I move: "That the Bill be now read a Second Time."
I am pleased to introduce my second Finance Bill at a time when our country is doing well, both economically and socially. The radical restructuring of the tax system which has taken place since 1997 has contributed considerably to the progress we have made. However, even a successful system requires that the relevant policies be adapted to changing times, that the system itself be maintained and protected and that, wherever necessary, the tax system be evaluated and reformed. Budget 2006 and this Finance Bill deliver on these three key requirements.
The policies of recent years have delivered a personal tax environment that fosters and supports effort and enterprise. For those on average pay, it has delivered one of the lowest tax wedges in the OECD area as well as taking many taxpayers out of the tax net entirely. It is no coincidence that since 1997 over 600,000 new jobs have been created and unemployment has been reduced from over 10% to a predicted 4.3% for this year while we expect the numbers in employment will increase by 60,000 in 2006. Tax policies framed in an employment friendly fashion have played a big part in achieving these impressive results. The personal tax changes in this Bill continue in this direction, as I will demonstrate later. Measures are also being introduced to ensure the tax system continues to operate effectively and to protect the system from unwarranted avoidance of taxes by the few.
There is much reform in this Finance Bill, for example, reform of tax incentives, reform of pension tax arrangements, reform of the tax treatment of high incomes to ensure individuals who are among the highest earners in the country do not use various tax reliefs to avoid paying any significant tax and reform of tax administration to ensure the system is not abused.
A large part of these reforms build on the review of tax schemes which I have had carried out over the past year, the reports of which were published yesterday. Last October, I made clear my commitment to a high standard of public financial management when I launched a series of initiatives in relation to public expenditure. In dealing with special tax incentives, I have sought to apply the same sharp focus on efficiency and value for money based on the review. Approximately two dozen separate schemes were investigated and the public can see in the studies which were undertaken the basis of some important decisions announced in budget 2006 and put into legislation in this Bill.
The various area-based property schemes were targeted at many areas throughout the State. Currently the urban renewal scheme has 49 areas in 42 towns and cities designated for relief. The town renewal scheme has areas in 100 towns designated for relief spread across all counties with the exception of Counties Longford, Leitrim and Dublin. The rural renewal scheme includes all of Counties Longford and Leitrim, north County Roscommon, parts of south and east County Sligo and west County Cavan. The present living over the shop scheme is confined to the city council areas of Cork, Dublin, Limerick, Waterford and Galway — in total 12.7 km of street length are designated for relief under this scheme.
Among the landmark schemes of the urban renewal tax schemes were the following: in Dublin, the development of the Custom House docks area as a location for a thriving financial services centre with high-quality buildings, the development of the rundown area of Temple Bar as a key part of Dublin's tourist attractions, the successful development of Tallaght town centre and, more recently, the major development of the Harp area in Smithfield in which over €200 million was invested between 1999 and 2004. Outside Dublin, the various urban renewal schemes have helped to revitalise and transform the inner city areas of Galway and Limerick, in particular.
I wish to make it clear in this context that I am committed to having an ex-ante cost-benefit assessment of any new schemes and I am also in favour of time limits on schemes, as recommended in the reviews. However, I do not believe it is necessary to provide in the legislation on any particular scheme that there must be a cost-benefit analysis for that scheme. Indeed, the consultants recommended a continuation of the existing tax reliefs for private hospitals, nursing homes and child care facilities without suggesting a time limit for these particular schemes. As I said, I agree with cost-benefit analysis of and time limits on new schemes but they are a matter for Government practice rather than statutory provision.
A picture has been painted by some commentators and certain Opposition spokespersons of a tax system which has resulted in the emergence of a substantial body of high income individuals who pay little or no tax. That is a distortion of the position. Despite assertions to the contrary, the position is that those who earn more contribute more to the income tax yield than was the case in 1997 when we took office. It is estimated that in 2006, the top 1% of income earners will pay approximately 20% of all income tax collected. In the 1997-98 tax year, the top 1% paid less than 15% of all income tax collected.
