I move: "That the Bill be now read a Second Time."
The objective of this Finance Bill is to provide a legislative basis for the taxation measures which I announced, or foreshadowed, in my Financial Statement on 30 January. Despite the constraints imposed by difficult external conditions, the Government are making further significant steps in taxation reform again in 1991. The provisions of this Bill, taken with those of the 1990 Finance Act, represent major progress towards gearing our tax system to the needs of the economy and to the requirements of the EC single market. In a little more than one year, we will have achieved: a reduction of 3 percentage points in the standard and top rates of income tax; a cut of 4 percentage points in the standard VAT rate; a considerable narrowing of the difference in excises between this country and the UK; a reduction in the standard rate of corporation tax to 40 per cent from 1 April this year; and significant reductions in the top rates of capital taxes.
This progress in reducing rates does not, however, represent the full extent of the Government's commitment to tax reform. It has to be seen in conjunction with: (a) our determination to improve tax collection and enforcement, so that taxes due are paid promptly and fairly. This year's Bill contains important initiatives in relation to the administration of capital acquisitions tax, stamp duty and capital gains tax, which means that all our main taxes are now on a self-assessment basis; (b) our commitment to broadening the tax-base generally, to making the tax system more equitable, and to ensuring that special reliefs and incentives are better targeted. This year's Bill maintains the thrust of earlier years, towards reducing the cost of "tax-expenditures", seeking to maximise their effectiveness and giving a fair deal to everyone; (c) our firm intention to build on the progress already made, especially in relation to personal income tax, which is no important for the attainment of our employment goals; and (d) our commitment to disciplined management of the public finances which, in the final analysis, is crucial to sustainable lower tax rates.
Before turning to the specific provisions of this Bill, I will outline our broad economic and budgetary strategy and comment briefly on the immediate prospects for the economy, and on budgetary developments.
The Government's economic strategy in the last few years has been based on lower public borrowing, improved competitiveness and strict adherence to our obligations in the EMS. This created the conditions for lower inflation and lower interest rates, which benefit everybody, and inspired greater investor and consumer confidence. These, in turn, resulted in a rate of economic growth among the highest in the EC, and, most important of all, in higher employment. By any standards the strategy was an outstanding success, not least because this progress was accompanied by sound economic fundamentals. With these, we are in a much better condition to withstand the present downturn in the international economy. By adhering to this broad strategy, we will be well placed too to benefit from its upturn in due course. The Government will be resolute in this regard despite the difficulties which the international scene may pose for us this year.
The Programme for National Recovery was the cornerstone of much of the economic and social advances of the past three years. The Programme for Economic and Social Progress continues that strategy which underpinned the Programme for National Recovery. Its primary aim is to develop a modern, efficient economy capable of sustained economic and employment growth. Only in this way can we earn the resources necessary to address broader social objectives.
Budgetary discipline must, and will, be maintained under the programme. In my budget speech I reaffirmed our mediumterm objective of progressively reducing the debt-GNP ratio towards 100 per cent by 1993, and our longer term aim of bringing this ratio more into line with the rest of the European Community. The budget target for 1991 — which envisages total borrowing of just under 2 per cent — was set with this goal firmly in mind.
The pay accord in the programme should help to consolidate the competitive gains of recent years. It should also ensure a further improvement in workers' living standards, against a background of good industrial relations. The combination of moderate pay increases, low inflation and income tax concessions in excess of £800 million on a cumulative basis gave substantial increases in real take home pay over the PNR period. The tax concessions in this year's budget combined with the pay increases agreed in the programme and an expected inflation rate of 3 per cent, provide the basis for a further increase in real take home pay this year.
Our policy of improving benefits for those on social welfare is being maintained. An innovative new approach is being adopted towards tackling unemployment black spots. Structural reforms aimed at making us a more competitive efficient economy will be implemented.
The policy strategy which is reflected in the Programme for Economic and Social Progress, in this year's budget measures and in the Government's stance generally is giving the right signals to investors both at home and abroad. The credibility of economic policy is central to maintaining the confidence in Ireland which is crucial to our future. A climate which encourages and sustains investment, the engine of growth, is the only solid basis for employment creation. This credibility was established during the Programme for National Recovery and it is being reinforced by the broad consensus which now obtains, for the continuation of that economic strategy in the new programme.
