I move: "That the Bill be now read a Second Time."
Finance (No. 2) Bill, 1992: Second Stage.
(Limerick East): On a point of order, what is the exact procedure for the different Stages as this is not clear from the Standing Order? Will there be Committee Stage or are we to have a general debate which will be wound up at 2.30 p.m.?
I can only tell the Deputy that the Minister shall be called on not later than 2.20 p.m. to make a speech in reply at the end of Second Stage.
(Limerick East): Will all Stages fall when the Minister replies?
The detail of the Bill will be reserved for Committee Stage.
(Limerick East): When will that be taken?
No provision has been made, unless Second Stage concludes early.
(Limerick East): I agreed to take the Bill because the Minister said it was absolutely necessary that it be passed before 1 January but I never envisaged that it would be taken by way of statements on the principle on Second Stage.
On the nod.
(Limerick East): I thought we would be given an opportunity to take the Bill section by section. We have conceded the principle already so we can go away now. Our only interest in coming into the House is to take it section by section. It is very unsatisfactory that no provision has been made for a Committee Stage debate on a Finance Bill. This is most peculiar.
I appreciate the difficulty Members find themselves in and if they wish to utilise the time involved in dealing with this measure and all its Stages the Whips might consider a time in which the Committee Stage will be taken, in other words, to allocate a time for Second Stage and other Stages. The Whips might look at that, if the Minister agrees.
(Limerick East): This is not in accordance with the agreement I thought I had reached. I can see no merit in making statements on the principle of a Finance Bill because this has already been conceded. It should be taken section by section.
In the normal way I have been fully briefed by the Department, section by section, this morning.
It is not ordered that way.
As Minister for Finance I do not order business.
(Limerick East): Could we adjourn for ten minutes to allow the Whips sort it out? It will be most unsatisfactory if there is no Committee Stage; it will be a pointless exercise. I am prepared to concede the principle of the Bill to the Minister and to let us all go home for a long weekend unless there is a Committee Stage.
I suggested earlier that we proceed with Second Stage and that in the meantime the Whips could meet to allocate a time for the other Stages. Is that satisfactory?
That is satisfactory.
(Limerick East): I agree, but it is most unsatisfactory.
Let us proceed with Second Stage and utilise the time thereafter to best advantage after consultation between the Whips.
When I introduced the No. 1 Finance Bill earlier this year, I announced that a second Bill would be required before year end to complete the legislative provisions needed to be in place by 1 January next. The Government, at the time the election was called, had been on the point of introducing a Bill containing both measures which it was essential to have enacted by year end, and related provisions. These legislative proposals were published on 13 November. If Oireachtas time had permitted, these legislative proposals would have been brought forward before Christmas. However, because of the very limited Oireachtas time now available, it has been decided to make only those legislative provisions which it is essential should be in force by 1 January, and where retrospective legislation would be unsuitable. These essential measures are contained in the Bill now before the House and in the ministerial regulations which I have made under the European Communities Act, 1972. I will explain in a moment why it was decided to adopt the exceptional course of using regulations to give effect to those provisions of the EC Directives not covered by the earlier Finance Act.
For this reason the bulk of the Bill before us today is devoted to the completion of arrangements for taxation of motor vehicles initiated in the Act. A small number of minor but essential items drawn from the proposals put forward in November make up the balance of the Bill. I would like to acknowledge at the outset the co-operation of my colleagues on the benches opposite in facilitating the smooth introduction of this vital piece of financial legislation.
The Government's proposals for legislation to be included in a second Finance Bill contained a number of chapters which provided for the transposition of EC Directives dealing with the structures to apply to excise duties on alcoholic drinks, cigarettes and other tobacco products and hydrocarbon oils. Inter alia, these directives define the scope of coverage of these goods for duty purposes and set out those that must be relieved of duty. They also deal with further aspects of the regime governing the control and movement of the excise duties in the internal market, including rules for controlling the sales of duty-free goods to intra-Community travellers; such sales will be permitted to continue until mid-1999. The main framework of this regime is already in place in the Finance Act, 1992.
