 stand part of the Bill."

This section amends section 25 of the Finance Act, 1978, to prohibit a claim for industrial building initial allowance under Chapter II of Part XV of the Income Tax Act, 1967, in respect of a building where an accelerated writing down allowance has been granted in respect of the building under section 25.

Question put and agreed to.
SECTION 15.
Question proposed: "That section 15 stand part of the Bill."

(Limerick East): This is the section where relief is increased from 50 per cent to 100 per cent in respect of agreements entered into after 6 April 1987 for the construction of toll roads. I should like the Minister to, first, put the case as to why a 100 per cent write-off should be provided for toll roads but effectively for nothing else. I should also like him to expand somewhat and throw some light on how he sees the private sector providing matching funds for the funds which are expected from Europe and, which I understand, under the roads programme, will be sanctioned very shortly. Does the Minister envisage that all the matching private funds will be provided by way of a tolling system or does he have some alternative view on how the private sector will put up matching funds for the construction of roads?

The relief for toll-road expenditure, which is in existence since 1981, has not been availed of to date. The only toll-road in operation in the State, the east-link bridge in Dublin, was financed without recourse to section 26. Following lengthy negotiations with Roadstone in the context of the planned Lucan Road-Navan Road toll-road project, the then Minister for Finance agreed in January 1985 that section 26 of the Finance Act, 1981, would be amended to extend the allowance to pre-trading interest and to allow capital expenditure on a toll road to be written off in full on the basis of a 50 per cent allowance in the year in which trading commenced and 10 per cent in each of the succeeding five years. The promised extension of section 26 was conditional on full financing of the project by the development company without guarantee or other forms of comfort from any public authority including a local authority.

The agreed amendments were to be made when the toll project went ahead. The assurances given by the Minister were repeated in April 1987. An agreement under section 9 of the Local Government (Toll Roads) Act, 1979, for the provision of the Lucan Road-Navan Road toll scheme was concluded between Dublin County Council and West-Link Toll Bridge Limited in October 1987. The toll road, now known as the west-link project, is expected to be completed by mid-1990 and the amendments to section 26 are being put in place on foot of the assurances given.

As West-Link Limited began to incur expenditure on the project in 1987, the amended section 26 is being made effective in respect of "relevant agreements", that is, agreements for the provision of toll roads, entered into on or after 6 April 1987. The cost of the increased relief in the future will depend on the extent to which use is made of it.

In relation to the general principle of toll roads our national road network is just as important for future development as any infrastructure of industrial buildings. As in the case of a factory, hotel or other building for which an incentive is given there is a need for the private sector to become involved in road building as well. The purpose of section 26 of the Finance Act was to encourage such involvement. The section in its previous form was not successful in achieving that objective. Drawing on the experience of negotiations in relation to an existing project the relief is being reconstructed to provide what is hoped will be a more effective incentive. It should be borne in mind that the relief applies only to expenditure which has actually been incurred and for which there is no other tax relief.

I might also mention in relation to toll roads and the question of Structural Funds in future under the National Development Plan that every project will be assessed in Brussels on its own merits. There could be a situation where the return on investment would only meet the investment which has been made but in other situations there might well be a profit involved. If Brussels is to aid a project in that situation they will look at and discount down whatever aid they give in relation to whatever profit has been made after allowing for a normal return on investment.

(Limerick East): This provision has not triggered any major investment up to now and I agree with the Minister that it should be amended along the lines he is proposing, especially in circumstances where commitments have been given to a particular company who are constructing a road on which the intention is to toll. Does the write-off follow the pattern set in the previous four sections which the Minister has explained to us? Will it be 50 per cent in the first period and 10 per cent in the subsequent five year chargeable period?

It will be the very same.

(Limerick East): Will it apply only on income arising from the toll road or will it apply on income arising from other projects?

It will arise only on toll roads.

(Limerick East): With regard to the specific project the Minister mentioned he said that a lot of the expenditure had been incurred already. Does this also include, say, interest on borrowed money on the project, subsequent repair and maintenance over a six year period, or does all the expenditure have to have occurred prior to the date of the tolling and the subsequent income flow?

It covers any interest incurred and ongoing maintenance of the toll road.

(Limerick East): Would it also include the running expenses involved in the collection of tolls, for example, the wages of the staff at the toll gates, the wages of maintenance men who paint signs on roads and who carry out repairs and that general area of activity, including the provision of a vehicle for removing broken down cars, etc?

The relief goes against the profit and in computing the profit those items would already be included in the accounts.

(Limerick East): I want to return to the second part of the question. It seems that the potential for tolling roads in this country is limited enough for reasons which we need not go into. Does the Minister intend putting the National Roads Authority on a statutory basis and giving them the right to toll? It seems to be very difficult to enter into commitments now when the tolling agent is effectively the local authority and where in regard to a long stretch of road a number of local authorities could be involved, sometimes competing local authorities. I remember that the intention was to toll the Naas by-pass but Kildare County Council subsequently refused to toll it, and they are the people who have the authority to toll. This is a reserved function in local authorities so it is a question for the members rather than the management. If the Minister agrees with the general view I have, that the opportunities for tolling are limited, could he, for the benefit of the House, indicate what other mechanism he sees which would enable the private sector to get involved profitably in the construction of roads and bridges other than by way of tolling? If the Minister relies on tolling alone the figure he has included in the National Development Plan will not be put on the table.

The figure in the National Development Plan is based on the public sector funding——

(Limerick East): The private sector element.

There is a private sector element involved as well. When the national roads authority are set up on a statutory basis it is intended that they will be empowered to operate tolls on national roads and enter into agreements with private sector interest whereby these interests would be remunerated from tolls on roads in return for their financial contribution towards the construction of the roads. I will not go into greater detail in this area or say what the national roads authority may or may not do, because they will be the statutory body charged with the responsibility. I think the Deputy will agree that it is the appropriate way to do it. We would never make any progress if we were to rely on individual local authorities to do the job.

I question whether the intent of this section will constitute a large incentive. If the Minister really was interested in getting people to invest in toll roads why does he restrict the allowance to be set off only against income arising by virtue of the toll agreement in question? In that context — unless I am wrong — I have this vision that people lay out a huge amount of capital to build a toll road and that there is no way in which, over any given taxable period, they avail of this 100 per cent write off against income because they will not get 50 per cent back in any given year. What is the importance of increasing the 50 per cent to 100 per cent if it is restricted to the flow of income from the project in question? I find myself slightly at a loss to understand why that would be of relevance. Had I spent £100 million on a road I cannot imagine why — if I am restricted in setting off my expenditure against income arising from that road project — how I could possibly get more than £50 million in any given accounting period.

When I read through the explanatory memorandum I asked myself, what could that possibly mean? Who is being inhibited by the restriction to 50 per cent? What likely toll road owner will get more than 50 per cent in any accounting period within which to write off the allowance?

The toll roads incentive represents a significant improvement on the previous 50 per cent relief which, as Deputy Noonan has said, was not taken up. There appears to be a mistaken impression around that the former relief could be offset against other income generally. That was not the case as income from toll projects only was subject to relief.

The provisions of section 15 allow relevant expenditure to be set off against income arising from an individual toll project. The ring fencing of the relief is appropriate in the context of doubling its amount. The amount of the relief is being doubled and it can be carried forward. Given that the income arising from toll projects will be considerable — for example the East-West Link bridge is expected to be heavily used when completed — the relevant expenditure will be absorbed over a reasonable number of years. The relief can be carried forward and set off over a reasonable number of years. Obviously, if it was not attractive it would not be taken up.

I can appreciate the Minister saying that they were not attractive for whatever reason——

The original one was not attractive.

Which, I would contend, had much more to do with commercial reasons than tax reasons. The Minister is increasing the amount of relief that can be set off from 50 per cent to 100 per cent. He says that will be an incentive to somebody——

The Minister is saying that people are inhibited at present from investing in tollroads but that they will be attracted by this increased allowance. Then he used the phrase that the ring fencing around this was appropriate in view of this increase. It may have been a misunderstanding that other income could be involved. Certainly it was a misunderstanding added to by the Explanatory Memorandum in this case which says:

Section 15 amends section 26 of the Finance Act, 1981—

(ii) to provide that the allowance may be set off only against income arising by virtue of the agreement under which the expenditure is incurred, and ...

If that is a misunderstanding it is one that is shared by somebody who writes explanatory memoranda. If that is the case I wonder, in any given year at the beginning of a project, if the Minister really wants to attract capital into tollroads whether it would not be far more sensible to say to somebody who had income arising on some other front that he could apply or set off the relevant relief. I do not believe that the difference between 50 per cent and 100 per cent will be crucial at all. I predict that the most likely outcome of all of this is that it will not act as an incentive at all. Neither do I think it will increase investment significantly. The Minister has his Western Parkway road, or whatever it is called; that investment is committed. To the extent that that is delivering on a commitment given, I do not mind, but I do not think the Minister will get a penny more by effecting this change than he would have got otherwise.

This relief has been developed in consultation with and arising from all the various submissions of development companies in relation thereto. Their judgment as to its potential success is more important than ours. They believe this meets the case for development and who are we to argue?

It is obvious that there is a significant difference between offsetting 50 per cent of the capital expenditure and offsetting 100 per cent, so I do not know what Deputy McDowell is worrying about. 100 per cent is 100 per cent.

I take it that tollroads mean tollbridges as well, since in fact we have not any tollroads. In the case of the only toll bridge we have, can the Minister say what has been the experience vis-à-vis the 50 per cent allowance? I cannot remember for how long that toll bridge has been operational; it must be almost five years. In that case can the Minister say whether any tax is now being paid or will the implementation of the provisions of this Bill mean that 100 per cent of the capital expenditure will be allowable in the case of the East Link bridge as well? In other words, will the provisions of this Bill be retrospective in the case of existing toll bridges? Whereas originally they could offset 50 per cent of their capital expenditure they will now be able to offset 100 per cent.

Of course, we must remember that there is the one person only building toll bridges here, one being the East Link and the other the West Link bridge. I have not been in a position to check this out on maps and so on, but I was told recently that the West Link bridge will be a twolane bridge with a fourlane highway entering it on each side. If that is true, that appears to be extraordinary. Perhaps the Minister could confirm that it is true. If it is true, it means that the person building the West Link bridge is cutting back on his expenditure on it, holding the traffic to ransom knowing that it will have to traverse the bridge, there being no alternative.

Does the fact that now 100 per cent of the capital expenditure and maintenance costs of the bridge, or the road, as the case may be, is allowable for relief mean that throughout the tenure of the toll the person building it will never pay any tax? The Minister will be able to effect that calculation. For example, I understand that, after 20 years, the East Link bridge will be handed back to Dublin Corporation. Does that mean that, within that 20-year period if there is now to be 100 per cent relief on capital expenditure, maintenance and capital costs — no tax will be paid by the toll holder over the entire period of his tenure?

