The difficultues which have arisen in relation to the corporation tax treatment of mushroom cultivation stem from a recent investigation into the measure by the European Commission. The application of the 10 per cent rate of corporation tax to mushroom cultivation had its origins in the fact that mushroom cultivation qualified for export sales relief. Export sales relief terminated for new companies in 1980 and was replaced by the 10 per cent rate of corporation tax. When legislation to bring mushroom cultivation within the scope of the 10 per cent scheme was proposed in 1981, the approval of the EC was sought under the competition provisions of the EC Treaty. At the time, the European Commission indicated that it did not have any comment to make but reserved the right to examine the measure in the future. The Commission opened an investigation into the application of the 10 per cent rate of corporation tax to mushroom cultivation in early 1991 as part of an ongoing review of aid schemes under Article 93 (1) of the EC Treaty.
The Government is acutely aware of the important role the mushroom industry plays in the economic life of rural Ireland and the important contribution the industry makes to rural development. Between full and part time jobs, the industry gives employment to some 5,000 people. Much of this employment is located in areas where other sources of employment are scarce and the industry also provides additional income to small family farm enterprises. The 10 per cent rate of corporation tax has been an important factor in encouraging the remarkable growth of the industry and its outstanding export performance. In the light of these circumstances the Government did not need to be persuaded of the necessity of making as strong a case as possible to the European Commission for the retention of the 10 per cent rate for the sector. The Government stressed to the Commission, in the clearest possible terms, the opportunities which mushroom production provides for the small farmer to diversify into an area where there are plentiful outlets on the open market and which reduces the producer's dependence on market support mechanisms such as intervention.
The Government also pointed out to the Commission that the 10 per cent rate provided a clearly focused incentive to the development of a sector of business which is making an important contribution to the development of some of the most disadvantaged areas in Ireland, and that the continued progress towards economic development in these regions depended in part upon the favourable tax treatment of the mushroom industry.
The Commission concluded its investigation early this year and, notwithstanding the strong case which the Government put forward in favour of retention of the 10 per cent rate found the application of the 10 per cent rate to mushroom cultivation to be incompatible with the Common Market and, as a consequence, called on Ireland to remove mushroom cultivation from the 10 per cent scheme. A formal procedure against Ireland on this matter, under Article 93 (2) of the EC Treaty, commenced earlier this year and it is expected that a notice to this effect will be published shortly in the Official Journal of the European Union. In the light of the Commission's findings on this matter, and the opening of the formal procedure, Ireland is obliged, as a member state of the European Union, to comply with the Commission's call to remove mushroom cultivation from within the scope of the 10 per cent rate of corporation tax. Accordingly, the forthcoming Finance Bill will contain measures to delete the special provisions under which mushroom cultivation benefits from the 10 per cent rate of tax.
While the Government regrets that it has become necessary on foot of our EU obligations, to remove mushroom cultivation from the 10 per cent scheme, the Government would hope that the healthy and vibrant nature of the mushroom sector would assist the industry in dealing with the challenge which the tax change represents.
In particular I would like to emphasise the relatively limited effect of this change on the primary producers of mushrooms. I must be remembered that this change will only have a direct effect on those elements of the mushroom sector which are incorporated. The bulk of the 5,000 jobs in the mushroom sector are based at the 550 mushroom farms around the country with approximately 700 people employed in the marketing and compost production sectors. It is estimated that less than 5 per cent of growers are incorporated and, although such growers tend to be the larger producers, they account for less than 10 per cent of total employment at grower level. Consequently, by far the largest part of the mushroom industry, in employment terms, will not be directly affected by the change in corporation tax treatment because they are taxed under income tax rather than corporation tax.
It is also important to note that the mushroom industry benefits from a number of other supports aside from the reduced rate of corporation tax. Over the past three years mushroom production has qualified for grant assistance under a number of schemes operated by the Department of Agriculture, Food and Forestry, including the farm improvement programme, the operational programme for rural development and the International Fund for Ireland. Under these schemes various projects in the mushroom sector have qualified, depending on the nature of the development, for assistance of anything between 15 per cent and 50 per cent of approved investments. Assistance will continue to be available to the mushroom sector under the farm improvement programme and the 1994-99 programme for rural development. The mushroom sector also qualifies under the BES investment scheme.
The speculation concerning the possible effects of the tax change on the mushroom industry has taken place in advance of publication of the relevant provisions in the Finance Bill. While understandable, speculation with regard to the possible effects of a tax change, the details of which have not yet been published, is not in the best interests of the industry and encourages the type of instability which we should all act to prevent in the current circumstances. I would therefore urge Deputies to await the publication of the Finance Bill and to assess the likely effects of the change in the light of the provisions of the Bill which will be published in the near future.
I am sure all Members would agree that it would be preferable if this change in the corporation tax treatment of mushroom cultivation did not have to take place. Nevertheless, we must recognise that the obligations which we entererd into as a member state of the European Union oblige us to abide by the provisions of European law on these matters and notwithstanding our strong reservations on the matter, we must comply with the provisions of the EEC Treaty and remove mushroom cultivation from the scope of the 10 per cent rate of corporation tax. While no sector of the economy wishes to be faced with a higher level of taxation, it would be a gross exaggeration to claim that up to 5,000 jobs are at risk. I have every confidence that the resilience and flexibility of the industry which have permitted it to thrive in the most competitive of market environments will also allow it to meet this new challenge successfully, overcome this setback and return in the longer term to a path of resumed growth and prosperity.