Failure to transpose these measures into national law could mean that, from 1 January 1993, we would be in breach of Community obligations and could give rise to operational difficulties for the Revenue Commissioners. However, given the limited amount of time available for the Oireachtas to process the Finance (No. 2) Bill, it was considered desirable to limit the contents of the Bill to those items for which provision must be made before the end of this year and for which primary legislation is essential. Under the European Communities Act, 1972, it is permissible to transpose into national law the Community directives relating to the completion of the internal market by means of regulations. Although the normal practice has been to effect the transposition of important EC measures by way of primary legislation, the time constraints now operating indicated that the regulatory approach should be considered in this instance in order to fulfil our Community obligations. In the light of the exceptional circumstances outlined, and the essentially technical nature of these indirect tax provisions — which will, in the main, have little practical significance on the ground — I decided to avail of this option rather than include these items in the Bill. These regulations have been circulated to the Members of the House and are also available in the Library.
Before turning to the detailed provisions of the Bill I would briefly like to review the past year and look at the prospects for 1993. In the budget presented last January, the Exchequer borrowing requirement was projected at £590 million, or 2.4 per cent of GNP. As we are all only too well aware, there has been strong upward pressure on noncapital supply spending this year, particularly on social spending. Despite the corrective action taken by the Government in July following a mid-year review of the likely outturn, it is quite clear that supply spending will be well ahead of target.
At the same time, tax revenue should produce a surplus this year, due mainly to a strong corporation tax performance. There are also likely to be savings on Central Fund services. Taken together, these factors will mitigate the effect on the budget of the supply spending overrun. The eventual 1992 outturn should, overall, represent a creditable budgetary performance in what has been a very difficult year. In particular, we can take a good deal of satisfaction in the fact that Irish fiscal performance in 1992 should again fall within the 3 per cent general Government deficit-GDP ratio specfied as one of the primary budgetary convergence criteria in the draft European Monetary Union Treaty. Steady downward pressure is thus being maintained on the Debt-GDP ratio, the other criterion of convergence. This has fallen from almost 117 per cent in 1987 to 94 per cent last year, and will again decline in 1992. We should not underrate these achievements, which compare very favourably with the likely budgetary performance in other EC member states.
The 1993 outlook presents a difficult challenge. In the absence of a dramatic improvement in the international economy, the budget arithmetic will have to accommodate a further increase in unemployment. Moreover it will have to be framed against the background of limited tax revenue buoyancy — in part a reflection of the otherwise welcome low inflation prospect. In addition, there are a number of particular factors which have negative repercussions on the revenue outlook for 1993. The inauguration of the Single European Market will involve the elimination of VAT at point of entry in relation to intra-EC trade. This will have an unavoidable adverse impact on cash-flow in the VAT area. Proposals for alternative measures to improve VAT cash-flow were published in November, but it is not essential to make legislative provision now in that regard, since this matter can be addressed in the budget. Even with measures on these lines, and taking account of the provisions of the Finance Act designed to strengthen the VAT system in preparation for the new challenges it faces, it will be difficult to maintain receipts in this area at the level that would have arisen under the former arrangements. As the House will be aware, capital liberalisation has required the modification of the deposit interest retention tax (DIRT), and significant losses, both definitive and of a cash-flow nature, will accrue from these necessary adjustments.
The key consideration in formulating an EBR target for 1993 will, of course, be to ensure that Ireland continues to act in a way compatible with the budgetary convergence criteria envisaged in the draft European Monetary Union Treaty. Nor should we lose sight of the fact that even if we did not have to take into account the EC parameters, preservation of the domestic and international confidence in economic management, which is crucial to sustainable growth in employment, would point to a similar requirement.
Section 3 makes a few minor, but necessary, technical amendments to the DIRT legislation. These changes are essential to ensure the new DIRT provisions introduced in the Finance Act operate as originally planned. First, the section ensures that companies opening foreign currency accounts which are DIRT-free can only do so on the same basis as for DIRT-free Irish currency accounts. In particular, this means that the company will have to supply their tax reference number in their declaration to the bank when they are opening the accounts. Allowing companies hold DIRT-free accounts involves a once-off cash flow loss, and not an ongoing cost to the Exchequer. Companies will of course, continue to pay corporation tax at 40 per cent on their interest income.