The other question I should like to ask the Minister is whether the toll bridge constructor avails of EC funding, other grants and so on? Is he ensuring that only capital expenditure actually incurred by the toll bridge builder will be offset in this case as relief? As Deputy McDowell said, without the aid of the Explanatory Memorandum we would not have a clue what this section was about.

It is not clear from the section in the Bill whether this is to be retrospective to previous toll bridge builders, whether the total capital expenditure or the actual amount spent by the builder of the bridge will be offset, whether the Minister has calculated, taking the capital expenditure and the total maintenance costs over the period into account — which he can also offset — if the passing of this legislation will mean that no toll bridge holder will have to pay any tax, or that every toll bridge holder will be allowed a tax free run to collect as much money as he wishes and will have sufficient offset to ensure that he will not have to pay any tax.

The existing Dublin east-link toll bridge was funded completely without recourse to section 26 of the Finance Act and this section has no relevance good, bad or indifferent to it. The promised extension of section 26 was conditional on full financing of the project for the Lucan west-link bridge. I thought the Deputy would know more about this than I do because the agreement was drawn between Dublin County Council and the company. There are certain matters in respect of which the Deputy is requesting information which I do not have except to say that the extension of section 26 was conditional on full financing of that project by the development company without guarantee, or other forms of comfort, from any other public authority, including the local authority. I hope the Deputy understands that this has nothing to do with the existing east-link bridge not being made retrospective in relation to that bridge or anything else. In relation to what profits may or may not be made out of it, the relief is put in place to ensure that if they make profits they will pay tax and if they do not make profits they will not pay tax, like any other commercial concern. Details of the arrangements between themselves and Dublin County Council are not available to me here at this stage.

Why will it be 50 per cent, half the relevant expenditure in the first year?

(Limerick East): It is the same as everything else, they are front-loaded.

I do not see why it will be of any interest to somebody who is operating a toll bridge to have it front-loaded. Where will he get that load of income in his first year? Would it not be fairer to say 20 per cent?

Obviously it suits them otherwise they would not be looking for it.

May be that is the right answer. I just cannot understand how one could get 50 per cent of capital costs back in a year to offset against anything. Therefore I wonder, even as an incentive, how valuable it could be?

(Limerick East): It is against turnover.

That is right. The Deputy can rest assured that because of the way it was structured they just would not touch it. It was during a period of negotiations, in an effort to get that project under way, that this was designed. That is the reality.

Question put and agreed to.
SECTION 16.

Here we have a number of amendments, the first of which is amendment No. 32 in the name of the Minister. I observe that amendments Nos. 33, 34, 34a and 35 are related and amendment No. 49 is consequential on amendment No. 35. I am suggesting, therefore, that we discuss amendments Nos. 32, 33, 34, 34a, 35 and 49 together by agreement. Is that satisfactory?

(Limerick East): Agreed.

I move amendment No. 32:

In page 24, subsection (1), line 4, after "undertaking" to insert ", other than a payment made in respect of the cancellation, redemption or repurchase of a unit".

These amendments affect a number of technical changes to section 16 of the Bill. To create a proper environment within which UCITS could successfully trade both a revised regulatory regime and a revised taxation regime were necessary. The regulatory regime was contained in the UCITS regulations made by the Minister for Industry and Commerce on 18 April 1989. Strictly, the taxation provisions should have awaited the making of the regulations but it was considered undesirable that a section of the complexity of section 16 be introduced on Committee Stage. Accordingly, while it was known that the regulations were to be made shortly, as the Finance Bill provisions were being drafted, the regulations were not in final form and some of the Finance Bill references were no more than holding provisions until the regulations were passed. The purpose of the amendments now being moved is to bring the Finance Bill measures into line with those UCITS regulations as made and to maker certain other technical changes.

The additional words being added to the definition of "relevant payment" is to put beyond doubt that the withholding tax does not apply to payments made in respect of the cancellation, redemption or repurchase of a unit. Such a payment would include or could consist only of a return on the investor's own capital and it is not and was never the intention that the withholding tax should apply to such payments. The cancellation, redemption or repurchase would be dealt with as part of the investor's personal gains liability.

The subsitution of the new definition of "relevant regulations" is to make specific reference to the new UCITS regulations made by the Minister for Industry and Commerce. The previous definition was a temporary reference pending the making of the regulations. The deletion of the definition of "securities" is caused by the fact that the UCITS regulations, as finally drafted by the parliamentary draftsman and made by the Minister for Industry and Commerce, did not contain the expected definition of securities. The amendment of subsection (9) (a) is consequential on the amendment of the definition of "relevant payment". That definition is being amended to put beyond doubt that payments in respect of the cancellation, redemption or repurchase of units are excluded from the withholding tax. The provisions of subsection (9) (a) specifying that certain payments are not to be treated as a distribution refers only to a relevant payment.

In certain circumstances, due to the operation of section 84 of the Corporation Tax Act, 1976, a payment for the cancellation of a share in a company can be a distribution. A unit can include shares in an investment company set up under the UCITS regulations. Accordingly, it is necessary to extend the exclusion to cancellation, redemption and repurchase payments. The deletion of subsection (10) is so that a substantive stand alone amendment of the VAT giving the same exemption can be included in Part III of the Bill. An amendment to that effect will be moved at the appropriate time.

(Limerick East): I have no objection to the amendments but when we get the amendments through I would like to come back on the section.

Amendment agreed to.

I move amendment No. 33:

In page 24, subsection (1), to delete lines 7 to 12, and substitute the following:

" `relevant Regulations' means the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 1989 (S.I. No. 78 of 1989);".

Amendment agreed to.

I move amendment No. 34:

In page 24, subsection (1), to delete line 23.

Amendment agreed to.

I move amendment No. 34a:

In page 28, subsection (9) (a), line 1, after "undertaking" to insert ", or a payment made in respect of the cancellation, redemption or repurchase of a unit in the undertaking,".

Amendment agreed to.

I move amendment No. 35:

In page 28, lines 6 to 8, to delete subsection (10).

Amendment agreed to.
Question proposed: "That section 16, as amended, stand part of the Bill."

(Limerick East): I would like some clarification from the Minister. This is an extraordinarily complex section. One of the benefits of being in this House is that one's vocabulary expands all the time. Undertakings for collective investment in transferable securities are now being known as “UCITS”. Can the Minister illustrate the difference between UCITS and a unit trust as I cannot grasp it. We were provided with Statutory Instrument No. 78, introduced by the Minister for Industry and Commerce, which has 90 pages. This section is to put a statutory base into the tax provisions in the instrument. This is quite difficult.

Is it the intention now that unit trusts will not be taxed globally, but that the tax liability will apply to the individual investors who make up the unit? Will they then be liable for income tax and capital gains tax? Will the liability fall on the investor or unit holder?

That is right.

(Limerick East): The Minister is also distinguishing between residents and non-residents. Will the liability of residents accrue here and that on non-residents accrue wherever their tax liability is, which would normally be their country of residence?

That is right.

(Limerick East): Could the Minister deal first with the provisions for withholding tax? Will withholding tax apply to the distributed income and the distributed capital gains and the non-distributed income?

To non-distributed income.

(Limerick East): If income is distributed to an Irish resident withholding tax will apply?

That is right.

(Limerick East): That will be at the point of distribution. With regard to capital gains on a UCIT, will withholding tax apply also if there are capital gains going to an Irish resident?

That is right.

(Limerick East): What about non-distributed income?

(Limerick East): Is there no withholding tax on non-distributed income.

There is a tax on distributed income and tax on non-distributed income. There is tax on distributed gains as well.

(Limerick East): But there is no tax on non-distributed gains?

There is no tax on non-distributed gains. This is complicated stuff.

(Limerick East): It is very complex. I take it that it applies at the new standard rate of 32 per cent, when we are talking about withholding tax.

That is right.

(Limerick East): In circumstances where somebody has a tax liability on distributed income on which he or she is paying income tax anyway, can withholding tax be offset against the liability for income tax on the same money?

(Limerick East): What about capital gains — does the same apply?

The same applies.

(Limerick East): Could the Minister tell me about Shannon and the Custom House Dock Site?

They are at a level playing pitch.

(Limerick East): They are both exempt?

Precisely, unless there is a situation where an Irish resident had money in a unit trust managed by Ireland. That would be the only situation where tax would arise.

(Limerick East): Outside those areas, in so far as withholding tax is concerned what is the commencement date for withholding in the case of units and unit trusts?

For UCITs after 6 April, 1990 and for unit trusts whenever they start to——

(Limerick East): Distribute. A final question, what is the situation on VAT? Will there be VAT on the management of the trust and, if so, at what rate? Will it apply both to the Custom House Dock Site and to Shannon, or will the VAT apply only to activities outside those areas?

They will be exempted from VAT by a subsequent amendment — No. 49.

(Limerick East): That is on the management of all the amounts?

Will the Minister explain how the new tax regime will contrast with the old tax regime of unit trusts? Unit trusts seemed to have a very pleasant tax regime until quite recently. The levy applied to a certain portion. As I see it, that will end now. From what the Minister says, the effect will be that distributed income and undistributed income will be subjected to withholding tax at the rate of 32 per cent and that realised and distributed capital gains will also be subjected to the same amount. In other words, all money that comes out of the fund to the unit holders, or whatever they are called, will be taxed at the rate of 32 per cent?

Taxed on their amounts.

Will they also be liable for whatever other tax they should be liable for on top of that?

I want to get a few matters straight. What about a unit trust which was composed of Government gilts, and gains on that? If the investment fund was primarily Government gilts, would they be subjected to withholding tax and would gains on Government gilts which at the moment have one tax regime be subjected to this withholding tax, or is there some way around that?

They are not subjected because they would not be taxed in the hands of the individual.

I do not follow that.

There might be some more information here which might be useful to the Deputy. Did the Deputy want to clarify something?

I want the Minister to clarify something.

I am not sure who will have matters clarified.

Perhaps while the Minister is getting clarification on that, I could put another couple of propositions to him.

I want to echo what Deputy Noonan has said. An 84 page regulation was put on our desks recently. It was as long as most Acts of Parliament and as complex. It was made under the European Communities Acts of 1972 and 1973. It does things like creating indictable offences and setting penalties and these are done by Statutory Instrument. It is entirely wrong that those regulations should be made in those ways. The European Communities Act of 1972 is infirm. Many people in this debate so far have been muttering about the Constitution and I have not, but one thing that I say about the Constitution is that the only things on which we are exempt from constitutional challenge on foot of our membership of the EC are necessitated obligations. One of the things we did on foot of our EC membership was to introduce an Act saying that 84 pages of regulations creating indictable offences and other things could be made by regulation. That was not required by the Treaty. It is not a necessitated obligation.

