6 Deputy Enda Kenny asked the Minister for Finance if he will indicate the start-up date for the transfer of assets to the National Asset Management Agency; and if he will make a statement on the matter. [44821/09]
Vol. 697 No. 1
6 Deputy Enda Kenny asked the Minister for Finance if he will indicate the start-up date for the transfer of assets to the National Asset Management Agency; and if he will make a statement on the matter. [44821/09]
The National Asset Management Agency Act 2009 provides for the acquisition of eligible assets from participating institutions by NAMA. In accordance with the terms of Part 6 of the Act, it is expected that the first acquisition schedules will be served by NAMA on participating institutions in January 2010. This will prioritise the loans of the larger borrowers across the participating institutions. Section 87 of the NAMA Act provides the date of acquisition of a designated bank asset shall be at least 28 days after the relevant acquisition schedule is served on the participating institution concerned unless NAMA specifies a shorter period in the acquisition schedule. The precise timing of the acquisition process and of the transfer of the first tranche of assets to NAMA will be dependent on the extent to which credit institutions have conducted the necessary preparatory work and on EU state aid approval. My officials continue to work closely with the European Commission in an effort to secure early approval for the scheme.
I understand the preference shares in AIB will not have a coupon paid to the Government. It may then be put into a position that it will have to acquire ordinary shares as a result of the effect of default. Will the Minister comment on this?
Is restructuring of the banks a core issue to getting EU state aid approval? Will the Minister inform the House where the debate now stands as to the necessary restructuring? Will we see the banks required to divest some of their existing activities, perhaps to a third banking force or elsewhere?
An issue arose with AIB about the payment of a coupon related to an instrument other than an instrument issued by the State. In view of the submission of the restructuring plan, the European Commission felt the payment of coupons should be suspended pending the determination of the restructuring plan. A decision, therefore, has not been taken as to whether the coupon on the preference shares taken by the State in AIB will be paid. That decision will be made in the context of the restructuring plan and having regard to state aid issues which arise from it.
Will this trigger the takeover of ordinary shares by the State?
It is a contingency; it is not something that will necessarily happen. The European Commission has advised us that this issue will be considered in the context of the request for its approval of the structural plan. The Commission expressed the view that were AIB able to raise private capital, then it would expect the State to continue to receive its coupon. That is only, however, a preliminary view.
The term sheet governing the preference shares made clear that if there were a default on the payment of the coupon, the State would then acquire an increasing share in the ordinary equity of the relevant institution.
The restructuring plan has been submitted to the Commission. In assessing it from a competition and state aid perspective, the Commission is anxious banks focus on their core business and divest themselves of assets not central to that. That is a matter which will engage the attention of the Commission in the coming weeks.
Would the Minister agree the State's acquisition of these ordinary shares compared to the preference shares represents appalling value for the taxpayer? Does he envisage that part of the restructuring of the banking sector will require them to divest some of their activities in the Irish market so the too-big-to fail problem will not afflict us in the future?
That issue will be examined. The current preference shareholding arrangement assures the taxpayer of a fixed repayment from the institution concerned. Were the State to take ordinary equity, it would have the expectation of a dividend and the hope of an eventual value in an item which is pure risk capital. That is the contrast between a pure equity investment and the preferential arrangements negotiated with Bank of Ireland andAIB.
However, the State would be vastly overpaying for this.
That issue can only be determined in a particular context at a particular time when the matter comes for determination which it does not at this stage.
The recent revelations in this matter are very disturbing for taxpayers. The State gave AIB €3.5 billion, €500 million short of the Minister's gap next Wednesday. For this, the Minister will inflict incredible pain on families and workers across the country. That €3.5 billion was for the purposes of acquiring a preference share interest in the bank. If it were to be converted into ordinary equity, the State stands to get, on the basis of the deal the Minister insisted was fantastic, 25% of AIB.
The State will get a greater share.
Today, the bank could be bought in its entirety for €5 billion. We stand to lose over €2 billion on this deal the Minister entered into with the National Pensions Reserve Fund.