In the same period, the contribution of lower earners to the income tax yield has reduced significantly. Those earning at or under the average industrial wage will pay 6% of the expected income tax yield for 2006 as compared with over 14% in 1997 when we took office. A small number of individuals with very high incomes have been able up to now, through the use of tax incentives and reliefs, to reduce their income tax liability to a very low level or to zero. However, this is precisely what I am addressing in this Bill which will ensure that from 2007 such individuals will generally have an average tax rate of not less than about 20%.
Under this Government's management, we have given money back to the taxpayer. We have become less reliant on taxes on labour to fund Government expenditure. In 1997, income tax represented 37% of total Exchequer tax revenue while taxes of a capital nature represented less than 5%. In 2005, income tax as a proportion of total tax revenue was less than 29% while the tax take from capital taxes and stamp duties increased to approximately 13% of total tax take.
As regards the SSIA scheme, it is amusing to see the two leading Opposition spokespersons now criticising as insufficient the new initiative in the Finance Bill for encouraging SSIA holders to invest their SSIA savings into pension schemes when one considers what they said in the past about this very successful savings scheme.
In his reply to the 2003 Budget Statement, Deputy Bruton was critical of the amount of money going into the SSIAs. He also criticised the fact that the specified amount of money was still being invested every year into the National Pensions Reserve Fund. Deputy Burton in the same debate in December 2002 complained that nothing was being done to curtail the cost of SSIAs. Two months earlier in October 2002, she had described the SSIA scheme as most ridiculous.
The economic background against which this Bill is being presented is encouragingly benign. The economy is forecast to grow by 4.6% this year. We have one of the healthiest fiscal positions in the EU with a low debt to GDP ratio and substantial savings in the form of the National Pensions Reserve Fund being put aside to meet future pension needs.
This benign scenario is subject to a number of downside risks.
As Ireland is a small and open economy, we are especially exposed to changes in the global economic environment. The prospect of further appreciation of the euro as well as increasing oil prices are causes for concern. If the increased oil prices are sustained, the subsequent fall in world demand could be expected to have some negative impact on Irish economic growth.
The risks I have outlined are effectively beyond our control. Therefore it is vital that we focus on those domestic factors which we can control so as to counter possible negative developments. I am concerned about the decline in cost competitiveness in recent years. This has an impact on employment in the exposed sectors of the economy. A vital part of competitiveness is the cost of doing business in Ireland. If Ireland's inflation rate exceeds that of our competitor countries, our businesses will not be able to expand and provide the jobs that will help us provide the standard of living we want in Ireland. We must ensure that future wage increases are in line with productivity improvements if we are to prevent further deterioration in our competitive position.
Sustaining economic growth and maintaining full employment in the Irish economy are Government priorities. Low inflation, responsible fiscal policies and effective investment are central to this objective. The Government will keep the public finances in a healthy condition and will keep down personal and business taxes to strengthen and maintain the competitive position of the Irish economy. We will continue to address our infrastructural deficit to safeguard the future economic well-being of our country. To this end, our rate of public investment will remain at almost twice the EU average as a percentage of gross national product. However, prudent management of the public finances remains essential in achieving all these priorities. In this context, increases in public expenditure must be carefully managed with, as I have stressed, a strong focus on ensuring enhanced efficiency, accountability, transparency and value for money. Of particular importance is the need to ensure that public expenditure grows broadly in line with available resources.
While respecting these parameters, the Government is committed to concentrating the resources available to it on improving the quality of public services and delivering further real improvements to pensioners and people on low incomes. We took important steps in that regard in the budget. The Economic and Social Research Institute's analysis indicates that this was "perhaps the most progressive budget package for many years — poorer households did proportionately better than rich ones". Our economic performance in recent years leaves us in a position of strength to deal with the challenges we may face in the coming years and in addressing the risks which I have outlined.