Turning to the prospects for 1991, I made it plain in presenting my budget that 1991 would undoubtedly be a difficult year. It was inescapable that slower growth abroad would affect us adversely. It was largely on this account that I projected that our growth rate this year would be less than half that of 1990. The prospect is that the international economy may be somewhat weaker, at least in the first half of the year, than expected two months ago. The UK authorities, who had been forecasting a modest rise in output this year, are now talking about a decline of 2 per cent. Moreover, the prospect for growth in our continental EC trading partners — particularly in Germany — is now weaker than forecast at the end of last year.
Though it will be no easy task to attain our Budget Day forecasts for growth, I remain optimistic about the short term prospects for the Irish economy. Better competitiveness and lower inflation should enable us to increase our share even in weaker international markets. The decisive conclusion to the Gulf crisis should see a resumption of strong investment growth, supported here by EC Structural Funds and by businesses continuing to gear up for the EC Single Market. The measures taken in the budget, together with the new Programme for Economic and Social Progress, will help to sustain investor confidence, and they will boost real incomes as the year advances. Most of the domestic economic indicators which have become available since the end of January relate to developments in 1990 but, in so far as they throw some light on prospects for this year, they support the view that 1991 will be a year of more modest progress. Manufacturing output remains subdued, at least in comparison with the very strong expansion of recent years, and consumer and investment spending have shown a weaker trend.
It must be borne in mind, of course, that our information essentially pre-dates the ending of the Gulf War. Not only did the war have adverse direct effects on international trade, but the associated uncertainty also damaged consumer and investor confidence. It is no surprise that expenditure on durables was restrained in the earlier part of the year, and as might be expected, indirect tax receipts felt the impact.
Of course, it must be borne in mind, in interpreting the tax returns, that at this stage what we are looking at is, in effect, the tail-end of the 1990-91 tax year. Consequently, year-on-year comparisons reflect the full impact of the reductions in tax rates introduced in the 1990 budget, both in the area of indirect taxation and in income tax. As we get further into the year, the influence of this factor will become less significant. In any case, we have yet to see the impact on consumer spending of the budget and the new programme measures which, for the most part, take increasing effect as the year progresses. These should give a boost to the revenue trend in the months ahead. As far as expenditure is concerned, outlays on social welfare have been affected by higher than expected unemployment in the first quarter, consequent on the sharp fall in net emigration. This apart, expenditure trends for the year to date show no significant departure from the expected pattern of departmental spending profiles.
Given the particular uncertainties which are a feature of 1991, it was bound to be difficult to evaluate the overall budgetary picture until a good part of the year would have passed. Nevertheless, the Government will monitor the evolving situation very closely, and will not hesitate to do what is necessary.
The recent reduction in domestic interest rates was a welcome development. In that context I would like to pay tribute to those financial institutions which passed on the 0.5 per cent reduction to their borrowers and mortgage holders with the minimum of delay. While we will continue to be constrained by the international interest rate environment I would hope that it will be possible for Irish interest rates to more fully reflect our strong economic fundamentals.
I would now like to address the individual sections of the Bill. Details of these sections are contained in the explanatory memorandum which has been circulated to Deputies with the Bill.
The opening sections of the Bill deal with the substantial package of income tax reliefs I announced in the budget. All in all, nearly 700,000 taxpayers will see their marginal income tax rate reduced as a result of these changes. These reliefs continue the established trend in income tax policy of making special provision for the low paid, especially those with children, extending the standard band, and reducing the top and standard rates of tax.
Increasing the general exemption limits is an effective way of relieving income tax for the low paid. These limits are being increased by £150 for a single person and £300 for a married couple, with the age exemption limits going up by a similar amount. The child addition, which I introduced in 1989 at £200 per child and increased to £300 per child last year, is being raised to £500 per child in respect of the third and subsequent children. This year's measures will exempt some 18,000 taxpayers with 23,000 children from tax altogether. A further 26,500 taxpayers with 36,000 children will be brought into marginal relief. The marginal relief rate itself is being reduced to 52 per cent; two years ago this rate stood at 60 per cent.
This is the third year in a row in which I have substantially increased the exemption limits. In 1988, the exemption limit for a married couple was £5,500 and took no account of children. It is now £6,800, an increase of nearly 25 per cent. For a married couple with three children, the increase is to £7,900, or nearly 44 per cent. For a couple with five children, the new figure is £8,900, which is an increase of over 60 per cent. These substantial increases in the income tax thresholds, in conjunction with family income supplement which I improved further in this year's budget, represent an effective response to the position of low-income families, while ensuring an incentive to take up employment.