The first time that anybody is prosecuted under one of those regulations, it will be immediately challenged and the whole procedure struck down. It will be said that these penalties were selected by a Minister, not by the European Community; that they are not required by the regulation in question; that there is no authority for them except that the civil servants and the Minister at the time selected these penalties and procedures. I obtained from the Oireachtas Library the directive on which the regulations are based. There is a close correspondence between them, but there are areas where a totally discretionary content is built into those regulations. I regard it as extremely extraordinary that the equivalent of a very substantial Act of Parliament has been pushed through by way of regulation, without anybody being in a position to challenge it and query its contents. Here we are, by reference, giving it some kind of statutory blessing.

We have to accept that there is a huge infirmity about those regulations and the way they have been brought in and scrutinised. Nobody in this House has the slightest idea of what their content really is and they have never even been debated here. It is amazing that something as long as that, 84 pages of solid law, can go through on the nod whereas we can spend an hour or maybe two hours on two or three lines of this Bill here. It is an extraordinary contrast. I worry about it because if the legal textbooks are to be believed, in particular Hogan's book on administrative law, there is the mother and father of a constitutional issue coming up the tracks at us on this because we are busily enacting things we are not entitled to do by these regulations. I would like the Minister to compare and contrast for my benefit the difference between the unit trust taxation regime, which was very beneficial to unit trust holders with levies and all the rest of it — they can make quite substantial capital gains — and what the regime will be under this because it seems to me they are going to be in a much worse position.

I have not seen that they will be in a worse position. We will deal with the regulations first. The regulations governing this are made under the EC Directive and are laid before the Houses of the Oireachtas in accordance with the general practice in regard to the translation of EC law into domestic law, and the general practice has been followed in this situation with UCITS.

On the development of UCITS, in order to facilitate the growth of the International Finances Services Centre and Shannon and to improve the competitiveness of Irish investment funds in the light of the easing of exchange controls, the basis of taxation of these collective investment undertakings has to be changed. This section also gives effect to decisions already made in relation to the IFSC. Essentially the new legislation recognises the trust nature of much of this type of investment and removes the tax bias against collective investment. If matters were left as they were they would be in a tax disadvantage position. The section puts in place the practice prevailing in most of the countries of the EC of not taxing the collective investment undertaking, but instead taxing it in the hands of the recipients by reference to their individual residence status and the status of the income received by them from the investment undertaking. A foreign resident receiving income from an Irish based fund would have no Irish tax liability. He would be dealt with in whatever country he was resident in.

Without tax similar to that applied to deposit interest, but with full tax credit and repayment where due, is applied to distributions made to Irish residents and to funds outside the IFSC and Shannon who do not distribute all of their income. Funds inside the IFSC and Shannon can also be liable to withholding on accumulated income only in relation to Irish investors. Because Government gilts are free of capital gains they do not catch that withholding tax which the Deputy mentioned earlier.

What about the distribution of those? If you make a gain on Government securities in a fund and distribute that gain to the unit holders, whoever they are——

There is no tax on the distribution of that because it does not attract tax at the start. It does not attract capital gains, consquently when it is distributed it does not attract tax either.

I have not really tried to bend my mind about it because I have not got the money to invest in these things.

They claim that by buying and selling unit trusts shrewdly they can, by paying the existing levy on capital gains in relation to unit trusts, make a very substantial tax free income or, let me put it this way, reduce tax income. It seems to me that this provision here ends that completely, although it may be putting the Irish unit trusts on the same basis as continental ones. Is the Irish taxpayer who uses these trusts to generate these reduced tax incomes being put at a disadvantage? Are there people who now can make substantial low taxed incomes by paying the existing levy on unit trusts and taking that as their only tax liability who will be liable to a great deal more taxation when this is brought in?

There is no levy on unit trusts at all. The Deputy talks about people telling him they pay a levy and get away with it. There is no levy at all on unit trusts.

There is an imputed capital gains provision. I am calling it a levy. I do not care what it is called, it is a taxation of some kind.

(Limerick East): Could I explore one point Deputy McDowell has raised?

At the moment the trust case is free from that and is in the hands of the individual then rather than the trust itself.

Does the unit holder pay at the moment?

No. He gets the full benefit.

Under this provision the unit holder may end up paying at 58 per cent whereas at the moment he will never have to pay that kind of money.

(Limerick East): I would like to chase the point raised by Deputy McDowell. It seems when you move the liability from, say, the unit trust to the individual who has invested through the unit trust, the individual incurs the normal liabilities under income tax and capital gains tax. On the face of it it looks as if he will end up worse off than he is now.

Because the other people were relieved?

(Limerick East): Yes, whereas there is a full transfer on to the shoulders of the individual investor. Secondly, I understand the interest income accruing on Government gilts is not subject to withholding tax. If a certain proportion of a UCIT or a unit trust is invested in Government paper and the withholding tax applies, as the Minister said, not only to distributed income but to non-distributed income, I cannot see then how the investor in the unit trust will be free from withholding tax on Government paper. Again that works to the disadvantage of the investor. I am wondering if the Minister and his Department have gone to great pains to ensure that non residents will have no tax liability and in doing that have increased the tax liability on residents.

Let us do the calculations. The unit trust paid 50 per cent and the unit holder got no credit at all for that 50 per cent paid. Now when it comes to the unit holder paying, taking account of all his exemptions he is better off than he was as things were. The Deputy raised another point in relation to withholding tax.

(Limerick East): On Government paper, Government gilts.

Withholding tax on Government paper?

(Limerick East): There is none at the moment.

It does not apply.

Where is it in the section that it does not apply?

(Limerick East): Let us take an unlikely enough example. A unit trust has half its investment in Government gilts. It distributes income then to its individual investors. According to what the Minister has told me there is a liability of 32 per cent withholding tax on that. Surely that works to the disadvantage of the investor.

"Relevant gains" as defined in the section means in relation to a collective investment undertaking, gains accruing to the undertaking being gains which would constitute chargeable gains in the hands of a person resident in the State. It would have to constitute a chargeable gain and Government stocks do not constitute chargeable gain. Does the Deputy get it?

(Limerick East): I get it all right, but you are going to have great fun disentangling it. How are you going to do it?

It does not start off as a chargeable gain but it will end up as a chargeable gain.

Do we take it that the withholding tax that will be applied will not apply at the rate of 32 per cent and will vary up and down depending on the source of income and the capital gains for each fund? In other words, can we take it that the moneys coming out of one of these UCITs into the hands of their unit holders will not be applied as a flat 32 per cent rate but will vary from fund to fund based on the source of income and capital gains of that fund?

Precisely, you get a mix.

(Limerick East): It will take another 90 pages.

And a few experts to disentangle it.

Question put and agreed to.
SECTION 17.
Question proposed: "That section 17 stand part of the Bill."

(Limerick East): Perhaps the Minister would provide further information. The section provides for the disclosure of information by UCITS at the request of the Inspector of Taxes. What is the intent of the section? I presume it is an anti-evasion measure. I wonder how practical are the expectations of the section in the light of the free movement of capital in and out as we approach 1992 and 1993. One would not need to be particularly agile to invest in UCITS and source them through London, Amsterdam or Newry, thereby not being caught by the provisions of this section. Is it only a bit of Christmas tree work for decorative purposes?

We could not leave the Irish market uncompetitive. We had to put it on a level footing with everybody else. In Luxembourg it is zero rated. If we do not change our own position we could find UCITS based in Luxembourg being sold here. The market opens up for everybody. It could be based here and sold abroad or vice versa.

Then we had to look at the possibilities of tax evasion. Under the exchange control notice relating to portfolio investment in foreign securities all instructions with regard to transactions in foreign securities must be routed through an approved agent. An approved agent is any bank in the State, any stockbroker licensed by the Irish Government, any solicitor of the courts of justice practising in the State and any other person appointed by the Central Bank of Ireland. They have to make the declaration and that is one way of protecting the position in relation to Irish investment.

The Deputy raised on the Second Stage the question of ring fencing the tax rates in an open economy such as ours, especially since we will have free movement of capital. It is a difficult problem because of the scope for tax evasion which it entails. It is a problem which is recognised by the Government and by the European Community. The Community are trying to stitch it down by introducing a Community-wide withholding tax. In terms of the steps which the Irish Government can take to counter abuses, it is obvious that obligations can be imposed only on persons subject to Irish law. This section imposes certain disclosure obligations on persons providing facilities in Ireland for Irish people to invest in foreign UCITS and on persons providing services in Ireland on behalf of foreign UCITS. Combined with the exchange control regulations and the requirements of the UCITS directive, this appears to be the maximum extent to which legislative control can be imposed. Persons who for tax evasion purposes indulge in activities which bring themselves outside this area of control will do so with the risk of at least exposing themselves to severe tax penalties for making fraudulent tax returns. Freedom from the withholding tax provisions given to undertakings in the International Financial Services Centre and at Shannon is on condition that they have non-resident investors only. It is accordingly in the vital interests of such undertakings not to allow Irish investors to invest by whatever means in their own activities.

It is hoped that this appeal to self-interest will act as a much more effective means of encouraging these undertakings to police themselves rather than the granting of elaborate powers of disclosure to the Revenue Commissioners. While this is an area to be kept under constant review, particularly in the light of developments in the European Community, what is contained in the section is the most that can be achieved consistent with the need not to impede the free movement of capital and not to damage Ireland's competitive position in the UCITS market. We have gone as far as we can go in making sure that our own fund managers are not at a disadvantage.

(Limerick East): The section is being introduced in hope rather than anything else. The onus is on the intermediary acting on behalf of foreign UCITS which market units in the State. If UCITS based in Luxembourg are being marketed here, this will probably be marketed north of the Border as well. There are no obligations under section 17 on somebody who invests through his local bank manager in UCITS out of Newry.

The Deputy must have been talking to his brother in the bank.

(Limerick East): I do not think one needs banking relations to explain this one. A 14-year-old after the first month of intermediate certificate commerce will see through this section. While I admire the Minister's optimism, the section is decorative but useless. The only way to prevent tax avoidance or evasion in the kind of Europe we are facing is by a withholding tax.

I am not sure that would be fully successful.

(Limerick East): Perhaps not. A whole new area is opening up. We will not solve the problem today. I will not oppose the section but it will not do much use.

The withholding tax has now run into a problem with the German decision to abolish it. This will set back the whole question of a withholding tax in the tax harmonisation in Europe. Even with agreement on withholding tax at whatever level, the Community have to be extremely careful what arrangements are entered into in relation to the OECD countries on the fringe, places like Switzerland, Austria and the Channel Islands. We could reach an agreement in the member states but find that the capital had flowed before the agreement was in place. It goes wider than the Community, into the EFTA and OECD countries. If any bit of it falls out of place, I am not sure how effective it will be. This is as far as we can go in taking precautions. A Community-wide system is the only way to manage it effectively in the long term.

I think the wool was pulled over my eyes slightly a little while ago. I want the Minister to put it on the record that no taxpayer will be worse off as a result of this new tax regime.

No unit trust holder.

(Limerick East): I come back to the idea of establishing a level playing pitch so that these activities would be as profitable here as anywhere else and would contribute to our economic development. The Minister should consider as a matter of priority the introduction of a confidentiality of banking Act. It is in this respect that we do not have a level playing pitch. This is the major difficulty with section 17. It will not work in the real world but it will upset many people because the Revenue Commissioners will have power to look behind transactions in certain circumstances.