This year's Finance Bill, when passed, will remove all those on the minimum wage from the tax net — 90,000 people; exclude workers on the average industrial wage from the higher tax rate — 55,000 people would enter the higher tax rate were this action not taken; confirm the restrictions on the use of tax reliefs by high income taxpayers to secure greater equity in the tax system; phase out various existing tax schemes and exemptions; and end the current remittance basis of taxation. It will continue the stamp duty exemption for young trained farmers for a further three years, increase the tax exemption limits for income from farm leasing for over five years and extend certain existing reliefs to cover the EU single farm payment entitlement in appropriate circumstances.
This Bill will also introduce a new scheme of tax relief for heritage property donated to the proposed Irish Heritage Trust. It will provide for income tax disregard for certain people minding children in their own home as announced in the budget and will adjust the rules governing "top-hat" pension provisions and approved retirement funds. The Bill will increase VAT registration thresholds to help small business, exempt biofuels from excise duties and reduce excise duties on certain home heating oils, including kerosene and LPG. These measures were announced in budget 2006.
In addition, the Bill will introduce a new initiative designed to encourage low income earners who hold SSIA accounts to transfer funds into pension schemes and will provide significant improvements in the film tax relief aimed at enhancing Ireland's competitive position as a film location. It will provide for automatic reporting by financial institutions and Departments of interest and certain other payments made to taxpayers. The Bill will provide for a surcharge of 10% in certain circumstances on undisclosed tax avoidance schemes. It will ensure that landlords will be obliged to meet their statutory registration requirements as a condition of getting generous tax relief and will tighten up the relevant contracts tax to discourage fraud and tax evasion. The Bill will include a range of provisions to facilitate business, including the financial services sector in particular, to assist in maintaining Ireland's competitiveness in these sectors and to create more jobs. It will also close off a series of abusive tax loopholes in the areas of film leasing, transfer of Irish assets into a foreign company, capital gains tax and VAT grouping.
The Bill consists of 122 sections and two Schedules. In the time available to me today, I will outline some of its main provisions. I will listen carefully to Deputies' contributions and will try to respond to their points in my reply to the debate.
On income tax, the various income tax measures and reliefs announced in the budget are dealt with in sections 2 to 7, inclusive. These widen the tax bands and increase various credits, including the basic personal credit and employee tax credit. The effect will be a reduction in average tax rates and removal of those on the current minimum wage from the tax net.
Section 8 revises the tax relief provisions in respect of local authority waste charges to maintain the value of the relief for taxpayers following the introduction of the "pay by use" principle. The existing provisions governing the relief require adjustment to take account of the revised charges structure at local level.
Section 9 deals with the budget day announcement and financial resolution which abolishes the relief for interest on loans taken out to acquire an interest in property rental income companies after 7 December 2005.
Section 11 links mortgage interest relief on rental properties to the registration requirements of the Private Residential Tenancies Board so as to encourage compliance with the registration requirement. Section 13 confirms the budget day announcement of a childminding relief for individuals minding up to three children in their own home, provided the income in question does not exceed €10,000 in the tax year.
Section 14 contains a number of important changes to the tax treatment of pension provision. First, the rate of age-based tax relief applying to all pension products is being increased where the contributor was 55 years old or over at any time during the tax year, to 35% of net earnings or remuneration, and to 40% for those aged 60 and over. This is aimed at incentivising individuals who have underfunded their pension over the years and now wish to improve their position as they approach retirement. The overall benefit limit of two thirds of final salary will still apply.
Second, the current annual earnings limit of €254,000 for certain contributions to pension schemes is to be indexed from the tax year 2007 to maintain its value in the future. Third, an annual taxable 3% imputed distribution is being applied to the value of assets in approved retirement funds. This will be phased in over three years. Fourth, the maximum tax-free lump sum for draw-downs from a pension fund made on or after 7 December 2005 will be €1.25 million. A cap is placed on the maximum allowable pension fund on retirement for tax purposes, at €5 million or, if higher, the value of the fund on 7 December 2005.
Section 15 provides for the discontinuance of the remittance basis of taxation with effect from 1 January 2006 in respect of employment income in so far as the employment is exercised in the State.
