I wish to share my time with Deputy Ardagh.
I emphasise to the House that the Government is fully conscious of the public concerns about the recent developments in regard to DIRT collection and in consequence would like to assist the Committee of Public Accounts as much as possible in continuing its investigative role in regard to this matter. I congratulate the committee on the rapid progress it has already made in its investigations. It has moved with commendable speed to follow up a matter of major public concern.
I understand the committee is considering whether it needs any additional powers to pursue its investigations fully. It is also considering whether legislative changes are needed for this purpose, which could involve increasing the powers of the Comptroller and Auditor General. In light of the committee's ongoing deliberations on this important issue, I look forward to its conclusions and recommendations on what legislative or other changes it sees as necessary to finalise its work.
Before discussing the role of the Committee of Public Accounts and the Comptroller and Auditor General, I wish to outline why DIRT was introduced and how it has operated. I also wish to set out the position in regard to the powers of the Revenue Commissioners and the Central Bank. Prior to the introduction of deposit interest retention tax in 1986, banks paid interest gross to their depositors without deduction of tax but were obliged to report to Revenue any case in which interest exceeding £50 in a year arose. Building societies, in contrast, deducted tax on the interest due to their depositors and shareholders under a composite rate arrangement and were not obliged to make returns of interest to Revenue. At that time banks did not have to return details of deposit interest over £50 where the account holder served a notice on the bank declaring on a form, known as Form F, that the beneficial owner of the interest on the account was not ordinarily resident in the State.
However, under section 17 of the Finance Act, 1983, a bank was obliged to require an affidavit from a person claiming non-resident status where the bank was not satisfied that the person was non-resident. These claims and affidavits were to be retained and made available to the Revenue Commissioners if requested.
A budget day financial resolution in 1986 which was incorporated into Chapter IV of Part I of the Finance Act, 1986, introduced deposit interest retention tax. The introduction of DIRT was intended to harmonise the tax treatment of deposit interest across the range of financial institutions, to increase tax revenue and to counter tax evasion more effectively. With effect from 6 April 1986, a retention tax, at the standard rate of income tax which was then 35 per cent, was deducted at source out of interest paid or credited on bank and building society deposits in the beneficial ownership of residents. The composite tax arrangement with the building societies was terminated from that date.
DIRT requires financial institutions to deduct tax at source from deposit interest earned by individuals who are tax resident in Ireland. Between 1986 and 1993 the rate of deduction was the standard income tax rate and DIRT was deducted in two half yearly instalments in October and April. From 1986 onwards banks and building societies were treated in the same way, both deducting tax from the interest paid to residents, and the obligation to notify Revenue of deposit interest was done away with.
Companies could offset the DIRT retained against liability to corporation tax. In addition to DIRT, between 1986 and 1993 individuals liable at the higher rates of income tax were liable to tax on their gross interest at the difference between the standard rate and the appropriate higher rate and were obliged to declare this to Revenue when completing their tax returns. In other words, depositors faced an income tax liability at their marginal rate in respect of the interest income, with credit for the DIRT already paid.
DIRT does not apply where the account holder is non-resident and makes a formal declaration to that effect to the financial institution. The law requires that the declaration should contain, inter alia, the name, address and country of tax residence of the person entitled to the deposit interest. The financial institution has a duty under the legislation to satisfy itself that a deposit is exempt from DIRT before it pays any interest gross. To qualify for exemption the deposit taker has to hold a valid declaration in respect of the deposit showing the name and address outside the State of the person beneficially entitled to the interest. The declaration is made available to the Revenue Commissioners on request.
The advent of EU-wide capital liberalisation from 1 January 1993 led to the very real danger that Irish depositors would choose to evade tax by transferring their funds to other EU countries without declaring interest on these foreign accounts to Revenue. It was considered that a tax driven outflow of funds would lead to upward pressure on interest rates as well as an unacceptably high loss of tax revenues. In order to deal with this the DIRT regime was altered in three principal respects. These measures were intended to protect Exchequer revenues to the maximum extent consistent with the need to avoid significant capital outflows.
The three principal changes may be set out as follows. Special savings accounts, or SSAs, were introduced on 1 January 1993 subject to final liability DIRT at the low rate of 10 per cent. This rate was increased to 15 per cent in the 1995 budget and was further increased to 20 per cent in the 1998 budget. This latter increase was effective from 6 April 1998. SSAs are targeted at the more mobile funds held by small to medium investors and offer a higher net return than ordinary deposit accounts. There are a number of conditions, most notably that an individual may hold no more than £50,000 in an SSA. However, a married couple may hold two individual SSAs separately or two joint SSAs, each with a maximum of £50,000.
