I move: "That the Bill be now read a Second Time."
This Finance Bill implements the tax changes announced in the budget and provides for a range of other measures. In particular, the Bill includes measures that will continue to foster an environment which will stimulate investment and provide more jobs. The budget and this Finance Bill lay the foundation for an early return of significant economic growth. All the indicators point that way at home and abroad. Our finances are in good hands, as the EU agreed yesterday at ECOFIN when it gave us a clean bill of health under the Stability and Growth Pact. The economy too is in safe hands and will continue to be so under this Government.
The Bill runs to 91 sections and four Schedules. I propose to outline the main provisions in the time available to me. The Committee Stage will provide an opportunity to debate the Bill in detail. I look forward to hearing the views of Deputies.
Part I of the Bill, which runs from section 1 to 42, deals with income tax, corporation tax and capital gains tax. In my period in office the income tax burden has reduced significantly. Since 1997, average tax rates have fallen for all categories of taxpayer, including those on lower incomes. After budget 2004, for a person on the average industrial wage, the average tax rate will be ten percentage points lower than it was in 1997. An increasing proportion of those on the income tax record, over 35% of all income earners, pay no tax at all. The number of such income earners increased by over 75% from 380,000 in 1997-98 to 669,000 after budget 2004.
After budget 2004, the percentage of the income tax yield coming from those earning at or under the average industrial wage is estimated to be 6% as compared with over 14% in 1997. That in a nutshell is the answer to some Deputies' recently discovered concerns for those on the average industrial wage. We have helped those on both low and middle incomes during our periods in Government by an enormous amount, unparalleled by any other recent Government of whatever political complexion.
Now is a period to consolidate the gains we have made. Available resources have been concentrated on continuing progress towards removing those on the minimum wage from the tax net. When the statutory minimum wage came into effect in April 2000, less than 64% of the minimum wage was exempt from tax. Section 3 increases the entry point to taxation of a PAYE worker by €240 per year to 90% of the increased new minimum wage annualised. Thus, for a single PAYE person, the first €12,800 per annum, or €246 per week, of earnings will be tax free. All PAYE workers will benefit from this increase of €240 in the employee tax credit.
Section 2 increases further the exemption limits from income tax for persons aged 65 and over to €15,500 single and €31,000 married. Since I became Minister for Finance the income tax exemption limits for the elderly have increased by more than 135%. In that period more than 81,000 income earners aged 65 or over have been removed from the tax net.
Section 4 increases the standard-rated allowance for trade union subscriptions from €130 to €200. Section 6 puts beyond doubt that income arising from the investment of personal injury awards made by the Personal Injuries Assessment Board for permanently incapacitated persons will be exempt from income tax in the same way as if the awards had been made by a court. This applies where the income in question forms the sole or main income of the individual.
Section 7 exempts from income tax compensatory awards where an individual's rights under employment-related legislation have been infringed, for example, in the case of discrimination, harassment or victimisation. Up to now, the position has been that such awards have been subject to income tax.
In the Finance Act 2003, I provided for the direct application of PAYE to taxable benefits-in-kind. Taken together with the changes in the Social Welfare Act 2003, this has ensured the application of PAYE and PRSI, including the training and health contribution levies, to these benefits from January this year. Some further legislative provisions are required now to bed down the new regime and these are provided for in sections 8 and 9. They include an exemption for mobile phones as well as for computers and high-speed Internet connections provided by an employer to an employee in their home for business use. An exemption in respect of certain company vans parked at home by employees is also provided for. This takes account of representations made to me by both employers and employees, and I was happy to respond favourably.
Section 9 also extends the existing BIK tax exemption for employer-provided travel passes to include Luas services, which are due to commence this year, while section 10 confirms the budget day announcement that the specified rate used to calculate the benefit-in-kind charge on certain preferential rate mortgage loans will be reduced from 4.5% to 3.5%.