The Minister talked about the 10 per cent withholding tax which has been removed in Germany by the new Minister for Finance. The effect of that withholding tax at the kind of interest rates which prevail in Germany was probably about 0.6 or 0.7 of 1 per cent. In the past 12 months £800 million or £900 million must have come here from Germany at a differential of about 2 per cent. The withholding tax was removed not simply because of the 0.6 or 0.7 per cent return; it was removed because it took confidence out of investment in Germany because it enabled the authorities there to look behind transactions. The cream-off of revenue was not the issue; it was looking behind the transactions.

They are now getting on to a level playing pitch with Luxembourg. Money was crossing to Luxembourg from Germany in enormous quantities. It is not the issue of the 10 per cent being withheld; it is the issue of confidentiality. The operation of the withholding tax provided enough information which the Revenue Commissioners could look behind. I would advocate that the Minister seriously consider a confidentiality Act for banks and investment houses for these kinds of transactions or all the things we aspire to in the financial services centre and at Shannon and in the operation of UCITS right through the Dublin market outside of those areas will not come about. That, added to free movement capital and the difficulties with withholding taxes will ensure that, whatever our aspirations, Dublin will not be a major player in financial services. That is the missing piece at the moment. In a totally non-political manner, I advocate very strongly that the Minister introduce that kind of Act.

Let me assure the Deputy that there is no disclosure in relation to foreign investors here. The same would apply to the financial services centre and to Shannon. We are talking about a declaration here which is no different from the declaration required in relation to DIRT and I do not think we have seen any of the dire consequences that the Deputy spoke about in relation to the introduction of DIRT.

The German situation is different. I take the Deputy's point, but the Revenue Commissioners do not have the right to go behind anything. It is no more than a declaration such as one would make in relation to DIRT. For foreign investment coming in, the situation is as intact as ever, and will remain so.

(Limerick East): I doubt that, and I have heard those assurances before. In terms of information we have the leakiest banking system to be found anywhere in the world. In this country it is possible to find out anybody's credit rating in a couple of hours.

A credit rating is one thing but getting behind transactions is something different. A credit rating can be got, but no disclosure.

(Limerick East): When information about Irish residents and Irish citizens is so easily exchanged between banking institutions without the customers' knowledge, I doubt very much that there is not a similar flow of information in regard to foreigners.

There is not. The £800 million from Germany that the Deputy talked about would not be here if there was any danger.

(Limerick East): Most of that is in Government paper and it is sourced elsewhere anyway. I am talking about situations where people, especially private individuals, have large sums of money they want to invest and they do not want people looking behind it but simply want to get a return. With the increase in trade in Europe and in the world, especially over the last ten years, there has been an enormous growth in personal wealth right across Europe.

The major activity in Luxembourg is in institutions handling the wealth of private individuals in a discreet and confidential manner and, frequently, through this mechanism of the UCITS. They rushed through, in something like 16 hours, a Confidentiality of Banking Act about two weeks ago and went into special session to do it. They did it very soon after the withholding tax in Germany was withdrawn. If we see big players like the Luxembourgers doing that almost as an emergency, if we are serious about Dublin as a financial services centre, we are very foolish not to look at the merits of what people are doing elsewhere because they have been very successful in this activity and we are only starting. We know how the people in Switzerland do things. Absolute confidentiality is the key and we do not have that in Ireland. If we do, it is more a question of custom, practice and precedent and not a matter of statute law backed up by penalties.

It is and has been in existence in Ireland, and is very closely guarded by the banking institutions themselves. I accept it is not in statute. I will certainly take on board the points the Deputy raised in relation to it. In my view, Luxembourg rushed such an Act through for a different reason. The whole question of withholding tax was being raised in Europe and if the withholding tax as per the proposals that were on the table were to come into being, I am sure the Deputy would agree with me that the Luxembourg business would be in serious trouble because it formed such a major part of their whole economy. They rushed it in because, when it came to the agreement, they could claim that their national position was enshrined in legislation.

I made the point that I was not going to apply withholding tax to Government contracts and Government papers sold abroad. I was looking for that exemption. They were looking at it from a different angle, and that is the situation. I see no risk in relation to the confidentiality of the Irish banking system. I have seen no developments in more recent times to change my view as to the level of confidentiality that the Irish banking system have held dearly and guarded very tightly.

The question of confidentiality in regard to the financial services centre in Dublin does not arise. We have an industry of its own in revenue trying to deal with every aspect of it, and we would not have the names we have if there was any doubt about issues of confidentiality as raised by the Deputy.

I would like to echo what Deputy Noonan said. I believe the emphasis in the International Financial Services Centre may be off target. Financial services may not be the great bonanza some people close to this Government seem to think it is going to be. By not attracting personal private banking to this country we are missing a golden opportunity to improve employment in Dublin.

It is worth while, as Deputy Noonan is pointing out, to emphasise that there is a growth in personal wealth as well as corporate wealth and that it is in personal banking that one finds the greatest employment potential. Corporate banking is very like wholesaling, whereas personal banking is much more employment intensive. If the Minister says there is such confidentiality, why not enshrine it in the laws and make it clear that that is the situation? Why leave it to be a matter of contract between the customer and the institution? If it is simply a matter of contract between the customer and the institution, the customer really has very little redress against an institution that breaches confidentiality. He cannot come to an Irish court to complain of breach of confidence because they would want to know how he was damaged by it and he might have to say it was as a result of the consequences that flowed from being found out and the court would probably say that that is just too bad. I do not think a court here would award damages to a foreigner claiming breach of confidentiality.

Money talks. Influence works. I agree with Deputy Noonan. It is not sufficient to leave matters to an agreement between the bank and its customer. We have to go further and lay down law requiring confidentiality on behalf of these institutions if we are to compete with Luxembourg, the Channel Islands, Switzerland and other places, for private banking.

Let me go back to the point that I do not believe financial services of the kind now contemplated in the Customs House Docks area are sufficient. There is a huge opportunity to take it one stage further. I do not think it is simply a question of hot money. Money has varying temperatures, from tepid to hot, and if we want to compete with Luxembourg and other places in Europe on a financial basis, we have to take this step of confidentiality being part of the statute law of this country. I agree entirely with what Deputy Noonan says. I think the Government are foolish to take a holier than thou attitude on this because the full potential of the financial services and banking industry in Dublin is being undermined by the absence of such legislation.

Section 16 contains no disclosure rules. Foreign investment can be made in confidence in the Irish based UCITS. I take on board what the Deputies have remarked in relation to private banking, and once we get the financial services centre up and running we will look at that as the next project.

Question put and agreed to.
NEW SECTION.

I move amendment No. 35a:

In page 30, before section 18, but in Chapter II, to insert the following new section:

"18. —Section 439 (1) of the Income Tax Act, 1967 is hereby amended by the insertion after subparagraph (ii) of a new subparagraph (iia) as follows:

`(iia) being payable for the promotions of the teaching of modern continental languages, or'.".

I am grateful for this opportunity to intervene in what seems to be a very affable and cosy club that has been operating here for the past few hours.

The Deputy is welcome to join it any time.

I am quite lost in admiration for the learning that is brought to bear by my colleague, Deputy Noonan, the Minister and——

(Limerick East): Flattery will not get the amendment through.

I am quite stunned by it all. It is entirely above my head because, like Deputy McDowell, I do not have the money that I could consider investing in any of these schemes but, unlike him, I do not even have friends who would tell me about the prospects of them. After that rather esoteric area that the Minister has been occupying himself with for the last hour or two, this amendment is in a sense somewhat more down to earth and is, I hope, of some significance. At this stage my concern is to put the proposal before the House and to invite the Minister to consider it. If he sees merit in it I would be quite happy not to press the amendment but to see him return to it on Report Stage. Even if he is not prepared to give that commitment I would propose to return with a redrafted amendment on Report Stage.

At present our tax code provides tax relief for those who are prepared to invest in various worth while activities. There is, for example, support in the tax code for those who are prepared to invest in sport and also for those who are prepared to invest in the President's Awards scheme. In section 349 (1) of the Income Tax Act there is support for those who invest in our educational institutions and specifically for those who invest in the promotion of natural science. This amendment seeks to provide a similar level of support and comparable relief for those who are prepared to encourage and invest in the teaching and training of modern continental languages.

There has been a great deal of talk about the extent to which we should prepare for 1992 and what is required of us in the economic, service and educational areas. We have boasted for many years that our educational system is one of our great strengths and traditionally it has been one of the main selling points employed by the Industrial Development Authority. I am struck, as a spokesman on education, by how high the level of education is meant to be. When listening to the debate a few moments ago I heard Deputy Noonan suggest that a 14 year old first year commerce student would have no difficulty making his way through the tangled web of section 17. Recently I heard Deputy McDowell tell us that a first year law student would be able to drive a coach-and-four through a planning Bill. Clearly this speaks highly for the quality of education in Ireland.

We all accept — and I think it is the case — that the quality of our educational system in the past has been one of our great strengths. We would all say that the fact that we are an English speaking country has been an advantage to us in seeking to advance our position in the international markets. With the developments that will flow from 1992 and the creation of the single internal market, the fact that we are English speaking and monolingual may well become a very considerable disadvantage. We keep talking about the fact that we will be part of the largest internal market in Europe but if we want to sell our goods there we would have to have an ability to speak the languages of those to whom we wish to sell. I think it is fair to say that all parties in this House have recognised that in one way or other.

The Minister's constituency colleague has made much of her commitment to the promotion of the teaching and training of modern continental languages although that public commitment is not always matched by the individual decisions taken, which sometimes have the effect of actually reducing the range of choices available within the school system, particularly the vocational education system. My own party have produced a document on the subject, spelling out in detail what we think can happen within the formal education system and perhaps more significantly what can happen outside the formal education system and the more significantly what can happen outside the formal education system and the role we see for industry and business. The Irish Council of the European Movement have published documents on this matter as have the Confederation of Irish Industry.

In a sense this amendment seeks to invite the House to make a public statement on the importance that it attaches to the promotion of the teaching and training of modern continental languages and to evidence that importance by giving this matter the same status as has been given to support for the natural sciences in the past and also to other areas including, in the very recent past, sport. As I have indicated the amendment as drafted provides a basis for discussion. I would be quite prepared to concede that the amendment would need to be polished and improved before it could find its way into the legislation. At this stage there should be support for the principle of giving encouragement and relief to those who are prepared to invest in this important area.