Widening the standard-rate band has the desirable effect of pushing up the income levels at which higher tax rates are reached. The standard band is being extended by £200 for a single person and £400 for a married couple. This is the fourth year in succession in which this band has been extended. It was £4,700 for a single person, and £9,400 for a married couple, in 1987; these figures are now £6,700 and £13,400 respectively, an increase of over 40 per cent.
Moreover, the personal allowance is being increased by £50 for a single person and 100 for a married couple, with appropriate consequential changes in the widowed personal allowance and in the widowed parent and single parent allowances.
The third area on which income tax policy has concentrated in recent years is the actual rates of tax themselves. This year I am providing for a reduction of 1 per cent in both the standard top tax rates. This brings them to 29 and 52 per cent respectively: before the 1989 budget, they stood at 35 and 58 per cent.
In other words, the past few years have seen very substantial improvements in the three focal points of income tax policy: the general exemption limits have been increased over the last three budgets by at least 25 per cent, and in some cases by over 60 per cent when the child addition is taken into account; the standard rate has been cut since 1989 by more than one-sixth; and the top rate of tax cut by more than one-tenth and the standard band has been extended by over 40 per cent, so that a significantly lower proportion of taxpayers face the higher rates. This is the way to deal with the tax wedge that is so much talked about: by real and substantial progress on extending the standard band and by reducing our tax rates.
These would be no mean achievements in any economy. Against the backdrop of the severe budgetary constraints imposed by the need to restore order to the public finances, they are clear proof of the Government's determination to reform taxation. Of course, despite these achievements, the Government recognise that more remains to be done as budgetary circumstances allow. I made this clear in my budget speech: the Government's aim, as I said, will be to reduce both the standard and top rates of tax by 2 per cent in each of the next two years.
The Bill also contains additional provisions to respond to the needs of certain taxpayers. A new allowance is being introduced to help widowed parents cope financially in the difficult bereavement period which follows the death of their spouse. This allowance, which will apply for the three years following that in which the spouse dies, will be £1,500 for the first year, £1,000 for the second year and £500 for the third year. This is being implemented in such a way that those people whose spouse died since 6 April last year will qualify. The ceilings on the relief on rent for persons aged 55 years or over who live in private rented accommodation are being increased from £750 to £1,000 for a single person and from £1,500 to £2,000 for a married person. In addition, I have decided to introduce a special ceiling of £1,500 for widowed persons. Finally, as announced in the budget, the PAYE allowance is being made available to persons whose place of employment is outside the State where they are paying tax under a PAYE-type system.
The last section in Chapter I arises from my announcement last December of certain relaxations in exchange controls. I said that individuals would, subject to certain conditions, be permitted to open foreign currency accounts with Irish financial institutions. I pointed out that deposit interest retention tax would apply to interest from such accounts, and that therefore permission to open them would have to await the passage of the Finance Bill. In keeping with this announcement, section 11 provides for the application of deposit interest retention tax to interest from foreign currency accounts held by individuals, with effect from 1 June 1991. Non-resident individuals opening new foreign currency accounts on or after that date will, of course, be able to receive interest gross on presentation of the usual declaration of non-residence. Existing foreign currency accounts of non-residents will not be affected by the provision; nor will accounts of companies.
Chapter II of the Bill deals with the relief for investment in corporate trades, commonly known as the business expansion scheme. It provides for the changes set out in the Financial Resolution passed by this House on budget day, 30 January, and for the transitional arrangements and other measures relating to the scheme which I announced in my statement of 12 March.
Briefly, the changes are as follows. To begin with, the scheme itself is being extended for two years, until 5 April 1993. Secondly, shipping, hotels, guesthouses and self-catering accommodation are being excluded from the scheme. Thirdly, the amount of BES funding an individual company can raise under the scheme is being reduced, from £2.5 million to £500,000. Fourthly, a lifetime cap of £75,000 is being imposed on the amount on which an individual taxpayer can claim relief. Subject to transitional arrangements which I will come to in a moment, these measures relate to shares issued on or after 30 January.