Section 11 extends the existing standard-rated tax relief in respect of health insurance policies which cover non-routine dental treatment to policies issued by insurers providing dental insurance only. The budget announcement of an income tax exemption for income received by Gaeltacht households under the summer college student scheme is provided for in section 12.
Section 13 provides for an updating of the qualification requirements in respect of the 100% stock relief for young trained farmers to reflect changes in the underlying academic courses. It also provides that, in general, it is the achievement of certain standards that is mandatory rather than just attendance at courses. Similar provisions are included in sections 68 and 69 in respect of stamp duty relief for young trained farmers.
Under section 14 the income tax exemption to encourage farm leasing is being improved by increasing the annual amount of leasing income exempted from tax and reducing the age limit for qualifying lessors. These improvements in the relief will encourage the higher utilisation of our agricultural land, which will become all the more important in view of the changes in the Common Agricultural Policy.
Section 16 facilitates occupational pension schemes in their investment activities by providing that any such schemes which borrow for investment reasons can be approved pension schemes for tax purposes.
Section 17 gives a capital gains tax exemption to certain individuals on the disposal of assets where the individuals already have an income tax exemption on the income derived from those assets, for example, persons in receipt of court compensation arising from incapacity where the gains and income from those assets are their principal source of income and gains. This will facilitate the use of a wider range of investments by these individuals.
The business expansion scheme and seed capital scheme reliefs are good schemes as long as they remain focused and targeted. Having reviewed the schemes in the lead-up to the budget, I am satisfied they continue to serve their purpose as now focused and section 18 provides for an extension to these schemes for a further three years until 31 December 2006. It also provides an increase in the maximum amount a company can raise under both schemes, from €750,000 to €1 million as announced.
The increase in the limit and extension in time from 5 February 2004 to 31 December 2006 and certain other changes to the schemes will be subject to a commencement order to allow for clarification of potential EU state aid issues raised by the European Commission. Other changes include an increase in the non-PAYE income limit for investor eligibility for the seed capital scheme and the phasing out by end-2004 of the application of the seed capital scheme to trading activities in an exchange facility established in the Custom House Docks area in Dublin.
Separate to the commencement order, an initial extension of the scheme to 4 February 2004 is provided for and sections 18 and 19 provide for transitional measures, including for arrangements and investments made before 4 February 2004.
Section 20 provides for a register of principal contractors for the purposes of relevant contracts tax, the tax which principal contractors are obliged to deduct at a rate of 35% from payments made to certain sub-contractors in the construction, meat processing and forestry sectors.
I have stated previously that it is essential that tax avoidance schemes and loopholes are tackled vigorously. In a press release last March I made clear my intention to close a loophole which had come to my attention. It related to the relief available to individuals in respect of interest paid on money borrowed for the purposes of acquiring an equity stake in, or lending money to, a company where the moneys are used to acquire certain premises. This is provided for in section 22.
Section 23 amends the scheme of capital allowances for qualifying residential units associated with registered nursing homes. The minimum number of qualifying residential units is being reduced from 20 to ten. The condition for buildings to be two-storey at maximum is being amended to allow that the units may be in a building of any number of floors where a fire safety certificate is issued.
Section 24 redrafts one of the eligibility conditions for investors in private hospitals to bring it into line with other reliefs by removing an unintended effect of disqualifying all investors in a project where one is ineligible.
Sections 25, 26 and 27 provide for an extension of various tax reliefs as outlined in the budget and set out transitional provisions where appropriate, as well as clarifying the conditions associated with the reliefs, for example, where planning issues arise.
I have always held the view that targeted, well designed tax incentive schemes can be a useful instrument in achieving desirable public policy objectives. Indeed, many places in Ireland have enjoyed a regeneration directly arising from area-based tax reliefs. The value of such schemes must be balanced against the important objective of ensuring a wide tax base if we are to maintain low rates. Accordingly, these reliefs are being phased out. However, arising from concerns expressed by various individuals and groups, including various local authorities, I felt that, on balance, there was a rationale for allowing a longer wind-down of the various tax reliefs referred to in these sections. This will allow for a more orderly completion of projects where delays had arisen for various reasons.