I am prepared to have a look at it but I would put on the record straight away that this would mean a further narrowing of the tax base. While I do not disagree with much of what the Deputy has said in relation to the promotion of the teaching of continental languages, why should we always return to the tax base as a way to deal with these matters? This would be a further erosion of the tax base. The question of teaching continental languages is one that has to come into focus straight away but I am not so sure that everybody should look towards the tax base as a means of dealing with it. The tax base has been eroded enough already. I presume it is the covenant the Deputy is referring to——

That is not to say that I am taking from the seriousness of the amendment that has been put down. I think it is laudable but quite honestly I am not disposed to continuing the extension of the whole covenant area. I have turned down some proposals in recent times. However, I will have a look at the amendment in more detail between now and Report Stage. I am sure the Deputy will appreciate that I only got it this morning.

I am happy with that. I will withdraw the amendment on the basis that we will return to the matter on Report Stage.

Amendment, by leave, withdrawn.

Amendment No. 36 is out of order on the grounds that it involves a potential charge on the people.

Amendment No. 36 not moved.
Section 18 agreed to.
SECTION 19.
Question proposed: "That section 19 stand part of the Bill."

The aim of this section is to impose a limit on the continuing escalating costs to the Exchequer — estimated at £79.4 million in 1988 — of domestic source section 84 loans. In particular heavy use was made of such loans by Shannon leasing companies. A representative of one such company has been quoted as saying that his company had an insatiable appetite, at the Exchequer's expense, for tax-based borrowing. Consideration was given to abolishing the device altogether but this was strongly objected to by the Department of Industry and Commerce and the IDA who were fearful of the adverse effect of such a move and the effects it might have on their efforts to increase manufacturing employment. In the circumstances the section denies, subject to phasing out provisions, the facility to all non-manufacturing entities including Shannon-based leasing companies. These companies will, however, continue to be able to avail of foreign source section 84 loans which do not involve an Exchequer cost. Representatives of some Shannon companies have already indicated that the change will not have any material effect on their businesses.

Denial of further domestic source section 84 loans to Shannon Leasing will put them on the same footing as the International Financial Services Centre in Dublin, companies in the Custom House Docks area with which we are all familiar. International financial services centre companies are precluded from obtaining domestic source section 84 loans. The same regime applies to both. In addition, the overall level of section 84 loans is being restricted to 110 per cent of current levels. This will effectively put a cap on the cost to the Exchequer of the device in future years. In effect, we have looked at it, left it in place for manufacturing companies both for domestic source and foreign source section 84 loans and we have put in a phasing-out period to 1991 for companies in the non-manufacturing area. As they are phased out the section 84 loans available from the banks can be increased to the manufacturing areas. We have also allowed the 10 per cent. All in all it is a fair response to the problems. The costs to the Exchequer were escalating and it is the manufacturing area about which we are more concerned because that is where we get a real payoff to the Exchequer and not from some of the companies that were using the system very heavily.

(Limerick East): The Minister mentioned tax foregone of approximately £79 million. How much of the tax foregone does the Minister expect to recover in the current tax year by the introduction of these measures, and how much does he expect to recover in the first full year of the operation of these restrictions?

It will not be a lot initially. What we are doing is capping the Exchequer because of the escalation in costs. It will take some time before the benefits come down. I do not see an immediate cost reduction.

(Limerick East): In this section the Minister has moved in two ways to restrict the scope of section 84 loans. First there is a restriction on the lending agency and then there are restrictions on the nature of the activity to which a section 84 loan will apply. Regarding the restrictions on the lending agency, there is a new concept introduced here, of a section 84 lender. At the risk of incurring the ire of Deputy McDowell I wonder how constitutional it is to differentiate between banks and finance houses, and nominate one as a section 84 lender from a particular date and say that people carrying similar licences cannot engage in the activity? I presume all the commercial banks are involved in section 84 lending at the moment, so they will all become section 84 lenders when this Bill is enacted. If we take this in tandem with the Central Bank Bill, other institutions will be given licences by the Central Bank to involve themselves in banking activities but they certainly are not section 84 lenders at the moment. I wonder what advice the Minister has on the constitutionality or the legality of a provision which allows one group of institutions a particular benefit and prevents others from getting involved in the activity.

My second query relates to the restrictions imposed on the lenders. Why is the limit 110 per cent? What sort of money are we talking about? What expansion in lending is envisaged there? I would like the Minister to expand further on that.

If we move to the area in which the activity is restricted, I understand that the section 84 lender will be able to lend next year up to 110 per cent of his commitments this year for manufacturing activity in the country. What is being excluded is non-manufacturing activity in Shannon. The leasing engaged in by some of the major Shannon companies will not be financed through section 84 lending domestically. That is the major restriction being applied to the activity. Has the Minister any information on, for example, companies like GPA and Yeoman? To what extent are they funded domestically now using section 84 loans, or are they almost exclusively funded internationally using section 84 loans? I have had no consultations with Shannon-based companies, so I presume they accept the section. If they had an objection I am sure I would have heard from them. I have heard the Minister's assurance that some of the big companies in Shannon are happy with these new arrangements. What level of consultation has the Minister or his officials had with Shannon-based companies? Can the Minister give a categoric assurance that they do not feel under pressure to relocate as a result of the removal of the section 84 loan from non-manufacturing activity? Perhaps the Minister has information as to what extent they are funded internationally rather than domestically and to what extent allowing them to continue with their present domestic arrangements until 1990 or 1991 will be of benefit to them?

Section 84 has expanded to a degree and has introduced an element of tax foregone which it is difficult to justify in present circumstances. We must continue to look at situations where we accommodate the corporate sector in too benign a fashion at the expense of income taxpayers and at situations where extra revenue can accrue to the Exchequer by tightening up a scheme such as this, in particular if the extra revenue is redistributed to income taxpayers, a general line of approach with which I agree.

The first comment on the proposed changes after the publication of the Bill came from GPA and they did not see any material effect on their business. They have become so large in international financing that what they would require would not even be available. Everything that is available in Ireland would not be any good to them. Their spokesman commented immediately that they did not see any problem, nor do we.

In relation to the rationale of using 110 per cent, we do not want to inhibit in any way the growth of manufacturing industry. The need for jobs is paramount. It was a question of judgment as to whether to leave it at 100 per cent or allow some expansion to take place. In view of the upturn in investment in the manufacturing sector, we want to encourage it in every way we can. In relation to the non-manufacturing areas, these areas are not of substantial benefit to the economy or to the taxpayer. It is only right that we should turn away the cost which has been escalating in this area over the last couple of years.

According to information from the Central Bank the total outstanding for both section 84 loans and preference share financing which accounts for only a small part of the total, as of mid-February in the last four years was as follows: February 1986 £785 million, 1987 £982 million, 1988 £971 million and in 1989 £1,285 million. The increase between February 1986 and 1989 was 64 per cent, so one can see the escalation. We do not have any information on the amount of foreign-sourced section 84 loans.

(Limerick East): Is it available from the Central Bank? Can the Minister get it for us?

They do not get it there either, as far as I know. We have no information on the foreign-sourced section 84 loans. Of the number of lending agencies, 16 of the banks are now section 84 lending, and this is a drop of three in the last 12 months. They are going out of it rather than trying to get into it. The total section 84 borrowing at present is £1,300 million. In answer to other questions, it increased in February 1986; the cut off date of 12 April in the present instance frequently occurs in connection with the restriction of any tax reliefs and in some of these situations taxpayers availing of the relief at the cut off date may be allowed to continue to avail of the relief, and we are leaving it until 1991 for them to get out.

On the question of advice, we do not see problems restricting the number of banking companies. I hear the point the Deputy has raised, and I am sure Deputy McDowell might have a view on it too. They say there have been precedents and they are quite happy with the advice they have had on the cut off point.

(Limerick East): I take it that the 110 per cent restriction applies to the bank and is not a national quota where one can compensate for the——

(Limerick East):——others' failure to take up this type of lending.

It just caps this type of lending.

(Limerick East): Does it just cap the lending by the individual institution?

Yes, that is right.

I have not addressed my mind to the constitutional implications of the section, but I presume that subsection 84A (4) effectively restricts this type of lending to existing lenders.

That is right.

This Bill was published on 14 March. What worries me about this somewhat extraordinary section is that it was said the subsection would not apply to interest paid in respect of relevant principal to a company which on 12 April 1989 had no outstanding principal advanced. Did that allow companies, which might feel they were about to be excluded, a month's notice to make a token loan?

No, 12 April was the date of the publication of the Finance Bill.

I see. I was looking at the date of the order for printing, but, of course, that was at the Minister's request. The companies did not have any time to get their act together, but it makes you wonder whether it is a fair way to go about business that one institution can indulge in profitable activity, if it is profitable, on the basis that it did so last year to the extent of 110 per cent, whereas another institution, which for whatever reason decided to cut back, or thought perhaps it might be cut back by Government, finds it is at a disadvantage commercially vis-à-vis competing banks. I agree with deputy Noonan that it is invidious to select institutions on the basis that what they have done last year they can do again this year. I do not see why lending in those circumstances should be capped in that way.

I do not see the logic for allowing further expansion in the circumstances. It restricts competition in section 84 lending. I cannot see the logic of that. It flies in the face of competition policy. It is probably very arbitrary. I do not know whether it offends the equality provision in the Constitution but the problem with that is that the equality rights in the Constitution are confined to citizens and companies or banks cannot claim to be equally treated.

(Limerick East): However, the shareholders could claim.

The shareholders have a secondary right of equality. However I agree it is problematical. On the wider issue, I do not see the justification for retaining section 84 lending in its present shape or form, and I said that before. The officials in the Department of Finance and their Minister were correct in suggesting to Government that it should be curtailed or abolished. When you get your nose out of the furrow at any given stage and survey the field around you, you see that our tax system is pro-capital and anti-employment. The IDA and the Minister for Industry and Commerce may shout and roar about the importance of this measure to their efforts to secure manufacturing employment here, but there are others trying to provide service employment who languish under a tax system which is very cruel and harsh to would be employers who will not get IDA assistance.

One of the most significant lumps in a tax reform package of any kind— whether it is the one I proposed or anybody else's — would be the abolition of section 84 lending. The Government should have taken their courage in their hands and said that they would apply the proceeds from the abolition of section 84 lending to a reduction in income tax, or a reduction of employee PRSI, and they would effectively shift the balance in favour of employment and away from capital.

I again want to go on record saying that I am against section 84 lending continuing as part of our tax code. This is a rather timid compromise between two conflicting views. It is a rather absurd compromise because in large measure it keeps it in existence. It confines it in this way and that and tries to cap it with a flexible cap. However, I think the time has come for the Minister to scrap section 84 lending and to tell the IDA and the Minister for Industry and Commerce, Deputy Burke, that his best chances of securing employment in the long run are not by aids to capital but by making the taxation on work lower.

Question put and agreed to.
NEW SECTION.