The House will be aware that on 12 March I issued a statement setting out transitional arrangements to apply to companies which, in the period between 1 January 1990 and 30 January 1991, had entered into binding contracts in writing to purchase or lease land or buildings, or plant or machinery, or to construct or refurbish a building, in the case of manufacturing, international services, or tourism companies; or to purchase a ship, in the case of shipping companies. Companies which had entered into such contractual commitments by the date would, subject to meeting certain conditions, be permitted to raise up to £1 million in BES funding — less any BES funding already raised, of course. To qualify under those arrangements, shares must be issued by 31 August 1991. Section 14 of the Bill provides accordingly.
My 12 March statement also dealt with two other matters, multiple companies and loans to subsidiaries, and section 15 includes provision for those. After budget day, evidence began to emerge of the increasing use of multiple company structures. These were clearly intended to get around the new £500,000 limit, and I said that I would be introducing measures to counter this development. The Bill provides that, where a company is party to an arrangement or understanding or agreement with another company or companies which is designed to circumvent the £500,000 per company limit, they will be entitled, not to £500,000 each, but to £500,000 divided equally among all the companies.
The other provision of section 15 ends the facility for a company to on-lend to a qualifying subsidiary funds raised under the BES; such funds can, in future, only be used to acquire shares in, rather than on-lend to, the subsidiary. The ability to on-lend BES funds was being used to give quasi-guarantees to investors under the scheme. Such guarantees meant that the risk which an equity-holder normally accepts was being shifted away, and the BES investor was in effect not a shareholder, but a creditor. This practice was not within the spirit of the scheme's objectives.
These two provisions will apply in respect of eligible shares issued on or after 12 March, except for companies qualifying under the transitional arrangements, or where a company had applied to Revenue for outline BES approval, or issued a BES prospectus, before that date.
Section 46 also provides, as I announced in the budget, that if a self-employed taxpayer's preliminary tax payment under self-assessment is based on 100 per cent of his liability for the previous year, he must exclude for this purpose the effect of any BES relief to which he was entitled for that year. Otherwise, a BES investment would serve to reduce not only tax liability for that year but also the preliminary tax payment in the following year.
While I am dealing with the business expansion scheme, I would like to make some general remarks about the scheme and about the purpose of the changes being made to it. The first point I want to emphasise is that the objective of the changes is to refocus the BES on its proper purpose of generating capital for smaller, riskier companies. Hence, the exclusion of asset-backed sectors and the reduction of the company limit from £2.5 million to £500,000. Without these changes, the cost of renewing the scheme would have been prohibitive. Renewal was, therefore, made possible by them.
The second thing I want to do is to nail the accusation that the BES is dead as far as tourism is concerned. It is not. There is still a large number of non-accommodation tourist facilities which qualify for investment under the scheme; for example marina services, cruiser hire, equestrian centre services and tour coach services. In fact, the exclusion for the asset-backed sectors should operate to improve the chances that such ventures will, in fact, be able to raise funds for investment.
The third point I want to make concerns the transitional arrangements I made in March. They were a recognition that there were cases where binding contracts in writing had been entered into on or before budget day in anticipation of BES funds. The wisdom of entering into binding written contracts in advance of securing the money to fund them is, of course, questionable, but it was to deal with the difficulties that would arise for companies, especially smaller companies, where such contracts existed that I announced these transitional arrangements. They are, however, transitional only; only a limited number of companies will be able to benefit from them, and only to the extent of £1 million per company less any BES funds already raised, and only where the shares are issued by 31 August. This Government are not in the business of putting small businesses out of business and, consequently, I made the transitional changes to which I have just referred.
However, the budget measures remain; a lifetime cap has been imposed on investors, the company limit has been reduced from £2.5 million to £500,000, and shipping, hotels, guesthouses and self-catering accommodation are excluded from the scheme. That is the position and so it will remain.
I also want to deal with the view that the BES has done no good in the economy, and that it should have been abolished. A review of the scheme carried out by my Department, in conjunction with the Departments of Industry and Commerce, Tourism and Transport, and the Marine and the office of the Revenue Commissioners, makes clear that whatever the cause and effect additional jobs were arising in companies which raised BES funds. It also threw light on the question of where the BES was most costeffective which, in the final analysis, is the key question about any incentive scheme.