Section 28 confirms my budget announcement that the termination date for film relief is being extended from 31 December 2004 to 31 December 2008 and the cap on the amount that can be raised under the section in respect of any one film is being increased from €10.5 million to €15 million per film. Changes to address instances of abuse are provided for in the section and these include the revision of the certification procedures, provisions to deal with over-complicated financial structures and enhanced requirements in respect of record keeping by film production companies. Deputies will be aware of the intense lobbying from the film industry aimed at convincing all parties that film relief should be retained, and my decision was broadly welcomed across the political spectrum. Those who greeted this decision from political parties other than my own should bear in mind that its continuation will mean that higher earners can reduce their tax bill through investment in qualifying films. European Commission approval will be needed for the continuation of the scheme and the increase in the overall investment.
Ireland has excelled in attracting foreign investment in recent years, with some of the world's leading companies choosing to locate here. However, we cannot rest on our laurels and we must always be vigilant in ensuring that Ireland remains competitive in this regard. The Bill provides measures that enhance the prospect of attracting further high quality investment projects to Ireland leading to additional future employment opportunities.
Sections 31, 34 and 42 are designed to encourage multinational corporations to locate their regional headquarters and holding companies in Ireland. The Bill provides for an exemption from tax on gains for holding companies on the disposal of a shareholding in a subsidiary, whether Irish or foreign, and makes a number of related changes to the scope of our provisions for relief against foreign tax in respect of dividend income paid to parent companies. Specifically, sections 31 and 34 amend the provisions on relief for foreign taxation in the case of dividends paid by a subsidiary to a parent company.
To qualify for relief for foreign taxation in the case of dividend income under a unilateral credit relief provision where no double taxation treaty applies, the shareholding involved must, up to now, have been at least 25% of the subsidiary company. This is being reduced to 5%. Relief is also being made available for foreign tax imposed on company tiers lower than the immediate subsidiary. Section 34 will implement Ireland's obligations under the EU parent and subsidiary directive. Section 31 will also allow companies to average the credit tax for foreign tax across dividend streams on shareholdings of 5% or more for the purpose of calculating the relief. The section also extends the credit mechanism to certain sub-national taxes imposed in tax treaty countries where those taxes are not covered by the relevant tax treaty. This issue arises in particular in the case of the US and Canada where non-federal taxes are not covered by the relevant tax treaty.
The capital gains tax exemption provided in section 42 will only apply where the shareholding held by the holding company is a minimum of 10% of the subsidiary concerned and at least €15 million in value, or where the shareholding held is a minimum of 5% of the subsidiary concerned and at least €50 million in value. It is also a requirement that the subsidiary is primarily a trading company or, taken together, the holding company and its subsidiaries are primarily a trading group. It is also a condition that the minimum shareholding has been held for a continuous period of 12 months in the three years prior to the disposal.
These measures will encourage foreign direct investment by facilitating multinational companies with operations in a number of different countries to set up holding companies in Ireland. The objective is to bring regional headquarters companies to Ireland, which would include corporate functions such as control of regional operations, group treasury, and centralised administration.
The programme for Government includes commitments to build the capability of firms to carry out and manage research and development in Ireland and work to ensure that Ireland develops a world-class research capacity. Following on from my announcement in the budget, section 33 provides for a 20% tax credit for companies for qualifying incremental expenditure on research and development.
There is a need for the economy to make a decisive transition from high volume, lower value enterprise to high value, high innovation, knowledge intensive enterprise, and research and development activities can encourage such enterprise. In addition, increased research and development activities can help embed an existing firm's activities in Ireland as well as develop additional high quality employment. Deputies might be interested to note that tax incentives are widely used to stimulate research and development in other advanced economies. Their effectiveness in doing so has been established by a series of empirical studies, especially among large firms in high-tech sectors, and this is where the need in Ireland for greater research intensity is most pronounced. As with all tax reliefs it is important that the measure be focused. Accordingly the measure is targeted at encouraging additional research and development by basing the scheme on incremental expenditure rather than permanent additional tax deductions for all research and development activities.