I move amendment No. 37:

In page 33, before section 20, to insert the following new section:

"20. —Chapter VI (as amended by section 45 of the Finance Act, 1984) of Part I of the Finance Act, 1980, is hereby amended—

(a) by the substitution in section 38 for the definition of `relevant accounting period' of the following definition:

` "relevant accounting period" means an accounting period or part of an accounting period of a company falling within the period from—

(a) where subsection (1CC) (inserted by section 45 of the Finance Act, 1984) of section 39 applies, the 13th day of April, 1984,

(b) where subsection (1CC) (as so inserted and amended by section 20 of the Finance Act, 1989) of section 39 applies, the 6th day of April, 1989, or

(c) in any other case, the 1st day of January, 1981,

to the 31st day of December, 2000; ',

and

(b) by the substitution in subsection (1CC) of section 39 of the following paragraph for paragraph (a):

`(a) In this subsection "computer services" means any or all of the following:

(i) data processing services,

(ii) software development services, and

(iii) technical or consultancy services which relate to either or both subparagraphs (i) and (ii),

the work on the rendering of which is carried out in the State in the course of a service undertaking in respect of which an employment grant was made by the Industrial Development Authority under section 25 of the Industrial Development Act, 1986.'.".

This amendment proposes to substitute a new section 20 for the existing section 20 in the Bill to provide a current commencement date for that section. Section 20 extends the definition of "computer services" (in section 39 (1CC) of the Finance Act, 1980) for the purposes of the 10 per cent corporation tax scheme to include technical or consultancy services related to data processing or software development.

The section as drafted would come into effect on 6 April 1989 under the commencement provisions in section 87 of the Bill. However, there is already in section 38 of the Finance Act, 1980, a specific commencement date of 13 April 1984 for the application of the 10 per cent scheme to "computer services". The 10 per cent scheme was extended to computer services by the Finance Act, 1984. The effect of section 20, as drafted, therefore, would be that while relevant technical or consultancy services would be recognised for the 10 per cent scheme from 6 April 1989, claims for relief in respect of these activities could be backdated to 13 April 1984.

The new section 20 provided for in the amendment removes this unintended effect and ensures that relevant technical or consultancy services will qualify as computer services from 6 April 1989.

(Limerick East): I would like to clarify the amendment. The section, as originally drafted, would allow claims to be backdated to April 1984?

That is right.

(Limerick East): I understand that the Minister wanted to operate from a current date and that is the reason he is bringing in a new section. Is that all that is involved in the amendment?

On the principle of the section and the amendment, we have the manufacturing rate of tax being extended to a service area of the economy. Whereas, I welcome the lower tax I wonder whether the selective reduction of a tax rate from 40 per cent to 10 per cent by political decision is the right way of going about it. I ask the more fundamental question: is it right that we should move bits and pieces of the services sector from one category of high taxation to another category of low taxation in the way provided here?

I am also wondering about the relevance of tying it down to IDA-backed projects. Why has that provision been inserted? The amendment reads as follows: ".... the work on the rendering of which is carried out in the State in the course of a service undertaking in respect of which an employment grant was made by the Industrial Development Authority under section 25 of the Industrial Development Act, 1986". Why is it being curtailed in that way and what is the justification for a curtailment? I note that the meaning of "goods" is being extended to include computer software development services. That is fine but to announce that it is to be transferred from one category of taxation to another and to include this provision that it has to be IDA financed makes me wonder what function we would be giving the IDA. In effect we would be giving them a taxation function. It seems that they would be able to decide whether someone is to get a lower rate of tax. I question the wisdom of doing this.

The reason for the extension is that data processing services and software development services and consultancy services which relate to either are recent developments in a high risk area. It is difficult enough to get people to invest in software services and because of this in an effort to promote software development services which are labour intensive this has been included as an incentive. They have much to recommend them. We are now turning out graduates suitable for this work and in an effort to promote these services in a high risk area this provision has been included. That is the way I see it.

Could the Minister elaborate on the provision in relation to the IDA? I do not accept that the way to decide that something is export orientated is on the basis that the IDA have grant aided the company.

It is a question of defining the qualification. If some tightness is not put on it various other services could be included.

What I object to is that here we have a tax system and we are saying that certain forms of services would be liable to a lower tax rate, a preferential tax rate for a particular purpose.

Preferential treatment.

Then the way we say to categorise them is to determine which of them have been grant aided by the IDA and those which have not. Is this wasteful? Are there people who might develop these services and look for the 10 per cent rate of tax but who for some reason might not satisfy IDA criteria? For instance, their capital structure might be totally inadequate or they might have an off the wall idea which the IDA advisers consider foolish. To make it as a precondition that the IDA must have helped someone out is a very roundabout way of saying, what the Minister is now saying is the real reason, that it should be export orientated. That is okay by me but I cannot see for the life of me why we have to say that one would not pay at the 10 per cent rate unless they had received IDA backing. Effectively this would allow the IDA to say how much of what this House has decided to be available by way of corporate relief should be given, to whom and when. I think that is wrong in principle.

That is the vetting procedure used.

(Limerick East): The wording of these sections makes me feel uneasy. Similar sections have been included in every Finance Bill published during the past eight to ten years. I am glad the Minister has come back with a new section which reduces the possibility that this would be applied retrospectively. We are all aware that year after year some new lobby group, usually supported by SFADCo or the IDA, go to the Minister for Industry and Commerce and the Minister for Finance to make the case for including some area of activity within the 10 per cent corporation tax regime. Each year concessions are made. While none of these little steps are objectionable in themselves they have the overall effect of diminishing the corporation tax base quite significantly and of accentuating the problem to which Deputy McDowell has constantly drawn attention, that we are making the regime for capital and fixed assets more benign in each Finance Bill while at the same time not making the income tax regime significantly better.

Some improvements have been made and some more are being made as outlined in the Finance Bill but there is no fundamental reform. The main reason for this is that the resources are not there to do so and they will never be there if we continue to restrict the corporation tax base. On its own merits this step can be justified in the same way that any of the others can be justified. There have been a series of them during the past few years, be it in respect of trading houses, the shipping industry, certain horticultural activities, the film industry and so on but they do not relate to what we strictly called manufacturing industry. We are now seeing the movement of certain sectors of the service industry into the 10 per cent corporation tax regime. I suppose this will continue to be the case.

The way this section is drafted makes me feel uneasy as it seems when it was first drafted a gap as wide as a gate had been opened up but then someone decided to close it by introducing this concept of companies having to be grant aided by the IDA. If this stipulation was not included we might be okay with software development services as they would very clearly be defined activities associated with manufacturing industry and technical or consultancy services are usually stand-alone activities but once we include data processing services we will be faced by the insurance companies and banks, who since 1 January, are liable to a 43 per cent rate of tax, at least on the face of it.

It seems that if the additional words which would have the effect of confining the 10 per cent rate of tax to companies who received an employment grant from the IDA were not included, a large proportion of the activities of an insurance company would be liable at a 10 per cent rate of tax rather than 43 per cent, as a large amount of the work done in an insurance company is of a data processing nature. The same applies to banking. Much of what goes on in a bank would come under the heading of data processing and there is nobody better at giving a wide definition than tax advisers if the form of words suits. I believe whoever drafted this section saw the gap and then tried to close it by introducing this notion. As Deputy McDowell has pointed out, the pressure will be put on and the Minister will be asked how we can justify this. Those who have already received will get more. First of all, a person would get a grant and then get tax relief. What about the fellow who has got nothing? Has he not a better case? There will be fellows back with levers trying to widen that gap further.

I am uneasy about the approach being adopted at present. We will have to take another look at this question. I am aware that we are bound by commitments and contracts and that the 10 per cent régime will continue until the year 2000. I support that fully but there are two things we will have to do very quickly. First, we will have to look beyond the year 2000 and make our minds up about what is going to happen then. After 1992 people will be thinking in terms of investment decisions, the benefit of which will accrue after the year 2000, and they will want clear signals — if not categoric statements — at least seven or eight years in advance of what will happen here after the year 2000.

The other matter is a concept on which Deputy McDowell has been fairly strong. Nobody would mind a 10 per cent scheme but it is a maximum of 10 per cent and it would be well worth putting flesh on the formula that Deputy McDowell proposed in his tax document of exploring the possibility of getting as near to 10 per cent as possible. It is not as simple as saying that it will be a minimum of 10 per cent because certain write-offs are legitimate.

Effectively, zero rated companiese have been operating in this country for years without paying any tax. Since the introduction of the 10 per cent régime companies have operated here and paid 1 per cent, 2 per cent and 3 per cent and not much more. In the first five or six years of operation they have effectively paid nothing. I know that the Minister's predecessor last year — and the Minister this year — tidied up the reduction in accelerated depreciation from 100 per cent to 50 per cent and sections 11 to 14, inclusive, this year.

We have a strong corporate base and it might be of greater benefit to the companies here if they paid slightly more on their corporate tax and less on their payroll taxes. It is well worth looking at that kind of switch and it could be done in a manner which would not only benefit the economy and employment but the companies which are now the beneficiaries of the 10 per cent tax régime.

I am not an advocate of easy ideological solutions. I do not say that there are enormous quantities of wealth out there in the corporate sector which we should grab. I am not into that line of simplistic argument but it is time to look at the balance of advantage, for the economy and the companies, because certainly in individual companies a case can be made where it would be to their benefit if the kind of switch I am talking about is made.

Quite frequently a corporate identity does not express a corporate view. The view expressed is that of the people running the corporation and frequently it is the view of the collective three or four key people at the top. The people who run our corporate sector now on the basis of the financial pages of the newspapers run it very effectively and profitably. However, they are running it at a return far less than their equivalents abroad. The people who are running the corporate sector so well in many areas, who are making it such a highly profitable sector and have a terrific export record, are being penalised because of PRSI and income tax. The very captains of industry who would be expected to lead the attack against any change along the lines I am talking about in regard to the 10 per cent régime would be the main beneficiaries of the change if the thing was constructed properly and if there was a switch from the corporate to the personal side.

There is a kind of schizophrenia in corporate Ireland at the moment because a chief executive who has a great gross income has quite a low income after tax. Some very significant people are living quite modestly and certainly they would benefit from major changes in income tax. However, one of those same people wearing his corporate hat is protecting the profitability of the corporation and advocating low corporate tax régimes. It is time to look again at the balance of advantage. This is a small step in one direction I will not be voting against the section, but it accentuates fears that have been growing in me and others over a number of years that this gradualism is wiping out the corporate tax base. At the same time the people who work in the sector are personally penalised for the advantages which accrue to the institution in which they work.

The more I thought about it the more convinced I became about the wrongness of this. Think of two individuals who have some expertise in the data processing or software development or consultancy service relating to those two things: one is an under-capitalised entrepreneur and the other has backing. One can go to the IDA with a corporate plan and the other can just hire an office in Camden Street and get going. One sets up a company which, as far as capital structure is concerned, is ramshackle and takes risky ventures on board which would not impress any grey-suited executive in the IDA. The other decides to do the safe thing and at the end of the first or second year — whenever the corporation tax falls to be paid — one of them pays 43 per cent and the other pays 10 per cent of their profits because the man who had the safe course and who had all the money behind him also got a grant from the IDA. That legislation seems wrong in principle.

