Amendments Nos. 36 and 37 in my name are being discussed with those in the name of the Minister. We had a lengthy and useful debate on Committee Stage.
I support in principle the provision of a share option scheme and the notion of taxing it at the capital gains tax rate of 20% rather than as benefit-in-kind at the income tax rate. I have no quarrel with the proposal that 70% of shares must be made available as part of the primary scheme. My quarrel is with the provision that up to 30% of shares can be set aside for certain workers.
I support the notion of a share option scheme because I believe that encouraging stakeholding and profit sharing within companies is good. It gives employees a sense of ownership and belonging. If such a scheme works properly, employees are incentivised to work harder and to identify their interests with the interest of the company. It gives them a greater sense of loyalty and it makes it possible for the employer to retain key workers for a longer period. It also allows the employer in ideal circumstances to vary at least part of the reward given to workers according to how the company is performing at any given time. There are numerous good reasons to support share option schemes and financial participation generally by employees. These reasons underpin the minimum 70% of shares which the Minister provides for in the primary scheme.
My difficulty is with the provision that 30% of shares can be set aside for key employees because the various other levelling out rules do not apply to it. It is not constrained in any way. There is no maximum in terms of the employee's other remuneration or monetary cap on the number of share options which can be given to an employee in any particular year. I am afraid the scheme will be abused. The Taoiseach, when he was Minister for Finance, abolished a similar scheme in 1992 because it was used as a means of legal tax avoidance by a relatively small number of people who gained enormously from it.
My concern is that the scheme will be used and abused by a small number of well paid workers to avoid paying tax. I am also concerned that it will be used by employers as a means of side-stepping the Minister's abolition of the cap on employers' PRSI. Unfortunately, I cannot support the Minister's amendment for those reasons. It is entirely predictable that the scheme will be abused by people who are already extremely well paid. We should not consciously create a loophole to that effect. The Minister was open to these arguments on Committee Stage but was more persuaded that he should give the scheme a go. He is wrong to do so but if he is minded to go ahead he should still consider the possibility of reducing the percentage of shares that could be made available, capping it by reference to an overall monetary amount, say £10,000 or £15,000, in any given year or capping it by reference to an employee's remuneration.
Minister for Finance (Mr. McCreevy): Deputy McDowell tabled these amendments on Committee Stage when we had a useful debate on the various types of employee financial participation schemes, including profit-sharing, share options and gain-sharing. While we may differ on the specifics there is general agreement on the principle that incentives for employee financial participation in their employers' businesses is good. Amendment No. 36 seeks to modify the "similar terms" rule by limiting the value of options exercised each year to one third of the employee's remuneration for that year. The "similar terms" rule allows some differentiation between employees as regards the number of options granted to each on the basis of levels of remuneration and similar factors, but any such differentiation must be broadly proportionate.
As I said on Committee Stage, I do not believe it is necessary or desirable to go further and impose a fixed monetary proportionality of 3:1 or any other ratio. There must be a reasonable degree of flexibility to make the new scheme a success. The existing "similar terms" rule and the other conditions for Revenue approval should limit the scope for abuse in the form of artificial loading of options in favour of directors and higher-paid employees who are not key employees.
Amendment No. 37 proposes the scrapping of the key employee element of the new scheme. It is generally acknowledged that most companies tend to have a few key people who, because of their mix of skills and abilities, are vital to the company's success. This is especially true in many of the fast growing sectors such as software, electronics and health care which are crucial to Ireland's economic success. Other countries also recognise this in their tax codes. For example, the UK has a favourable tax regime for options granted to key employees.
It should be remembered that the scheme, as constructed, requires that as share options given to key employees increase so also must the number given under the all-employee part of the scheme to maintain the 30:70 ratio. This will put a damper on any tendency to overly reward the higher paid at the expense of those on more modest levels of remuneration.
The argument has been put that if a company wants to retain the services of a key employee the way to do so is to increase his or her salary and not expect the Exchequer to partially foot the Bill by reducing the tax rate applying to share options. I do not concur with this viewpoint. Increasing basic pay not only introduces wage inflexibility into remuneration systems for companies, it also puts companies, especially new start-up companies, in a position in which they can ill afford to be.
The reality is that such companies cannot afford, as a fixed inflexible item, the salary levels which would be required and can then use the funds for more productive purposes. The advantage of using share options is that there is no impact on the company's cost base. The fall in high-tech share prices over the past six months has demonstrated there is no absolute guarantee of any reward from these options but this is a risk employees must be prepared to face.
The issue of an appropriate tax treatment of share options has been on the table for discussion for years and it is time to act. The scheme I propose is a reasonable compromise between the conflicting points of view on how to proceed. However, the House may be assured I have every intention of keeping the scheme under close review and if there is evidence that it is being abused I will not hesitate to make whatever changes are necessary to correct that. I cannot accept Deputy McDowell's amendments.
Deputy Mitchell raised the issue of whether the new scheme should apply to former employees and he suggested this may be contrary to the intention of relief, which is to retain staff. The scheme, as drafted, was intended to preclude former employees from exercising options granted while in employment. Representations have been made to me, notwithstanding that companies see share options schemes as a valuable tool for recruitment and retention of staff, that companies allow former employees to exercise options granted while in employment. Ruling out former employees from exercising such options would, therefore, be too restrictive and debar such schemes.
The normal period allowed for exercise by former employees in the case of multinationals is in the region of 90 days and the IAIM guidelines permit longer periods. Such schemes also have arrangements for those who leave for reasons of disability. I emphasise this is facilitative only and is not mandatory. My amendments mean that legislation does not rule out schemes where the company considers it appropriate to allow some leeway to former employees.
We have had a good debate on this issue on Committee Stage for the past three years. It is time to do something in this area. The debate about share options has been around for some time. As Deputy McDowell correctly pointed out, we had a generous share option scheme between 1986 and 1992 until the former Minister for Finance and current Taoiseach abolished it. He did so for good reasons. The scheme was used extensively by a small group, and a small number of financial institutions in particular, to reward some of their better paid employees. The then Minister abandoned it in the 1992 Finance Act. This matter has been debated for some time and came up during the recently concluded PPF, when a group was set up. It is impossible to get universal agreement as to how we should proceed and I decided, as I told the committee, to go in this direction. It is not the last we will hear about share options and as I said, I intend to keep the matter under review. I expect to come back to this matter so let us see how it operates.
Like many provisions in the Finance Bill this is the result of a series of compromises and there is some legitimacy in some of Deputy McDowell's arguments. We talked for long enough about put ting something on the statute book and I am not saying we cannot talk further about it but it is about time to see how it operates in this climate. I am assured it is a key part of retaining employees and of ensuring higher growth levels for Ireland. Those advocating share option schemes suggested such schemes were the key to ensuring parts of the globe became economic dynamos and that we should do the same here. I am convinced by those arguments but I am not saying the scheme we have come up with is the last word on this. I have made more and more changes to the ESOP legislation with each Finance Bill I have introduced and I am now so confused that I will have to get a day-long tutorial from the Revenue Commissioners to explain it. It has become confusing and hard to follow because of the changes I have had to make, though I hope we will not have to do that again. Let us see how this operates.