Standard rate DIRT tax now satisfies the depositor's full liability to income tax in respect of his interest income, even if he pays income tax at the higher 46 per cent rate on his marginal income. In other words, DIRT became a final liability tax. However, the interest subject to the standard rate DIRT remains liable to PRSI and the other levies and must be included in the taxpayers return of income. This measure was designed to reduce the incentive for depositors to transfer funds into either low DIRT SSAs or foreign accounts.
Companies may now operate DIRT free accounts, although the interest income is subject to corporation tax. This measure provides a cash flow advantage for businesses and so reduces the incentive for them to operate overseas accounts.
Since the introduction of DIRT there have been two special categories of individuals who could receive a refund of DIRT paid. These are individuals over 65 years of age and disabled individuals who would not be liable, or fully liable, to income tax on their deposit interest because their taxable income would be too low. Such individuals are entitled to a subsequent refund or partial refund of DIRT paid to Revenue. Almost £12 million in refunds was paid in 1997, representing about 7.25 per cent of the gross DIRT yield.
Since its introduction in 1986, the DIRT system has resulted in the collection of about £2.5 billion by the State. The yield, net of refunds for each year, is as follows: 1986 — £137 million; 1987 — £297 million; 1988 — £206 million; 1989 — £185 million; 1990 — £271 million; 1991 — £261 million; 1992 — £255 million; 1993 — £260 million; 1994 — £90 million; 1995 — £114 million; 1996 — £126 million; 1997 — £148 million; 1998 — £67 million. The total amount is £2,415 million.
While the annual yield was as high as £271 million in 1990, the amount of moneys collected has since fallen. The reduction in yield reflects among other things the significant decline in interest rates, the introduction of the special savings accounts with their low rate of DIRT and the general decline in the standard rate of DIRT. The yield to date for 1998 is £66.7 million. However, this does not include the October payment which accounts for somewhere in the region of two-thirds of the total yield.
At present it is the general practice of member states not to tax the interest income of non-residents and this has created opportunities for evasion leading to an erosion of national tax revenues. Member states have experienced large capital outflows to other member states from individuals seeking to evade domestic tax. It is anticipated that this problem will be reinforced by the adoption of the euro which will create a single currency market within the participating states, thus allowing investors to move their funds to other member states without any exchange rate risks. In the past the Commission has favoured tackling the problem by way of an EU-wide withholding tax at a minimum rate of 15 per cent. However, when the issue was last discussed in 1994, a withholding tax solution was not acceptable to certain member states.
Like other member states we do not tax non-resident deposits. However, at the ECOFIN meeting in December 1997, member states agreed that a common EU framework to ensure a minimum of effective taxation of interest would be pursued. It was agreed that the Commission's proposal, based on the coexistence model, would form the basis for progressing the matter. The adoption of the coexistence model would give member states the option of either applying a withholding tax, levied at a proposed 20 per cent minimum rate by the paying agent, or providing information on savings income to other member states, or using a combination of both systems. This model envisages that each member state will be required to either operate a withholding tax or provide other member states with information on savings income paid to their residents. The proposal would also take account of the need to preserve the competitiveness of EU financial markets.
In principle Ireland has no objection to a common EU framework provided it is effective in safeguarding tax revenues but does not at the same time undermine the competitiveness of member states' capital markets. Ireland supports the general thrust of these proposals.
At this stage the draft directive is under active consideration by an EU Council working group. While it is the intention of EU Finance Ministers to complete the process by the middle of next year, there are a number of significant issues which still need to be resolved.
The report in the Sunday Independent last April that there was a sizeable number of bogus non-resident accounts in the AIB and other banks in the late 1980s and early 1990s has given rise to considerable and understandable concerns. I make very clear once again the Government's intolerance of those who engage in tax evasion and those who assist or abet tax evaders. Deputies will appreciate that the pursuit of particular tax cases is a matter for the Revenue Commissioners. It has always been accepted that neither the Minister for Finance nor the Government get involved in such cases for obvious reasons.
The Revenue Commissioners have a wide range of powers to combat tax evasion. They have powers to access bank accounts although only in certain specified circumstances. The powers available to Revenue were last added to significantly in 1992 when the Taoiseach was Minister for Finance. These new powers included: provision of third party returns to Revenue on an automatic basis; reporting by domestic institutions who act as intermediaries in the opening of foreign bank accounts by Irish residents; provision of information on dealings by related parties such as suppliers; extended inspection powers in relation to certain tax records and accounts, and attachment of amounts owed by third parties to a defaulting taxpayer. These were added to further in 1993 and in 1995 when reporting arrangements and other duties were imposed on certain company advisers.