The review covered 347 companies and identified some 4,250 additional jobs in those companies. It identified State aid in respect to those companies of some £74 million, between tax foregone under the BES and direct State aid in the form of IDA grants. This sectoral breakdown was as follows: 3,138 additional jobs were identified in 275 manufacturing and international services companies, which had received £36.9 million in BES investment at a tax foregone cost of £20 million approximately and £24.9 million in direct State aid. One thousand additional jobs were identified in 63 tourism companies which had received £46.8 million in BES investment at a tax foregone cost of approximately £23.5 million. Seventy-eight additional jobs were identified in four shipping companies which had received £7.7 million in BES investment at a tax foregone cost of £3.9 million, while 28 additional jobs were identified in five special trading houses which had received £3.3 million in BES investment at a tax foregone cost of £1.7 million.
Of course, it is not possible to establish objectively to the exclusion to the element of judgment that State support — including low-cost finance under the BES — was directly the cause of the additional jobs identified. Jobs growth is very likely to have reflected other influences as well, not least the favourable economic climate which has existed in recent years. In addition, account was not taken of possible effects on non-BES companies, in the relevant sectors or otherwise. Nevertheless, it is reasonable to assume that BES funding played some part. It will also be noticed that there were significant variations across sectors in the level of additional jobs identified. These considerations underpinned, although were not the exclusive or deciding factors in, the budget decisions taken on the BES.
The Bill contains three sections relating specifically to income tax on farming.
Section 10 increases the existing £2,000 income tax exemption for lessors of farmland who are aged 55 years or over, or who are unable to carry on farming because of mental or physical infirmity. This measure is aimed at encouraging greater land mobility and enabling younger farmers to have the use of land for a reasonable period in order to plan ahead. The new exemption limit will be £3,000 in the case of leases of at least five years duration and £4,000 where leases are for seven years or more.
Section 23 continues, as an exceptional and temporary measure, the 50 per cent rate of accelerated capital allowances for certain expenditure incurred by farmers on the control of farmyard pollution, where such expenditure is incurred before 1 April 1993, and approved by the Minister for Agriculture and Food either under the scheme of investment aid for the control of farmyard pollution or the farm improvement programme. The accelerated capital allowances will apply on a net-of-grant basis. This special concession is intended to assist these farmers who avail of these schemes which protect the environment. The existing scheme of stock relief, which is unique to the farming sector, is renewed for a further period of two years in section 16.
The International Financial Services Centre has been a tremendous success story for this country. So far, approximately 160 projects have been approved for the centre and companies have entered into definite employment commitments for almost 2,600 new jobs. The Bill contains a number of provisions which will help ensure that the centre will continue to thrive.
In the case of investment companies which have been designated by the Central Bank, section 17 provides for "tax transparency", for example foreign investors will only be liable in their home countries for any tax due in respect of their shares in the income or gains of the company. This brings them into line with similar investment vehicles, such as UCITS (Undertakings for Collective Investment in Transferable Securities) and Unit Trusts.
Section 102 of the Bill exempts from companies' capital duty all investment companies to which the provisions of Part XIII of the Companies Act, 1990, relate. This exemption already applies to UCITS and it is considered appropriate that it should extend to other investment vehicles, to which Part XIII of the Companies Act 1990, relates, in the IFSC.
Although insurance was one of the financial services listed for the IFSC in the Finance Act, 1987, life assurance business has not yet been attracted into the centre. It has been suggested that the IFSC is at a disadvantage vis-á-vis competitor centres because in Ireland the investment income of policyholders is liable to tax as well as the normal trading profits of the company, whereas continental countries do not operate this kind of taxation system. A disadvantage also arises vis-á-vis other forms of savings products, such as UCITS and Unit Trusts, already operating in the IFSC, in respect of which “tax transparency” has already been granted. Accordingly, I have included provisions in section 25 which will, I hope, ease the way for the entry of life assurance business, which has very significant employment potential, to the IFSC. The effect of section 25 is that such companies transacting business with non-residents only will effectively enjoy tax exemption in relation to the income of policyholders, leaving such income to be taxed in the hands of the recipient, as is the norm amongst continental European countries. The section also incorporates some precautions which are designed to ensure that shareholders' profits will be partially “ring-fenced” in order to preserve the tax due on these profits.
The 10 per cent rate of corporation tax is a vital part of the package which has been designed to attract business to the IFSC. Originally, that incentive was due to expire on 31 December 2000. Following agreement with the EC Commission, that date is now being extended under section 29 to 31 December 2005. The period during which new projects may be approved for the IFSC has also been extended, from 31 December 1990 to 31 December 1994.