Section 3 also contains two provisions designed to ensure the operation of the new 10 per cent accounts is not more liberal than originally envisaged. First, the section prohibits the linking of the special savings account with any other account. This is to avoid a situation whereby a customer of a bank or building society might open both a special savings account and another account, and arrange to have all or most of the interest paid on the special savings account to avail of the low tax rate on that interest. For example, a deposit-taking institution could offer 20 per cent interest on a £50,000 special savings account provided that another £50,000 was left in an account which paid no interest. This section will prohibits such practices. The section also prohibits the holding of special savings accounts in foreign currencies. These measures are to fulfil the aim of the special savings accounts — namely to keep money in the country, while securing for the Exchequer, the best tax yield commensurate with the key requirement.
We have come a very long way since 1987 when the International Financial Services Centre was no more than an idea. Now some 220 projects have been approved to operate from there. These projects have committed themselves to the creation of over 3,000 new jobs and have also contributed substantial employment in the accounting, legal and general services sectors in the Dublin area. Already some 1,200 of the 3,000 new jobs committed have been filled and the Exchequer is receiving the additional bonus of sizeable payments of corporation tax on foot of the profits earned from the international financial activities of IFSC companies. In 1992 the estimated corporation tax yield from IFSC companies is approximately £75 million which is a very significant and welcome contribution in these difficult times.
There is no doubt in my mind but that the centre has been a tremendous success and I look forward to it continuing to grow and contribute to employment creation and economic development in Ireland.
From time to time we need to amend, update or extend legislation to facilitate the development of the centre. We have done so many times over the last five to six years. Today I recommend to the House new provisions designed to ensure that certain companies in the centre can continue to trade there and contribute to its development. In certain circumstances, the giving of tax relief to a company could result in an increase in the overall tax burden, including foreign tax, on the company or its parent such that the company would be unable to continue to trade in the State. To deal with such situations, it is proposed that the Minister for Finance may in certain circumstances, by notice in writing, reduce the tax relief to which certain companies trading in the IFSC would be entitled. It is also proposed to cover financial service companies in the Shannon Free Airport Zone which find themselves in similar difficulties. The aim in reducing the tax relief would be to ensure that such companies would be able to continue to trade here and contribute to the development of the IFSC and Shannon zone. In keeping with that objective, it is provided that the Minister may only reduce the relief to the extent that it is necessary to secure a company's continued presence in the State.
The proposed legislation is not specific to any particular country. It would be my intention, however, to use this provision in the immediate future to impose a higher effective rate of tax on certain investment companies in the IFSC which could not otherwise carry on their business in the centre for the reasons I have given. The legislation is flexible enough, nevertheless, to be used in other similar situations where it is necessary. The EC Commission was given details of the way we propose to deal with this problem and it has confirmed that it has no objection since a reduction of an existing relief is involved.
This is an important piece of legislation to help the development of the centre. It is needed urgently, as otherwise the future of certain companies in the IFSC could be adversely affected. Accordingly, I recommend it to the House.
Part II of the Bill deals with customs and excise measures, arising from the completion of the Single Internal Market, which must be put in place before 1 January 1993. Chapters I and II provide for the balance of the legislation necessary to establish the revised arrangements for the taxation of motor vehicles from that date. The current border controlled excise duty on motor vehicles is being replaced by a vehicle registration tax — which we discussed here at length last May — to be administered by the Revenue Commissioners, while road tax will continue to be the responsibility of the local authorities under the Department of the Environment.