Section 17 provides for the measure announced in the budget which will place a limit on the use of tax reliefs by those on high incomes. The measure will ensure that such taxpayers will not be able to use specified tax reliefs to reduce their tax bill in any year below approximately 20%. A full list of the reliefs which are covered is included in the Bill. Broadly, these consist of the various property based reliefs and other incentive reliefs such as film relief, the business expansion scheme and donations. However, the normal expenses of business, including standard depreciation allowances and losses, will still be allowed in the normal way.
Section 18 provides for significant improvements in the relief for investment in film production. The percentage of expenditure that is eligible for tax relief is being raised to 80% for all films, up from the existing levels of 55% or 66%, depending on the film budget. In addition, the ceiling on qualifying expenditure for any one film is being increased from €15 million to €35 million. These improvements are subject to European Commission approval.
Section 19 increases the annual cap on the amount that can be claimed for expenditure on farm pollution control measures to the lesser of €50,000 or 50% of qualifying expenditure, with effect from 1 January 2006.
Section 20 extends the scheme of tax relief for donations to approved bodies to include the donation of publicly quoted securities, which will be treated in much the same way as cash donations of equivalent value.
As my budget day announcement noted, section 22 abolishes the stallion and greyhound tax exemptions from 31 July 2008. Discussions will take place with the industry and the European Commission on a replacement scheme.
Section 23 includes the proposed Irish Heritage Trust in the list of approved bodies for the purpose of the tax relief on donations scheme. This will facilitate the trust in building up an endowment fund for the maintenance of its heritage properties. Three other provisions relate to the trust and are contained in sections 66, 107 and 116.
Sections 24 to 33, inclusive, set out the termination dates and transitional arrangements relating to various tax relieved property schemes, the details of which were announced on budget day. Sections 34 to 38, inclusive, deal with capital allowances for private hospitals, psychiatric hospitals, nursing homes and child care facilities. I am extending the clawback period for these facilities from ten to 15 years and the "tax life" rules will be revised to facilitate investors in transferring their interests to other investors within the 15 year clawback period. These provisions will apply to facilities commencing in use after 31 July 2006.
Sections 39 and 40 set out requirements for those who wish to invest some or all of their SSIA funds in a pension product. The purpose of this initiative is to encourage SSIA holders on the lower end of the income scale to provide themselves with improved retirement arrangements by transferring moneys from their SSIA accounts into pensions. A total of €1 will be added for every €3 transferred from an eligible SSIA account into a personal retirement savings account, PRSA, a retirement annuity contract or an additional voluntary contribution, AVC, subject to a maximum bonus of €2,500. In addition, the exit tax to be paid on the SSIA moneys so transferred into individuals' pension accounts will be refunded. The scheme is aimed at lower earners and will not be available to 42% taxpayers who have access to considerable incentives. There will be restrictions on the scheme, in particular that the incentive will not be available to fund regular normal pension contributions. This bonus is for making a new additional contribution. This is a once-off special pensions initiative relating to lower earners with SSIA funds. The wider issues relating to improving global pension coverage, as discussed in the recent report of the Pensions Board, will be examined by the Government in the coming months.
Section 41 amends the law relating to relevant contracts tax, RCT, which principal contractors are obliged to deduct from payments made to certain subcontractors in the construction, meat processing and forestry sectors in order to tighten controls and discourage fraud and evasion. Applicants for C2 certificates will face more stringent application criteria, while the payment limit Revenue operates for some subcontractors regarding C2 payments is being put on a statutory basis.
Sections 42 to 44, inclusive, 49, 57 and 99 provide for measures of a substantive, clarificatory and technical nature to assist in the development of the funds industry in Ireland, an important part of the international financial services sector. Section 45 amends legislative changes included in the Finance Act 2005 to ensure the 23% exit tax on the proceeds of a life assurance policy cannot be deferred indefinitely by the continual rolling over of a policy without it becoming chargeable to the tax. The changes respond to certain points made to me by the industry but I am determined to ensure the tax deferral available to investors is reasonable and definite.