The Taoiseach was Minister for Finance in 1992 and most Members of the House will recall the criticisms he faced from many quarters when he brought forward the proposals to strengthen Revenue's powers to collect the State's taxes. The reaction in 1992 was mild compared with the furore in 1995 when Deputy Quinn brought forward measures in the Finance Bill which became known as the "whistle-blower's section". Some enterprising student might find it interesting to go back many years and assess the reaction inside and outside the House to any proposals at various times to strengthen Revenue's powers.
I referred earlier to Revenue's powers in relation to bank accounts. The main power is in section 908 of the Taxes Consolidation Act, 1997. This section, which emanates from the 1983 Finance Act, empowers Revenue to apply for a High Court order to require a financial institution to furnish certain information regarding an individual who is ordinarily resident in the State. The preconditions necessary to make an application to the High Court are: that the individual failed to deliver a required return of income; or such return is unsatisfactory; and the authorised officer is of the opinion that the person has undisclosed accounts with the institution, or the institution has information which indicates that the individual's return is false. Where an order is given, the High Court may, on application of the authorised officer, freeze bank accounts of the individual concerned.
Similar powers are available under section 907 of the Taxes Consolidation Act. Under this section, which was introduced in 1983, the appeal is made to the appeals commissioners rather than to the court and the authorised officer must send a copy of any application to the taxpayer and the bank before the hearing. The taxpayer and the institution may also attend and present arguments during the hearing of the application and there are no account freezing powers. It is important to emphasise that neither section 907 nor section 908 applies to non-resident accounts. The general right of a Revenue officer to enter a business premises to examine records, a basic requirement in relation to audit, does not apply to a premises where banking business is carried on.
I indicated on several occasions that, following the report of the McCracken tribunal, I asked Revenue and my Department to examine whether new powers are needed for Revenue in tackling tax evasion. This review is a wide-ranging one and includes the question of extra powers in relation to bank accounts and the examination of the affairs of banking institutions. The outcome of this review will be examined in the light of the report of the Moriarty tribunal so that whatever measures are considered necessary in this area can be taken.
Deputies will be aware that the Moriarty tribunal is charged with looking specifically at "whether the Revenue Commissioners availed fully, properly and in a timely manner in exercising the powers available to it in collecting or seeking to collect the taxation due by Mr. Michael Lowry and Mr. Charles Haughey ." and also at the adequacy of the current tax laws for the protection of the State's tax base from fraud and evasion in the establishment and maintenance of offshore accounts. Many aspects of the problems relating to offshore accounts will be similar to those relating to the issue of bogus non-resident accounts which are being examined by the Committee of Public Accounts.
I assure the House that the Government will fully support any measures which can assure that the liability of persons and companies to tax can be reasonably and effectively pursued. Any such proposals would need to be carefully gone into to ensure they would be effective, could not be easily circumvented, would not needlessly disrupt the affairs of compliant, law-abiding taxpayers, and would be proportionate in their effect on the financial sector when measured against the problems to be tackled.
As part of the ongoing review of Revenue's powers, officers from the Department of Finance and Revenue visited a number of other countries to compare Irish powers of access to bank information with those in the United Kingdom, Germany, the Netherlands, Sweden, France and New Zealand. This review found that all those countries, except for Sweden and New Zealand, adopt a policy similar to Ireland of providing the tax authority with the minimum access to bank information necessary to properly administer the tax system. However, within these parameters the tax authorities in the United Kingdom, the Netherlands, Germany and France appear to have greater access powers than the Revenue Commissioners have under existing Irish law.
This international comparison will provide very useful background for the completion of the review of Revenue's powers. Deputies will acknowledge that in completing this review the Government will have to ensure that a balance must be struck between having wide-ranging powers to reassure the public of the equity of the tax system and the need to encourage taxpayers to be compliant and to make it possible to settle liabilities. Revenue attaches great importance to promoting voluntary compliance as well as increasing powers.
While the public climate at present may dictate additional Revenue powers, and there appears to be scope for such moves, the poor reception in the business community in the past has to be borne in mind. The extra powers given to Revenue in the past have been used wisely by it. I have no doubt that any further powers will be used just as wisely, but as a people we have to decide carefully how far we want to go in giving the State wide-ranging powers of surveillance.
While the Revenue Commissioners have come in for a certain amount of criticism over the past year or so, I am very aware of the proficiency, expertise, perseverance and balance shown by the them in pursuing their task. I complimented the Revenue in the past and I do so again tonight on how well it has improved its performance and delivery of services during the past ten years. Over that period the amount of taxes collected by the Revenue has more than doubled to £19 billion gross.