The basic framework for the introduction of a vehicle registration tax was included in the Finance Act, 1992. Part II, Chapter 1, of the current Bill, comprising sections 4 to 17, completes the legislative provisions necessary for the introduction of the tax and includes measures which reflect detailed discussions with trade interests. The purpose of the chapter is: (i) to specify the rates of VRT to apply to the various categories of vehicles; (ii) to elaborate, clarify and refine a number of definitional and control aspects; (iii) to repeal the existing excise duty provisions; (iv) to provide for a system of temporary registrations; (v) to provide for a system of pre-booking of particular registration numbers; (vi) to provide a system for partial VRT refunds in respect of cars bought by car hire firms, leasing companies and driving schools so as to compensate them for a reduction in VAT deductibility that arises as a consequence of the revised vehicle taxation arrangements and (vii) to provide for a role for the Revenue Commissioners in relation to road tax enforcement.
I propose now to deal in some detail with the rates issue. In previous statements I have made it clear that the priority for the new tax is that Exchequer revenue from motor vehicles be maintained at the level arising under current arrangements. I also indicated that, in so far as is possible within the constraints of maintaining overall revenue, the aim would also be to leave the price of new cars broadly unchanged.
At the moment, VAT is payable on the price of the vehicle inclusive of excise duty. However, because the new tax will be excluded from the VAT base, the VAT payable will be lower. In order to recover the VAT on the excise element which would otherwise be lost, the nominal VRT rate will have to be higher than the nominal excise rate being replaced. A straight conversion of the excise rate of 20 per cent which applies for most private cars, those under 2012 cc, would imply a VRT rate of 24.2 per cent — that is the equivalent of the current excise charge plus VAT at 21 per cent thereon.
However, the issue is further complicated because, under Community arrangements, rates have to be set by reference to "Open Market Selling Price" (OMSP), as opposed to the "Recommended Retail Selling Price" (RRSP) applicable under the current system. While the RRSP is the benchmark for existing excise rates, cars are usually sold for less than the RRSP reflecting the discounts traditionally offered by dealers which, I understand, average about 8 per cent. The motor distributors, by opting to declare an RRSP sufficiently high to allow scope for discounting, leave themselves liable to "additional" duty on the amount of the discount built into the RRSP. Although distributors have always been free to declare RRSPs which are closer to the actual selling price and thereby mitigate part of the tax charge, they have almost invariably chosen not to do so; this is presumably because they considered the higher tax charge incurred as being outweighed by the advantage of being able to offer a higher nominal discount to customers.
Under the new system, the VRT charge on an individual car will be determined by the application of the VRT rates set out in this Bill to the OMSP as declared by the distributor. Should all the distributors have declared OMSPs identical to their existing RRSPs, a simple conversion of the old excise rate — 20 per cent to 24.2 per cent — would have met the objective of maintaining revenue while leaving prices unaffected. Equally, should declared OMSPs have reflected a uniform level of discount on RRSPs, the same result could have been achieved by an appropriately higher VRT rate; for instance, if OMSPs were all declared at 92 per cent of RRSP, the VRT rate would be 26.3 per cent. However, the evidence to date indicates that distributors propose to adopt different practices in terms of discounting of existing RRSPs.
This gives rise to difficulty in that it creates a clear and unavoidable conflict between the objective of maintaining overall revenue and the desire not to disturb prices, particularly in terms of the relativity of different marques. The VRT rate that would maintain revenue from the section of the market where OMSPs were set at RRSP would be too low to maintain the tax yield from the rest of the market where RRSPs were discounted. Conversely, the rate that would be needed to maintain revenue in the section of the market where RRSPs were discounted would result in an increased tax charge on the remainder, with consequently higher prices.
Faced with this division, as already stated, it is simply not possible to reconcile the objective of revenue neutrality with the achievement of price neutrality in all cases, given that a single rate of VRT must apply to all models in a particular category. While a VRT rate that would ensure that no car increases in price is a theoretical possibility, it would expose the Exchequer to a substantial and, therefore, unacceptable loss of revenue. Given that budgetary considerations, especially in the difficult circumstances of 1993, dictate that revenues must be maintained, I have decided that the best approach is to set the rate by reference to RRSPs discounted by 6 per cent, that is slightly less than the current industry average. This approach will secure the bulk of existing revenues and should also obviate to a considerable extent the need for price increases. Furthermore, the rate proposed enables those distributors who finally declare OMSPs reflecting discounts of more than 6 per cent to reduce prices slightly. On this basis the rate applicable to private cars not exceeding 2012 cc will be 25.75 per cent, while for larger cars the rate will be 31.8 per cent — the current excise duty rate for this category is 24.7 per cent.