You are saying to somebody, "to him who hath more shall be given, and from him who hath not even that which he has shall be taken away". That is fundamentally the principle laid down there. If you hold out the begging bowl and are sufficiently impressive to get help from the Government in one area you will get it from the other area as well, whereas if you cannot, for whatever reason, get the IDA to back you, you can stick at the 43 per cent level. How can it possibly be justified that someone who does the same service but in a different way and is undercapitalised, is told that he can have a 43 per cent corporation tax rate but someone who does the same work and does not attract the favourable attention of a semi-State body — would-be entrepreneurs but too cautious to put their toe into the pool themselves — is told by the IDA that he will get a 10 per cent rate? Look at the converse side of the coin. The IDA are saying to the Department of Finance that if they get a tax incentive package they will haul in a few big fish to this country. They say that if they have the right to offer a 10 per cent rate they will bring in the goodies. That is fine except for the proposition that one of the pre-conditions for giving the goodies is that they have to give employment grants as well.

That is a wrong basis on which to decide. Why is it relevant that the IDA have given them a grant? It is relevant only for the reason Deputy Noonan gave, that in some sense it puts a piece of string across the gateway that has been opened. The decision as to how wide the gateway is open is given to the IDA and they are allowed to market tailormade tax packages for people in whom they are interested while others, who are not favourably looked on by the IDA, do not get anything like the same treatment. It is simply wrong in principle to design a tax system where a certain class of activity attracts a 10 per cent rate but only on condition that a semi-State body have decided to pour some of the taxpayers' money into it through another pocket.

To go back to what Deputy Noonan said in relation to the section 84 type lending discrimination, is this not much more obviously a case where there is discrimination because you are discriminating between two potential entrepreneurs on the basis that one of them is approved of by a semi-State body?

The High Court recently struck down the Imposition of Duties Act on the basis that this House cannot delegate its legislative powers but if the House provides a 10 per cent tax rate and then allows the IDA to select to whom that tax rate will be given it is in my view delegating its taxation powers to the IDA. That is wrong. For the reasons I have outlined I am against this provision.

(Limerick East): I should like to move from the theory to the practice and refer to a number of IDA decisions I came across in my time as Minister for Industry and Commerce. I can recall a cut-glass manufacturing industry in the west being refused IDA grants in accordance with the normal IDA practice that they do not grant aid another activity if they think the market is saturated. The line of decision-making would be, we have Waterford Glass, Cavan Crystal and Galway Crystal and neither the domestic market or the foreign market would justify another cut-glass industry. Grants were refused to the applicants from the west but the entrepreneur went ahead and has now a successful small glass cutting industry.

If we were to apply that scheme of things to computer related services, as in the section, that person would be paying tax on his profits at 43 per cent. If that person had been grant-aided by the IDA in the first instance and had received an employment grant he would be paying tax at 10 per cent. This does not arise in manufacturing industry because all manufacturing industry has a 10 per cent regime. However, the Minister now is differentiating between service industries which are aided by the IDA and those which are not. The IDA will have propositions for data processing services which they will not grant-aid because they have had such proportions before; they will grant-aid some and will not grant-aid others. If a person has the bottle to go ahead without grant-aid and sets up a data processing service or a softwear development service he will be paying tax at 43 per cent.

That person can go to the High Court.

(Limerick East): The firm grant-aided by the IDA will be paying tax at the rate of 10 per cent. This is a very curious formulation of the proposition. I would like the Minister to have a look at this between now and Report Stage to try to get a more satisfactory draft.

All that is new in this is technical consultancy services which relate to either paragraphs (1) or (2). The remainder has been in existence for years and I agree with many of the sentiments expressed about certain aspects of them. Computer services were first included in the scheme in 1984 and the vetting service of the IDA has always been the vehicle by which those things have been done. One can argue for and against that. As Deputies Noonan and McDowell rightly say, one can look at any sector and say that it should get more than another sector but what is involved here is trying to improve the labour intensive side. I agree with the Deputies when they say that we must get further away from aiding capital as against labour. We started that process and are continuing it this year. Other areas are being tightened up but a lot of tightening up remains to be done on the whole corporate side of taxation. I want to see us going further down that road because the balance was tilted for too long, far too heavily in favour of capital as against employment. Hopefully, we will be able to continue the move in the right direction next year.

As far as softwear and technical services are concerned we are talking about labour intensive services. One can argue one way or the other as to whether we should do this. In my view we need to pull the whole area together. I am aware of cases like that mentioned by Deputy Noonan. Different State agencies have told people there was no room for their project, that the market was saturated and that they would not get into an export market with their product, but subsequently they were proved wrong. We all could be good decision makers in hindsight but somebody has to make a judgment on the day an application is received.

There has been mention of keeping an entrepreneur out if one believes that the market may be saturated but if a person is good enough he will take a niche in the market at any stage. A decision has to be made then as to whether that person should be supported. The Report of the Commission on Taxation favoured more use of grants and less use of tax incentives and it appears that that is what Deputy Noonan is referring to. I do not think the Deputy believes in grants and I certainly do not. They have been overused here and industry has been overpadded by them. We have developed a grant mentality here. At the end of the day if any project has to depend solely on a grant for success it will inevitably fail. That is my honest opinion. In the case of many of the investors who come here the grant is used as a top-up. I have never believed they were the crucial factor in encouraging an investor to come here. The taxation system had a hell of a lot more to do with them coming than the level of grants.

In my time as Minister for Industry and Commerce I attempted, and succeeded to a great degree, in scaling back the grants. The result is that we are producing more jobs for less money and I want to see us going further down that line.

(Limerick East): At the commencement of his reply the Minister told us that these provisions have been in existence for some time but that is not the issue involved. If a person is manufacturing aluminium saucepans and makes a profit that person is charged at the rate of 10 per cent regardless of whether he or she was grant-aided by the IDA. Whether one gets a grant or not there is no differentiation in manufacturing between the way the tax is applied subsequently. However, the difference between that provision which has existed for some time and the provision before us is that to qualify for the 10 per cent regime one must get a grant from the IDA in the first instance. If one has the bottle to go ahead and establish a niche in the market without the IDA grant — good entrepreneurs do that — then that person is taxed at the 43 per cent rate because it is not self-evidently manufacturing industry. To be a computer related activity which qualifies as manufacturing that industry must be grant-aided by the IDA or otherwise it will be treated as part of the service industry and taxed at the rate of 43 per cent. That is unfair.

It is IDA policy, and it is a correct policy, that we should not throw grants at everybody until the market is saturated and they all knock each other out of business. We should not be grant-aiding in the way some of our bank managers sanction figure for a house or six figures for a farm. If the IDA give grants to everybody they will compete with each other and knock each other out of the market. However, that is not the issue. What we are highlighting is that to qualify for the 10 per cent regime one must get a grant from the IDA, while in manufacturing activity the tax rate is 10 per cent.

If a decision is made to extend the 10 per cent tax rate who will be the adjudicator?

The IDA, and not the Dáil.

We use the IDA for BES schemes but who will be the adjudicator if it will not be the IDA in this case? Have the Members a better idea?

Once the business is up and going it does not matter.

Who will be the adjudicator as to how a business is progressing? Are the Deputies saying that we should forget about the IDA and let the Revenue decide? I would prefer the IDA before the Revenue any day to make an adjudication in relation to industry.

(Limerick East): I do not want either body adjudicating.

What does the Deputy want?

(Limerick East): I want the activity to be defined precisely so that all activities so defined will qualify for the 10 per cent rate.

The Deputy wants us to get away from the way things happen.

(Limerick East): No. If we are extending the definition to manufacturing industry I want a clear definition of what the new activity is so that any person who engages in that activity will qualify for the 10 per cent regardless of whether they get an IDA grant. It is in the definition of the activity that the imprecision is here.

There are holes in that also.

(Limerick East): There are because it is very difficult to draft such a provision.

That is correct.

(Limerick East): It is possible that we could open the door to existing services and that is why the drift towards including sections of the service industry into manufacturing industry is difficult to deal with. Setting up the IDA as a type of post factum adjudicator of which tax regime one should be in, whether it is 10 per cent or 43 per cent, is not the best way to proceed, to put it at its mildest. The Minister should have another shot at defining this activity between now and Report Stage. Then we will all agree that the new activity should qualify for the 10 per cent regime.

I do not think we would be able to make it tight enough and I am sure the Deputy would not have applied the same logic to his argument when the BES was introduced. This is very nearly the same situation again. When we are trying to define the activity and talking about a 10 per cent corporation tax rate it is not very easy to get it tight enough so that we do not open doors. However, let us look at some of the activities which have won through in the courts in relation to the 10 per cent manufacturing rate of corporation tax, for example, ripening bananas, pasteurising milk——

(Limerick East): Putting tea in teabags.

Let us be realistic about where we are going. I suppose teabags will be the next one.

All I am asking the Minister to do is to move forward three years to when two consultancy companies both of which will be thriving but one of which will not impress the grey suited man from the IDA when this Bill is law. It cannot be justified that an error of judgment by an IDA executive should say for all time that one company should pay tax at the rate of 10 per cent while the other should pay tax at 43 per cent when they are supplying the same service and giving the same employment and same benefits to the economy, but one will cost the taxpayer less. I cannot understand how the Minister can put his hand on his heart and say that that is fair tax law. By definition it is unfair tax law. It will be grossly unfair if, in four years' time two equally successful companies, one of which gets money from the IDA — and that is the only difference between them — pay radically different tax rates on profits.

We will have a look at it to see if we can draft it tight enough to do the job. I am not saying it is perfect.

It is most unfair.

It is unfair but we cannot be perfect in everything we do when we get into law.

Will the Minister have another look at it?

I will have another look at it between now and Report Stage.

Amendment put and agreed to.
Section 20 deleted.
NEW SECTION.

I move amendment No. 38:

In page 33, before section 21, to insert the following new section:

"21. —Section 39A (inserted by the Finance Act, 1981) of the Finance Act, 1980, is hereby amended by the deletion of subsections (8) and (9).".

This amendment proposes to insert into the Finance Bill a new section 21 which will amend section 39A of the Finance Act, 1980, to remove the less than 50 employee limitation on Shannon service companies qualifying for the 10 per cent scheme of corporation tax. Where the number of such a company's employees equals or exceeds 50, subsection (8) of section 39A provides for a limit on the amount of relief due to it under the 10 per cent scheme by reference to the number of its employees.

I am glad to say that following a recent submission to the Commission in the matter by the Government the Commission has indicated — it has to approve any moves in regard to regional aid — that it will raise no objection to the removal of the 50 employee limit. This is a particularly welcome improvement in the incentives available in trying to attract new employment to the Shannon area. In addition it will encourage existing companies in Shannon to expand their operations and removes the possibility of them leaving, as their relief will no longer be liable to be restricted if their employee numbers equal or exceed 50. I think both Deputies are familiar with what we are doing in this area.

(Limerick East): This is a very welcome amendment. To a certain extent it is bringing existing practice into line with the realities of the situation and I welcome that. I take it that no new ceiling is being introduced; it is just that the ceiling of 50 is being removed and they can float upwards now without having to go through——

The 50 employee ceiling is being taken away.