Full details of the scheme, including a core definition of research and development activities, are set out in section 33 and detailed guidelines will be issued by my colleague, the Minister for Enterprise, Trade and Employment, on what activities will constitute research and development activities for the purpose of the credit. Companies will be able to deduct 20% of the incremental spend on research and development from their corporation tax bill in addition to its normal deduction as an expense. Incremental spend will be calculated by reference to a base year. For expenditure in 2004, 2005 and 2006, incremental spend will be calculated by reference to expenditure in 2003. In 2007 the base year will be 2004: in 2008, 2005 will be the base and so on. Capital investment on construction and refurbishment of building will be treated separately, with a 20% credit made available irrespective of its incremental nature.
Section 35 is aimed at assisting the leasing sector of our financial industry and it provides that lessors engaged in finance leasing may elect to pay tax on income from the finance leasing of short-life assets on the basis of accounting income rather than income based on income tax rules. The option will be subject to a number of conditions detailed in the Bill. Section 39 extends the qualifying period for the scheme of tax relief for corporate investment in certain renewable energy projects from 31 December 2004 to 31 December 2006.
An EU directive dealing with the taxation of interest and royalties was agreed in 2003. The purpose of this directive is to eliminate withholding taxes on cross-border interest and royalty payments between associated companies and branches in different member states. The directive was transposed by way of statutory instrument in late 2003 and its provisions are being repeated in section 41 and Schedule 1 with a number of minor technical additions.
Part 2 deals with excise duties. Sections 45 and 48 confirm, respectively, the budget increases of 25 cent including VAT in the excise duty on a packet of 20 cigarettes and 5 cent per litre including VAT in respect of petrol and diesel. As indicated in my budget, changes to indirect taxes were limited this year and have contributed to our goal of reducing inflation.
Section 46 enables certain quantitative restrictions on cigarettes and tobacco to be retained in respect of travellers from the new EU member states after 1 May next. In effect, the regime applying to travellers from other existing member states will not be applied to cigarettes or tobacco acquired by travellers from the new member states in question during the transitional arrangements for accession states.
Sections 49 and 50 provide for a qualified exemption from the excise duty on biofuels for use in certain approved pilot projects, including those undertaken to test the technical viability of using biofuel as a motor fuel.
Part 3 deals with VAT. Sections 55, 56 and 58 provide for the EU directive on the VAT treatment of cross-border supplies of gas and electricity to be transposed into Irish VAT law. Increased liberalisation of the electricity and gas markets and increased cross-border trade between member states required a change in the rules to clarify that supplies of gas and electricity were taxable in the member state of final consumption, avoiding the need for a supplier to register in every member state which he or she supplies.
Section 57 confirms that, where a house and site are sold together, the VAT treatment is that both the house arid the site are subject to VAT. An interpretation of the VAT Act 1972 has been used to attempt to exempt the sale of developed sites, where a site and new house or apartment are being sold together. The Bill provides that, where a developed site is sold in such circumstances, it is subject to VAT.
Sections 59 and 61 confirm the budget night financial resolution to increase the farmers' flat rate addition for VAT purposes from 4.3% to 4.4% with effect from 1 January 2004. There is a corresponding increase to 4.4% for the sale of livestock by VAT registered farmers.
Section 63 clarifies that, where a trader in Ireland supplies goods or services to a trader abroad in a situation where the recipient in the other member state is liable for VAT on a reverse charge basis, then the Irish trader must issue a VAT invoice. This will not impose any extra burden on traders and reflects existing commercial practice. Sections 64 and 65 contain a number of technical amendments to clarify the VAT treatment of fund management and administration services provided to Irish and foreign investment funds.