In setting the rate for those vans derived from cars or jeeps, which are currently liable to excise at a rate of 12.5 per cent, I am taking the same broad approach. However, in recognition of the fact that VAT-registered purchasers account for the bulk of this segment of the market, I propose to ensure that they are not disadvantaged by virtue of the new arrangements. The make-up of the total tax charge as between VAT and excise/VRT is altered, with the VAT element being reduced. VRT, unlike VAT, is not reclaimable. Thus, since the effect of maintaining the total tax charge constant would be to increase the cost to VAT-registered purchasers, the VRT rate of 13.3 per cent which I am proposing for these vehicles should leave the net tax burden unchanged for business purchasers. Furthermore, this rate should facilitate a reduction in the retail price of the vehicles concerned for private customers.
In the case of both private cars and vans derived from cars and jeeps, I am providing for a minimum VRT charge of £100.
For motorcycles, the Bill provides for the replication of the existing system as far as possible. As with cars, the nominal VRT rates will have to be higher than the nominal excise rates being replaced to recover the VAT being lost as a consequence of the exclusion of the new tax from the VAT base. The rates now being proposed in that context are £2.50 per cc for the first 350 ccs and £1.25 per cc thereafter. Vehicles such as trucks, lorries and dumpers, which are currently exempt from excise duty, but liable to a £40 administrative registration charge payable to local authorities, will be liable to an equivalent flat-rate registration tax.
Vehicles such as fire engines and ambulances, which are currently exempt from both excise duty and the present administrative registration charge, will not be liable to any registration charge.
The new arrangements would, in the absence of offsetting action, reduce the amount of tax deductible for those businesses entitled to a VAT deduction in respect of cars and would thus increase their net costs. The businesses concerned are car hire, car leasing and driving schools. In order to leave their tax burden unchanged, I am providing in section 10 for partial refunds of VRT as required.
In section 7 I am enabling the Revenue Commissioners to establish a facility for the reservation of particular registration numbers with a significance to car owners. The section also allows the Revenue Commissioners to establish a register of vehicles of persons visiting the State, where temporary registration is required. This facility replicates an existing system and typically applies in situations where, for example, persons have not yet registered the vehicle in their home country.
It is envisaged that, as part of their functions in enforcing the new vehicle registration tax, officers of the Revenue Commissioners would also have a role in relation to the enforcement of road tax. This new role, which will supplement that of the Garda in this area, should give an additional impetus to curbing road tax evasion. Section 15 contains the necessary enabling provision in that regard.
The Government's proposals for legislation to be included in a second Finance Bill, published on 13 November 1992, also contained a number of measures relating to vehicle licensing i.e. road tax. Chapter II of this Bill, comprising sections 18 to 23, provides for those amendments to the road tax regime that are specifically necessitated by the introduction of the vehicle registration tax.
Under the revised taxation arrangements whereby registration is now to be administered by the Revenue Commissioners, while road tax will continue to be a matter for the local authorities under the Department of the Environment, it will no longer be possible to simultaneously complete registration and first licensing of a vehicle. Production of a registration certificate, which will be issued by the Revenue Commissioners, will, in future, be a pre-condition for vehicle licensing. Section 20 will permit, by way of a good defence mechanism, that a motorist will not be penalised for the use of an unlicensed vehicle provided a licence is obtained within seven days of registration; this will give the motorist sufficient time, following registration, in which to license a vehicle. To take account of the foregoing provision, the section also provides that a licence shall be due from date of registration, as opposed to date of first use as applies under present arrangements. Finally, the section will allow a surcharge to be made on arrears of road tax in order to encourage motorists to obtain licences on time in the case of both first licensing and renewals.