This is a major boost to the centre and will, I am sure, help to consolidate its future. It is my earnest hope that many companies will take advantage of these extensions and move quickly to establish in the centre. There is no doubt in my mind that the centre has an important part to play in the worldwide financial services industry and it is the Government's intention to ensure that it can continue to do so.
As with the IFSC, the Bill also extends the expiry date for the Shannon 10 per cent tax rate from 31 December 2000 to 31 December 2005. In addition, the provisions of sections 17 and 102, in relation to investment companies, will apply in the Shannon zone.
In section 18, the National Treasury Management Agency, which was established on 3 December 1990, is being given an exemption from corporation tax and capital gains tax. The agency is totally funded from, and carries out certain delegated functions for the Exchequer. Because any tax it would pay would in effect be funded by the Exchequer, the exemption avoids a circular transfer process. A corporation tax exemption is also being given to the pensions board. Section 35 provides for this. The board are self-financing, with their administrative expenses being met by fees levied on pension funds. Any surpluses arising to the board will be once-off or used to provide against unexpected expenditure. It would be inconsistent to tax the board's surpluses, derived from fees levied on pension funds which are themselves exempt from corporation tax.
Section 19 closes a loophole in relation to the availability of double rent allowance to lessees in the urban renewal designated areas. Under existing provisions, it would have been possible to obtain more than the intended ten-year span of relief. This section limits lessees to a maximum of ten years. The section affects rent payable on leases entered into on and from 18 April 1991, the date of publication of this Bill.
Section 21 relaxes the current requirement that, for initial capital allowances on buildings to be available to the purchaser, the buildings be unused when acquired. These allowances will now be given if the buildings are sold within one year of being first used and the allowances have not alreay been claimed by any other person. This change will help property developments, particularly in the designated areas, where the current commercial practice is frequently to sell buildings with tenants in occupation.
Section 22 implements the budget proposal in relation to the use of capital allowances through certain property investment schemes. These schemes were deliberately designed to maximise the short term use of the capital allowances available for the construction of buildings in the designated areas in an unintended and unacceptable way. If appropriate action were not taken, the schemes would have led to a considerable front-loading of tax losses on the Exchequer in 1991 and subsequent years. Obviously I could not have permitted this. Accordingly the section restricts the use of the capital allowances in question in the case of such schemes.
The section has been carefully drafted to ensure that there will be no adverse effect on the normal type of joint investment in property which has taken place in recent years. Thus the restrictions will not apply to schemes which are in accordance with a practice which commonly prevailed in the State in the five years to budget day 1991. To take an example, where four individuals jointly purchase a new building in a designated area in the traditional way, it is intended that the associated capital allowances will continue to be available for set-off against all the income of each of these individuals for tax purposes. The Revenue Commissioners will be prepared to express an opinion on the entitlement to capital allowances where requested to do so in any particular case. Thus, a group of investors contemplating an acquisition or development in a designated area need be in no doubt about their position.
Section 24 makes a number of changes in the legislation governing the availability of domestic-sourced section 84 loans. The changes are in continuation of the general policy of widening the tax base and reducing the cost to the Exchequer of section 84 loans while, at the same time, providing transitional arrangements in the case of certain loans for new industrial projects. The cost to the Exchequer is reduced through the lowering of the ceiling for new loans from 75 per cent to 40 per cent of the loan volume as at 12 April 1989, with effect from 31 December next. This reduction takes account of the fact that about £500 million in loans to Shannon financial services companies will terminate on that date. The new 40 per cent ceiling will apply earlier in the case of any particular lender if any such Shannon loan of this lender terminates before 31 December next.
The cost to the Exchequer of section 84 loans is also being reduced by taxing the interest in the hands of the lender in the case of what are known as high-coupon loans. These are loans in foreign currencies with high interest rates which are much more costly to the Exchequer than the ordinary IR£ loans. The prohibition will operate through the taxation of the interest on section 84 loans in the hands of the lender where the interest rate exceeds 80 per cent of DIBOR. To cater for the fact that the UK is still our major trading partner, sterling loans are excluded from the scope of this restriction.
Transitional arrangements are being introduced in the case of loans for certain new manufacturing projects. Where it is not possible for such loans to come within the new 40 per cent ceiling, the provisions permit the giving of these loans above the ceiling. The 80 per cent of DIBOR rule will not apply to certain new loans for manufacturing companies where commitments had been given before budget day.