The stamp duty provisions are contained in Part 4. The stamp duty exemption for owner-occupiers of new houses and apartments has up to now been dependent on a floor area certificate from the Department of the Environment, Heritage and Local Government indicating that the building is not greater than 125 square metres. However, this particular certification process is linked with the now abolished new house grants and will cease on 2 April 2004. Consequently, section 71 provides for a new floor area compliance certificate for such houses and apartments, which will also certify that the property conforms to approved building standards. The certificate will be issued by the Department of the Environment, Heritage and Local Government for the purpose of the stamp duty exemption.
Section 73 replaces the current section of the Stamp Duties Consolidation Act 1999 which provided for a stamp duty exemption for certain international trademarks. I announced in the budget that I would introduce a stamp duty exemption for transfers of various types of intellectual property. This new wider and more comprehensive section provides for an exemption from stamp duty on the sale, transfer or other disposition of intellectual property. Intellectual property includes any patent, trademark, copyright, registered design, design right, invention, domain name, supplementary protection certificate or plant breeders' rights. This measure is aimed at making Ireland a more attractive place for the location of such intellectual property.
Section 76 provides for an extension of capital acquisitions tax business relief to the situation where two or more companies hold shares in family-owned businesses. The current legislative provision only covers situations where there is one holding company.
Sections 77 and 80 provide for an extension of the legislative framework that underpins tax information exchange agreements with certain jurisdictions to include gift and inheritance tax. An amendment is also being made to the relevant legislation to apply the existing Revenue powers to encompass the foreign equivalent of estate, inheritance and gift tax.
Section 83 amends the scheme of tax relief for donations of heritage items to cultural institutions of the State. The minimum value of an item or collection which can qualify is being increased from €100,000 to €150,000 with the additional requirement that, in the case of a collection, at least one item in the collection must have a minimum value of €50.000. In addition, there are detailed changes in the rules governing the selection of heritage items. These changes are designed to facilitate the work of the selection committee which comprises representatives of the cultural institutions and bodies concerned.
Subject to certain conditions, the Revenue Commissioners already have the power to apply to the High Court for an order requiring a financial institution to make records available for inspection or to furnish information relevant to the tax liability of a taxpayer, including a group or class of person whose individual identities are not known to Revenue. Section 84 extends this power so that it can apply in respect of information and records held by certain foreign financial entities which are under the control of a domestic financial institution. This is a recommendation made in the Revenue powers group report which is being proceeded with now because of the current Revenue initiative in regard to offshore accounts. I published the report of the Revenue powers group on 4 February 2004 with a view to allowing time for all interested parties to discuss and debate the issues raised by the group. I will consider the various recommendations made in the report in the context of next year's Finance Bill.
Section 87 and Schedule 4 confirm the transposition into Irish law of the EU savings directive on the taxation of savings income in the form of interest payments. The aim of the directive is to enable savings income in the form of interest payments made in one EU member state to individuals resident for tax purposes in another EU member state to be taxed in accordance with the laws of the latter member state.
Section 88 provides for the carrying over from one year to another of unspent Exchequer capital allocations up to a limit of 10% of each year's total capital allocation under the rolling five year multi-annual envelopes for Departments announced in the budget. The Government is committed to keeping capital investment at 5% of gross national product over the period 2004 to 2008. Under the capital envelopes, a total of €33.6 billion will be available for capital investment to support the economy's future growth potential. The ability to carry forward from one year to another unspent Exchequer capital is an important element of multi-annual budgeting for capital purposes and for the management of capital programmes.
As Minister for Finance, I have managed in successive budgets and Finance Bills to create a low tax rate environment, a policy which has boosted investment and created jobs. Probably the most telling statistic is that, over the past six years, the numbers at work have increased by more than 300,000. Unemployment today remains at historically low levels. Whatever one's ideology in this House, it must be accepted that the onus is on us, as policymakers, to create conditions that reduce unemployment. However, while much has been achieved in this respect, we cannot take future prosperity for granted. This Bill includes significant measures that ensure further investment for Ireland and jobs for its people.
I hope the House has benefited from the outline I gave of the provisions in the Bill. I look forward to the debate on it and commend the Bill to the House.