Developments which have been implemented by Revenue in recent years include the introduction of a self-assessment system, the use of targeted and random audits, more effective enforcement through the sheriffs and other mechanisms, the extended use of the tax clearance system, the development of a new prosecution system, and a charter of taxpayers rights. These are all developments for which we can compliment Revenue on the changes it made within the organisation to ensure that the tax system works far better now than it did ten years ago. The challenge of managing and administering the tax system over the years should not be underestimated. I firmly believe that, in recent times, the strong growth in tax revenues is due, in no small part, to the determination of Revenue to continue to improve the tax collection system. Vast strides have been made in this area which is strongly reflected in the advances made in overall tax compliance. The greater efficiency and effectiveness achieved by Revenue has been one of the significant contributing factors towards the achievement of national budgetary and economic objectives.
The role of the Central Bank has come in for some scrutiny in recent weeks. Some of the comments on the bank fail to recognise the objectives set for it by this House. The bank's role in the financial services sector is that of prudential regulator. The purpose of this regulation is, as the Governor of the Bank correctly pointed out to the Committee of Public Accounts last week, to protect depositors' funds and the stability of the financial system as a whole. Although prudential supervision plays a critical role in helping to avoid bank failure, it should be stressed that the object of this supervision as it exists in Ireland and in the EU is not the prevention of bank failure at any cost.
If the main focus was on preventing bank failure regardless of cost, this could be achieved only at the expense of stifling competition, innovation and efficiency and would ultimately be self-defeating. Neither is supervision designed to eliminate risk, but to set the parameters within which risk should be contained. We cannot compare banks with other commercial companies unless we first acknowledge that banks have high levels of borrowings, in forms of deposits and interbank loans, even after taking into account the stringent prudential limits set by the Bank. This is in the nature of banking, not only in Ireland but everywhere else. The Central Bank's prudential supervision has provided Ireland with a safe banking environment for the ordinary saver, whether personal or business, and it is in all our interests to ensure that we do not lose sight of that.
The expertise and experience required to conduct prudential regulation in a manner which guards against bank failure is invaluable and I have no hesitation in acknowledging that the Central Bank has performed this role with distinction and success. A recent survey in the 1998 Global Competitiveness Report of the World Economic Forum placed it third in the world in terms of its efficiency and effectiveness in this regard. The bank's record bears this out.
The range of services which the Central Bank oversees has developed significantly since legislative provision for supervision was first made in 1971. The bank's powers and duties in financial services supervision are now spread across a wide range of primary and secondary legislation. They encompass the regulation of banks, building societies, non-bank financial institutions, including those located in the IFSC, as well as investment intermediaries and the Stock Exchange. The bank also operates the deposit protection scheme, and recently was appointed the supervisory authority for investor compensation under the Investor Compensation Act, l998.
Developments in the area of prudential supervision by the bank have been influenced primarily by evolving international standards as well as financial innovation in Ireland and worldwide. Most directly, however, the bank has been influenced by the development of EU law, which has been a key influence on the evolution of its statutory role as prudential regulator of financial service providers.
Mention of European law leads to an issue which has been the subject of debate in this House on a number of occasions in recent times — confidentiality. Indeed, the Governor referred to this in his address to the Committee of Public Accounts last week. Confidentiality is a core element in the prudential supervision of financial institutions not only in Ireland but internationally. It is seen as a necessary balance to the extremely wide powers of intrusion and information gathering provided to the Central Bank and prudential regulators in other developed countries in legislation.
Supervisors need access to such sensitive information relating to bank capital and high exposure loans in order to assess the risks to the financial entities that they supervise. This information has to remain confidential because it may relate to problems in a bank which the supervisor is helping to resolve, and which, if disclosed, could lead to a lack of confidence in the bank, and consequent loss to customers and the State. Supervisors have access to sensitive commercial data which, if released, would impinge on a bank's competitiveness. It is, as the Governor also pointed out, the guarantee of confidentiality which facilitates and promotes supervisory co-operation with prudential supervisors in Ireland and elsewhere with a view to providing a comprehensive international and domestic framework for supervising the financial sector.
International exchanges of information occur daily. Supervisory authorities must be assured that, when transmitting confidential information to their counterparts elsewhere, the information transmitted is also subject to stringent professional secrecy requirements in the receiving institution. This is why EU law is so strict on the issue of confidentiality and Irish law, which reflects this EU law, is equally stringent. If the Irish regulatory authority cannot be assured of the confidence of regulators in other countries the effectiveness of our regulatory system would be severely dented.
At its meeting today, the Government decided to establish a single regulatory authority for financial services. Agreement was reached on the establishment of an implementation group to furnish proposals on the role and functions of the new authority and progress the work necessary to enable the required legislation to be drawn up. A press release giving more details and the terms of reference of the group is being prepared for issue tomorrow.
The Government is fully committed to assisting the Committee of Public Accounts to progress its investigations as rapidly as possible and to reach early conclusions. We await the committee's recommendations on what further assistance can be given to them to achieve this and we undertake to facilitate it with whatever powers or assistance the House considers necessary and appropriate for this purpose.