Section 50 ensures life assurance companies only benefit from group losses and certain other loss reliefs at the corporation tax rate of 12.5% as opposed to the standard income tax rate of 20% which applies for the income and gains of policyholders from such policies. Section 51 is aimed at preventing abuses of the patent income exemption through recategorising franchise licence fees as patent royalty payments and also limits the amount of exempt patent royalty distributions that may be made by a company in certain circumstances to the aggregate of its research and development spend over a three-year period.
Section 53 removes the requirement to deduct withholding tax on interest paid on quoted registered Eurobonds, bringing the treatment of such bonds into line with that of those in bearer form. Section 54 provides for the ring-fencing of losses and capital allowances in qualifying shipping trades. Section 55 gives effect to the 2005 EU mergers directive which broadens the scope of the original reliefs in the 1990 EU mergers directive. Section 56 makes a number of minor additional amendments to the provisions dealing with the tax aspects of the move, by companies, to the new international financial reporting standards, IFRS.
Section 58 gives effect to the budget announcement on the restriction of interest relief under section 247 of the Taxes Consolidation Act 1997 in the context of transactions between related companies. This is an important measure to block off avoidance attempts but I appreciate that the section 247 relief is being used by firms in a perfectly appropriate way. It is not my intention to cut off genuine use of the section.
Section 59 deals with the research and development tax credit. The section provides that a proportion of expenditure on machinery or plant which is to be used partly for research and development will qualify for the tax credit. Where plant and machinery are included in the incremental spending calculation but are in dual use in both research and development and production, there will be a proportionate allocation of the expenditure for the purposes of the credit. The section also makes additional provision in regard to the credit which is only one of the Government's actions in incentivising the development of research and development in Ireland.
Section 60 improves the legislation on the taxation of shipping-related profits by providing for a clearer, more streamlined process for applicant companies electing for the tonnage tax regime. Section 61 introduces measures to increase the scope of income against which losses and capital allowances in the big ticket leasing sector can be offset.
Turning to capital gains tax, section 63 gives effect to the budget proposal that the EU single farm payment entitlement will qualify as an asset for the purposes of the capital gains tax retirement relief, provided the farmer in question fulfils the ten-year rule in regard to the ownership and usage of the land which is disposed of at the same time as that entitlement. The section also caters for the situation where a husband and wife are co-owners of land but only one of them becomes a partner in a milk production partnership.
Section 66 deals with relief from capital gains tax on the disposal of certain works of art where prior to the disposal they were on loan to and displayed in an approved gallery or museum. The minimum period of loan is being increased from six to ten years and the section is being extended to apply also to such loans made to the proposed Irish Heritage Trust.
Section 68 is an anti-avoidance measure dealing with capital gains tax in certain circumstances of a disposal of a chargeable asset to a spouse, a separated spouse or a former spouse. Section 69 and 70 provide that the Revenue Commissioners can obtain information for capital gains tax purposes regarding the issue of shares to the members of a mutual life assurance company or a mutual building society on the occasion of these ceasing to be mutual companies.
Parts 2 and 3 deal with indirect taxes, that is, excise and VAT. These include sections 71 to 84, inclusive, which set out a range of changes in regard to excise duties, including confirmation of the budget day reduction in excise duty on kerosene and LPG used for heating and the reduction of betting duty from 2% to 1% with the industry bearing the liability. In recognition of the environmental issues we face the House will welcome the large-scale scheme I have provided for in the Bill to promote biofuels. This is complemented by providing a new VRT relief to promote new flexible fuel vehicles and the extension of the existing relief to dual electric-petrol vehicles.