Trade licences have long been available to the members of the motor trade to enable them use unlicensed vehicles in public in the course of their business — for example for test driving new vehicles. Provision is being made, in section 21, for the continuation of a trade licence system under the new arrangements. However, it is necessary to recast the system in the light of its enhanced importance in the new regime, where it will form part of the control arrangements, not alone for road tax but also for value registration tax. The revisions made should ensure that the system is not abused.
As recovery vehicles, e.g. tow-trucks, will no longer be permitted to operate using trade licences and will, therefore, require a road tax disc, provision is made in section 22 for the application of an existing road tax rate to such vehicles. Section 23 provides for the repeal of provisions relating to the small administrative registration charge which applied under the system now being replaced.
I explained at the outset why I had, after careful consideration, concluded that the regulatory route was appropriate in these circumstances to transpose the EC Directives.
Further regulations will need to be made by the Revenue Commissioners to give detailed, on the ground, effect to the regulations made by me under the European Communities Act, 1972, and, as the power to do so cannot be provided for by way of regulations, provision is included in section 25 for such powers. Similarly, it has been necessary to provide, in the Bill, for the creation of certain penalties and offences to back up the provisions in the ministerial regulations and this is done in sections 26 and 27.
Before I leave this matter, I wish to stress that neither these regulations nor the Bill deal with actual rates of duty which member states are obliged to respect from 1 January 1993. In practically all cases, our rates of duty already comply with the relevant provisions. The exceptions include the duty on heavy fuel oil and the duties on tobacco products. It is considered preferable to deal with the action required as regards rates as part of the normal budgetary process, rather than by way of regulation, even though this course of action means that we will technically be in breach of our EC obligations in the period between 1 January and budget day.
I also draw the attention of the House to the fact that similar regulations will have to be made to complete the VAT arrangements for the Single Market. The ECOFIN Council adopted the outstanding technical measures on Monday last and these will have to be transposed into national law as a priority. I can assure the House that these regulations will be wholly technical and will not impinge on the more substantive issues of rates of VAT.
Section 28 provides for the abolition of the 3 per cent levy on investments in life assurance products and collective investment undertakings, with effect from a date to be set by Ministerial order. As the House is aware, during the discussion on the new DIRT provisions in the Finance Bill in May, I undertook to hold discussions with the life assurance companies and others in the financial services industry to consider the impact of the revised DIRT arrangements on the provision of equity finance to Irish industry. Following these discussions, I put forward my proposals for changes in this area in the draft legislation published in November. These proposals include the introduction of special investment accounts and a change in the taxation arrangements for life assurance products in general. Both sets of provisions involve the abolition of the 3 per cent levy.
The special investment accounts were to be operative from the date of capital liberalisation and the new tax arrangements for general life assurance from 1 January 1993. To delay the introduction of the special investment accounts until significantly later than the special saving accounts could have serious implications for their successful launch. However, because of the method of collecting tax from such investment products, it is not essential that all the provisions relating to changes in their taxation arrangements be enacted now, and many of them can wait until the next Finance Bill. In contrast to other taxes on such investments, action needs to be taken now in regard to the 3 per cent levy. This is because this levy is an upfront charge paid by the investor when the investment is initially made. It would be very difficult to abolish it retrospectively. It is, therefore, proposed to provide for its abolition, but to give the Minister for Finance power to give effect to this by order. This will facilitate the new Government in introducing the proposed special investment accounts at the same time as special savings accounts, should it wish to do so. It will also facilitate the new Government in introducing a new general regime for life assurance companies from 1 January, should it also so decide. The final decisions will of course remain to be taken by the new Government. While the other necessary provisions can be included in the 1993 Finance Bill with retrospective effect, an earlier statement of the Government's intent will be necessary if the special investment accounts are to be introduced at the same time as the special savings accounts.
I commend the Bill to the House.
(Limerick East): At the outset I must say this is a most unsatisfactory way to conduct business. The commitments given to us, that only matters necessary and vital to the running of the country had to be enacted by 1 January 1993 would be included, have been breached. Therefore, neither the Department nor the Minister is now acting in good faith. This is a very strange way to proceed. Whereas we thought we had reached agreement that matters of vital interest only would be taken we find now that extraneous matters have been introduced.