(Limerick East):——the machinations of forming sister companies, etc.

Amendment agreed to.
SECTION 21.

Is it agreed to take amendments No. 39 and 40 together?

Deputies

Agreed.

I move amendment No. 39:

In page 34, paragraph (a), to delete lines 29 to 35, and substitute the following:

"(ii) would be deemed to have been made for the accounting period by virtue of subsection (3) and (6) of section 64 of the Corporation Tax Act, 1976, if—

(I) the said subsections (3) and (6) were treated as applying for the purpose of this definition as they apply for the purposes of the said section 64, and

(II) every reference to `distributable income of the company' in the said subsection (3) were a reference to the amount determined by the formula

(R - S) + T

where R, S and T have the same meanings as otherwise in this paragraph,".

These are tidying up amendments.

(Limerick East): What is involved in amendments Nos. 39 and 40?

These are technical amendments which make a drafting correction to the definition of "W" for the purposes of the formula set out in section 21 of the Bill by reference to which tax credits are to be calculated. Amendment No. 39 is a substantive amendment while amendment No. 40 relates to where the amended text is repeated in the table. The amendments clarify the meaning of the term "distributable income of the company" for the purposes of section 64 of the Corporation Tax Act, 1976 — paragraph (II) of the amendment — in so far as the provisions of that section are adopted in defining "W" for the purposes of the formula.

Section 21 amends the formula in section 45 of the Finance Act, 1980, by reference to which tax credits will be attached to distributions made after 6 April 1989 on a proportional basis. This is part of the Primary Fund. It is necessary for the purposes of the amended formula that the amount, designated by "W", of all distributions made by a company before 6 April 1988 for an accounting period should be defined. The sum of all distributions made by a company for an accounting period may in some cases exceed the distributable income of the company for that accounting period. Amendment No. 39 is a substantive amendment while amendment No. 40 is a technical, tidying up amendment. It is part of the Primary Fund which was introduced last year, suspended and being brought into operation this year under this section.

Amendment agreed to.

I move amendment No. 40:

In page 36, to delete lines 38 to 43, and substitute the following:

"(ii) would be deemed to have been made for the accounting period by virtue of subsections (3) and (6) of section 64 of the Corporation Tax Act, 1976, if—

(I) the said subsection (3) and (6) were treated as applying for the purposes of this definition as they apply for the purposes of the said section 64, and

(II) every reference to `distributable income of the company' in the said subsection (3) were a reference to the amount determined by the formula

(R - S) + T

where R, S and T have the same meanings as otherwise in this paragraph,".

Amendment agreed to.
Question proposed: "That section 21, as amended, stand part of the Bill."

(Limerick East): Last year a very difficult section was introduced and I think it is being made even more difficult by these amendments. I should like the Minister, not so much for our benefit but for the benefit of accountants who find this section extraordinarily difficult to understand, to put his briefing note on the record. I do not want to take up the time of the House by going through the section now but it is an extraordinarily difficult section, even for the professionals who will be dealing with it. They need some more guidelines.

Sections 21 and 22 amend section 32 of the Finance Act, 1988, in a number of ways. Section 32 of the Finance Act, 1988, changed the tax rules for distribution by companies of dividends from different types of profits. Prior to section 32 a company with a mix of profits had to pay in dividends all its post-tax 10 per cent profits first before they could pay out dividends from their other post-tax profits. This was known as the Primary Fund rule. Section 32 abolished the Primary Fund and introduced new rules to take effect from 6 April 1989. The key rule in these new arrangements is proportionality, that is, dividends are treated as coming proportionately from the mix of post-tax profits. Thus the new rules reflect the underlying commercial reality of a company with a mix of 10 per cent profits, standard rate profits and other profits.

In response to representations made after the publication of section 32 my predecessor announced last year that consideration would be given to simplifying or improving the detailed provisions of section 32. Following discussions with a number of representative bodies and companies, certain changes to section 32 were decided on, as proposed in sections 21 and 22. The key change is that, instead of the rule that the dividends must be paid in the first instance out of the mix of profits of the immediately preceding year, a company will now be able to pay the dividends out of the mix of profits of any one or more previous years in the past nine years. This is known within the accountancy profession as "vintaging". Where such profits are exhausted the company can go back to earlier years. Thus these changes will give companies much more flexibility in regard to dividend distributions while maintaining the basic proportionality rule.

The proportionate basis, as set out in sections 21 and 22, is logical and reasonable. The reality is that companies have one pool of profits only. The new rules are designed to treat dividends as paid from this pool for the purpose of calculating the tax credits to be attached to those dividends. This approach ensures a fair system for companies, their shareholders and the Exchequer. It strikes a balance so that if there were, within a group of companies, a 10 per cent company, a 43 per cent company, a 35 per cent company, we are saying to them that they should distribute their profits in the proportions in which they are earned. It seems to be a fair and reasonable way for the Exchequer, shareholders and everybody else. Certainly, some companies would like to have total flexibility in relation to which would be the most tax efficient method as far as they are concerned. Therefore, this endeavours to strike a balance between the different interests involved.

(Limerick East): Last year the Minister's predecessor introduced a scheme which was an option. I take it that that option is now being removed and that henceforth the provisions of section 21 will apply to all distributions?

That is right.

(Limerick East): The option applied for a year only; was not that correct?

That is right.

(Limerick East): Am I right in saying that the effective date will be from the beginning of the current tax year, 5 April 1989?

6 April of the current year.

Question put and agreed to.
SECTION 22.
Question proposed: "That section 22 stand part of the Bill."

This section proposes to allow companies an alternative to the provisions of section 45 of the Finance Act, 1980, as amended last year, which provides that, for the purpose of computing the attaching tax credits, distributions made by a company, with specified exceptions, should be attributed to the accounting period ending immediately prior to the date of payment of the distribution.

Subject to conditions the alternative will allow companies to nominate an accounting period or periods for which a distribution will be treated as made for the purpose of computing the tax credit to be attached to it. A company may nominate an accounting period or periods ending not earlier than nine years from the date on which the distribution is made if it still has undistributed income relating to those periods. When there is no longer undistributed income relating to those periods companies may nominate an earlier accounting period or periods. A company will not be entitled to nominate that a distribution was made for the accounting period in which it was made unless it is an interim dividend paid before 6 April 1990, a distribution arising from tax-based section 84 lending or preference share financing, or is in respect of the first or last accounting period in which a company carries on business. An election for the alternative method will have to be made to the inspector of taxes within six months of the end of the accounting period in which the distribution is made.

The option set out in section 22 allows companies generous scope in managing the tax credits they attach to distributions made to their shareholders. Sections 22 and 45 of the 1980 Finance Act, as now amended, introduce maximum flexibility into the computation of tax credits consistent with limiting the cost to the Exchequer of the abolition of the primary fund.

The proportional system of attaching reduced 10 per cent tax credits to distributions now proposed reflects the fullest consultation with interested bodies. It should prove a fair and reasonable system in replacement of the primary fund provisions.

Question put and agreed to.
SECTION 23.
Question proposed: "That section 23 stand part of the Bill."

(Limerick East): These provisions relate to dividends on preference shares, do they not? Am I right in saying they pre-dated 1984 loans?

Yes, preference shares.

(Limerick East): Preference shares would not be widely used in this fashion now, would they? What exactly is the Minister doing? Is he restricting it along the same lines as the 1984 loans?

Yes, foreign-sourced loans. There was a restriction on foreign-sourced loans not seen or attended to at the time, as far as I can recall. This provision is to free it again which will allow funds to flow into the subsidiaries of companies here whether based at, say Shannon, the International Financial Services Centre, or wherever without any cost to the Exchequer good, bad or indifferent. It was an impediment not seen at the time and this seeks to correct it.

(Limerick East): Is it confined to non-resident shareholders?

Question put and agreed to.
SECTION 24.
Question proposed: "That section 24 stand part of the Bill."

This section is a technical provision designed to remove two unintended and opposite interactions between the relief for manufacturing industry — the 10 per cent scheme — provided by the Finance Act, 1980, and the surcharges contained in sections 101 and 162 of the Corporation Tax Act, 1976, in respect of the undistributed investment, rental and certain other income of close companies. One of the interactions, by not giving full weight to the amount of tax borne on the income liable to surcharge, actually increases the surcharge beyond what it should reasonably be. The other interaction, by allowing manufacturing relief in respect of a surcharge, effectively reduces the surcharge.

The manufacturing relief and the surcharges are totally unrelated concepts and, therefore, should not interact as they do. The very existence of the interactions, which are not mutually exclusive, provide for an administrative problem not always amenable to a simple and readily acceptable equitable solution.

This section proposes to address the problem by providing that the surcharges will operate as intended and will not be taken into account in calculating manufacturing relief.

Question put and agreed to.
SECTION 25.

I move amendment No. 41:

In page 40, paragraph (b), line 4, to delete "qualifying" and substitute "allowable".

This is a drafting amendment to section 25 of the Bill which increases the relief payable to a company referred to as an allowable investor company which invests in film productions. In line 4 of page 40 there is a reference to "qualifying investor company" which should read "allowable investor company". This amendment corrects that error.

Amendment agreed to.
Question proposed: "That section 25, as amended, stand part of the Bill".

Perhaps the Minister could clarify for me this film industry provision. There seems always to be great concern to make special arrangements for the film industry. In the couple of minutes remaining I should like to know what the Department of Finance think of this, whether all these tax-based incentives are effective at all or do they merely represent a response to the urgings of an influential group of people? Is there much in it?

There was an incentive scheme in existence which was not operational or being taken up. This constitutes a significant improvement on that scheme. If one looks at the development of the film industry in Canada and Australia one will see that it grew out of a tax-based incentive package. This is a similar attempt to ascertain whether there will be a response to it here. As the House will be aware, if we could attract film makers here their industry is a very labour-intensive one and a good business to get going. That is the way it grew in Canada and Australia and it is being tried here in the hope that it will be successful.

(Limerick East): I note that the ceiling is being increased from £100,000 to £200,000. Could the Minister clarify what will be the position of companies who invest more than £200,000 in a film? As I understand the position they can claim up to £600,000.

It can be £600,000 in one year or £200,000 each year over three years.

(Limerick East): If they claim the £600,000 in the year subsequent to the investment, and invest subsequently, they cannot claim anything further for three years; is that correct?

That is the position. The maximum is £600,000 whichever way one takes it.

Question put and agreed to.

Acting Chairman

As it is now 1.30 p.m. I am required to put the following question in accordance with an Order of the Dáil of 9 May 1989:

"That the amendments set down by the Minister for Finance to Part I of the Bill and not disposed of are hereby made to the Bill; and, in respect of each of the sections undisposed of in the said Part, the section or, as appropriate, the section as amended, is hereby agreed to".

Question put and agreed to.
Sitting suspended at 1.30 p.m. and resumed at 2.30 p.m.