Sections 85 to 94, inclusive, contain a number of important revisions to the VAT code. Sections 88 and 94 confirm the increases in the VAT registration thresholds for small businesses from 1 May 2006. The revised thresholds are €27,500 in the case of services and €55,000 in the case of goods. Sections 87 and 89 amend the VAT Act to provide for the taxation of the private use of deductible and non-deductible business services. Section 88 also contains an anti-avoidance measure designed to strengthen the VAT grouping provisions so as to ensure the related companies are appropriately grouped for VAT purposes. Sections 86, 90 and 92 replace the existing rules regarding the VAT treatment of the supply of a "package" of services comprised of two or more elements which attract VAT at different rates. Sections 91 and 92 provide for the granting of deductibility for VAT incurred on costs associated with the issue of new stocks, shares, debentures and other securities made to raise capital where that person is entitled to VAT deductibility.
Part 4 deals with stamp duties. Section 96 extends to a foster child the stamp duty reliefs available to a natural or an adopted child. Section 97 provides for an amendment to the exemption from stamp duty of any instrument made for the purposes of or in connection with the demutualisation of an assurance company which carries on a mutual life business. Section 98 gives effect to the budget announcement extending the exemption for transfers of land to young trained farmers from stamp duty for another three years until 31 December 2008. Section 101 provides for an exemption from stamp duty on the sale, transfer or other disposition of an EU single farm payment entitlement. Section 102 gives effect to the budget announcement regarding the abolition of companies capital duty for transactions effected on or after 7 December 2005. Section 103 ensures that where a combined ATM and debit card is used solely as an ATM or debit card, the charge will be €10, whereas if it is used for both functions, the existing €20 charge will apply.
Part 5 deals with capital acquisition tax. Section 107 is concerned with the clawback of the exemption granted to heritage objects contained in a gift or inheritance if such objects are sold within six years after the valuation date of the gift or inheritance. This clawback does not apply if the objects are sold by private treaty to one of the qualifying bodies referred to in section 77(3) of the Act and the proposed Irish Heritage Trust is now being added to the list of qualifying bodies.
Section 110 gives effect to the budget proposal that the EU single farm payment entitlement will qualify as agricultural property for the purposes of agricultural relief under capital acquisitions tax rules. It also provides that, where land which qualified for agricultural relief or business relief, as the case may be, is disposed of in the period commencing six years after the date of the gift or inheritance and ending ten years after that date, the relief granted will be clawed back in respect of the development value of the land at the date of the gift or inheritance.
Section 111 amends the provision which grants a credit for capital gains tax that has been paid against capital acquisitions tax where those taxes are chargeable on the same property and arise on the same event. This credit will cease to apply where the gift or inheritance is subsequently disposed of by the beneficiary within two years of its acquisition.
Section 114 provides a new scheme of tax relief for heritage property donated to the proposed Irish Heritage Trust as announced in the budget. To qualify for relief, the heritage property will have to be approved by the Minister for the Environment, Heritage and Local Government by reference to the criteria set out in the section. There will be a ceiling of €6 million on the aggregate value of the heritage properties that can be approved in any one year. Allowing the proposed trust to avail of this scheme will be important to its successful launch.
Sections 117 and 118 are important tax administration provisions. The first of these will allow the Revenue Commissioners, with the consent of the Minister for Finance, to introduce regulations governing the automatic reporting to Revenue by financial institutions of interest and other profit payments made to customers as well as certain payments made by Departments. The Revenue Commissioners and my Department will consult the financial institutions before implementing this reporting system. Section 118 addresses the use of tax avoidance schemes by way of a surcharge of 10% on undisclosed transactions that are ultimately determined to be tax avoidance transactions. The surcharge will not apply where full details of the transaction are disclosed in a "protective notification" to Revenue within a specified time limit. People who are open about their tax planning arrangements will be able to show them to Revenue, and will not be surcharged if the arrangements concerned are later determined to be in breach of anti-avoidance rules.
I hope the House has benefited from this elaboration of the measures in the Bill. There are still some matters under consideration that I may bring forward on Committee Stage should they receive Cabinet approval. At this stage, they remain part of the deliberative process. Should I have such amendments to bring forward, I will seek to notify Opposition spokespersons in advance of the Committee Stage. I will also give consideration to any constructive suggestions put forward during our debate today and tomorrow. I commend the Bill to the House and look forward to a constructive debate on it.
