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Dáil Éireann debate -
Wednesday, 27 Jun 2001

Vol. 539 No. 2

Other Questions. - Share Option Schemes.

Proinsias De Rossa

Question:

8 Proinsias De Rossa asked the Minister for Finance if his attention has been drawn to the serious concerns expressed by a senior trade union official (details supplied) representing tax inspectors that special tax breaks for employees on share options introduced in the Finance Act, 2001, amounted to a tax evasion scheme; the steps he will take to address these concerns; and if he will make a statement on the matter. [19037/01]

I am aware of the various criticisms expressed by certain elements of the trade union movement of the changes I made to the tax treatment of share option schemes, and do not accept them. The tax treatment of approved share option schemes, which is based on legislation approved by the Houses of the Oireachtas this year, could not be regarded as amounting to a tax evasion or avoidance scheme. Tax evasion involves an individual deliberately, and in breach of the relevant legislation, not paying the appropriate taxation due. Tax avoidance means using a scheme in a manner for which it was never intended by the Legislature.

I have already addressed the House, for example in a reply to Parliamentary Question No. 61 on 17 May 2001, on the tax treatment of approved share option schemes as provided for in the Finance Act, 2001, and set out in some detail the way in which the new arrangements will operate. Under the approved scheme, employees will no longer be chargeable to income tax on the exercise of share options but will now be chargeable to capital gains tax on the full gain, that is, the difference between the amount paid for the shares and the amount received when they are sold.

The scheme must, in particular, be available to all employees on similar terms. While there may be a key employee element in which share options can be granted without the similar terms conditions, at least 70% of the shares must be available for the all-employee part of the scheme. Furthermore, the scheme must not contain features that would discourage qualifying employees from participating, or have the effect of conferring benefits wholly or mainly on directors or higher paid employees of the company. I do not accept that this will allow for schemes where the beneficiaries will effectively be a small group of highly paid executives, self-selected as key workers, as suggested in the concerns referred to by the Deputy.

The all-employee and key employee element of the scheme provides a good balance between the twin objectives of facilitating the participation by all the employees in the fortunes of the company they work for, and helping companies to retain staff vital to their success in a difficult national and international labour market.

Under these new arrangements, to obtain approval from the Revenue Commissioners, share option schemes must comply with the terms of the legislation. Apart for the recent change to the share option legislation, favourable and generous tax benefits already exist for various employee share schemes, including approved profit-sharing schemes and employee share ownership trusts. One of the main reasons for giving favourable tax treatment to such schemes is to encourage employees to gain a stake in their employing company and such treatment for these schemes is supported by many parts of the trade union movement.

Does the Minister agree that the absence of a ceiling and the presence of the so-called key employee element in this scheme are a method by which a small number of already highly paid employees, or managers for that mat ter, can effectively reduce their marginal rate of tax from 42% to 20%?

Over a number of budgets and Finance Bills we discussed the possibility of reintroducing share option schemes as they once existed. Much thought was given to the matter. The PPF included a proviso that a group would examine all these matters, including share option schemes. It is not possible to reach universal agreement with everybody involved in this area. Many of the points the Deputy raises were also raised on Committee Stage and considered by me. I decided to go for this particular scheme to see how it would work. I do not have much evidence to date on whether it has been a great success: the information coming to me is that people are quite slow in taking it up. It was time to address the area of share options, and many trade union members strongly support the idea. This was reported to me by one particular official but there are four or five others to whom I can also refer who support the scheme.

By their nature share option schemes are for the private sector. Has the Minister made any progress in bringing forward plans for gain-sharing in the public sector to give equal access to this type of gain for public servants?

That matter is also under consideration. As I pointed out on Second Stage of the Finance Bill, I am not averse to the principle but it may be difficult to get an accepted scheme which will not just be a bonus scheme at a lower tax rate for everybody.

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