Section 25 allows life assurance companies to amalgamate their ordinary and industrial branch funds for corporation tax purposes. The 1989 Insurance Act permitted the amalgamation of these separate funds into a common fund for life assurance policies. This section brings the tax legislation into line with this. In order to minimise the cost to the Exchequer, the past tax losses on industrial business are being ring-fenced so that they can be offset only against the future income from the industrial side of the business.
Section 26 contains taxation provisions aimed at facilitating the securitisation of mortgages. Securitisation is a special type of arrangement under which a bank or a building society effectively sells off a package of its mortgages through an intermediary to investors such as pension funds and life assurance companies. Securitisation will provide a new investment outlet in the State for pension funds and life assurance companies and will also provide the scope for extra mortgage finance for the banks and buildings societies. The borrower's consent will be required for the securitisation of the mortgage to take place and the borrower will continue in practice to have the same business relationship with the bank or building society as existed prior to the securitisation.
Section 27 ensures that the standard rate of corporation tax will continue to apply in the case of the processing of meat which is sold into intervention.
Section 30 extends from 2000 to 2010 the termination date for the special 10 per cent rate of corporation tax in the case of certain activities in line with the similar extension for manufacturing contained in last year's Finance Act.
Section 31 converts into domestic tax law the EC Directive on a common system of taxation for the distribution of profits from a subsidiary company in one EC country to their parent located in another member state. This directive is part of a package of three measures on which agreement was reached during Ireland's EC Presidency after a delay of 21 years. The other two measures are concerned with mergers, divisions, transfers of assets and exchanges of shares involving companies in different member states and with an arbitration procedure where there is disagreement between the Revenue authorities in different EC countries on a particular double taxation question. It is hoped to introduce an amendment on Committee Stage containing the provisions in the mergers directive. The new arbitration convention will be dealt with by way of a Government Order in accordance with the normal practice for double taxation treaties. The aim of section 31 is to ensure that the profits distributed by the subsidiary to its parent are not taxed by both the countries concerned. Although the reliefs provided by section 31 already apply under existing double taxation treaties with the majority of our EC partners, the new provisions will extend the reliefs in the case of the remaining EC countries.
The scope of the tax exemptions for pension funds was extended in the 1988 Finance Act to investment in financial futures and traded options in the State. Section 32 will now allow for similar treatment for such investment in foreign futures and options exchanges. This change is appropriate in the context of 1992.
In last year's Finance Act, a one-year tax relief was given for corporate donations to the Trust for Community Initiatives. The trust was set up by the business community as their response to my call for an initiative from them aimed at alleviating poverty and increasing employment. It promotes a wide range of community development projects throughout the country. I have decided to renew the tax relief on company donations to the trust for one further year and section 33 provides for this.
The main provisions in Chapter VI are to give effect to the introduction of self-assessment for capital gains tax, as announced in the budget. This will bring capital gains tax into line with other taxes such as income tax, corporate tax and capital acquisitions tax, to which self-assessment already applies. Capital gains tax will continue to be due in the year following that in which the disposal of the assets takes place. Preliminary tax will be payable on 1 November in the tax year following the disposal of the assets, and the tax return will be due on the following 31 January. In order to avoid the possibility of an interest charge, preliminary tax must be at least 90 per cent of the full amount of the tax due for the year of assessment. To help taxpayers and their agents adapt to the changeover, the Revenue Commissioners have produced an explanatory booklet on the measures as introduced. This is being posted to taxpayers on their agents and is also available on request from tax offices.
In addition to this major change, the Bill contains in Chapter V three proposals which will provide relief from capital gains tax in certain cases. The first concerns the disposal of an asset, whether a business or a farm, on the retirement of the owner. The threshold for relief on disposal of an asset outside the family is being raised from £50,000 to £200,000. The second proposal concerns the provisions governing the disposal of shares by a retiring director of a family company. The requirement that the individual making the disposal be a full-time working director for the ten years prior to the disposal is being eased. The requirement in future will be that he or she has been a working director in the company for ten years of which five years must have been full-time. Moreover, this time period need no longer be immediately prior to the disposal of the asset. These changes will make it easier for people to retire from a business or farm and thus enable business and farms to pass to younger management. They will also cater for people whose active involvement in a family company is curtailed by, for example, illness or disability.
The third provision is being introduced to encourage private owners of works of art to lend them to galleries for display to the public. When a work of art, worth over £25,000, has been on loan to an approved gallery for six years for display to the public, it will be exempt from capital gains tax on its subsequent disposal.