The Minister is always at pains to suggest there is no link between the budget woes that people will hear from him on Wednesday and the bail out for the bankers and developers. The figures in question are deeply worrying, especially for the Minister, as they suggest the arithmetic has gone badly askew.
The indications during the debate on the NAMA legislation——
Does the Deputy have a question?
——were that the top ten and then top 30 developers' loans would be transferred before Christmas. How many does the Minister expect to be actually transferred? Has the Minister revised the transfer date to the end of January or even February? What is the value of those assets? What is the revised date for the transfer of all toxic debts to NAMA?
I do not know where to begin with the various assertions and statements made by the Deputy about bail outs for developers and bankers. Deputy Burton is well aware that with the budget there is a profound gap between the State's receipts and expenses in Vote capital and Central Fund payments.
There is €7.5 billion this year for the banks.
Deputy Burton, allow the Minister to reply.
It is the narrowing of that gap that has to be addressed in the budget next Wednesday.
Apart from that gap, the State has had to make a substantial investment to ensure that we continue to have a viable banking system. It was made on the basis of a defined return from Bank of Ireland and AIB. If that investment is converted into ordinary equity by way of a capitalisation, then the State's interest, while more long-term and greater in character and eventual value, will lose the short-term advantage of an income flow. It is not correct, as Deputy Burton suggested, that if the State obtains shares in lieu of coupon payments then these shares are part of the 25% stake which the State already has in the institution.
The NAMA draft business plan was published in early October, based on the best available information then. Minor delays took place with the completion of the legislative process. This was due to final proofing of the Bill before presentation to the President. Operational issues have also arisen concerning shareholder approval in the different applicant institutions. These factors have extended the timetable but it is not a significant delay. I except the first set of acquisition schedules will be served on participating institutions in January. The agency will begin with the largest aggregate exposures and the first tranche will take place in January. The business plan indicated that the transfer process will be completed by July 2010. As I have stated previously, the commencement of the transfer assets will begin in January and a final business plan will be prepared in the coming weeks for approval by the NAMA board. I do not expect the timetable as set out in the draft business plan to change to any significant extent.
I will allow a brief question from Deputy O'Donnell. We have already spent a great deal of time on this question.
I have two brief questions. Am I correct that the extraordinary shares will be based on coupon foregone in terms of preference shares?
No. The term sheet provides that additional ordinary shares are allocated in the event of non-payment of the coupon.
What extra percentage of ordinary shares would the Minister expect?
I do not have those particulars before me and will arrange for the information regarding the term sheet to be forwarded to the Deputy. It is calculated by proportion to the value of the institution and the——
The Minister referred to the restructuring of AIB or any of the banks. What level of additional private capital will the two main banks, Allied Irish Bank and Bank of Ireland, require?
Again, the determination of what additional capital will be required will turn, first, on the impact of the acceleration of losses imposed by the NAMA exercise and, second, by a determination on the part of the Governor of the Central Bank and Financial Regulator in terms of what will be the appropriate percentage required by these institutions.
The market is determining that, as the Minister is well aware.
7 Deputy Emmet Stagg asked the Minister for Finance his views on the fact that about two thirds of lost competitiveness here in recent years has arisen from adverse currency movements; the extent he attributes the loss of competitiveness to increased labour costs; and if he will make a statement on the matter. [44884/09]
In recent years Ireland's harmonised competitiveness indicator — the euro's exchange rate adjusted for Ireland's trading patterns — has increased, which implies a loss of international competitiveness. There are two reasons for this. First, Ireland trades relatively more with the UK and the USA, and both sterling and the US dollar have depreciated against the euro in recent years. Second, until last year, inflation in Ireland was higher than in the rest of the euro area while wages also grew rapidly. Part of these increases in labour costs and prices were justified as productivity growth in Ireland was higher than in the euro area. However, some of the growth in labour costs, in particular in recent years, was out of line with productivity developments. The National Competitiveness Council has outlined a range of wider cost factors that have also damaged our competitiveness.
As a small member of a currency union we have no control over the exchange rates we face and must focus on improving competitiveness at home. As such, we need to improve our competitiveness as quickly as possible and there are already a number of positive developments in this regard. Consumer prices in Ireland are now declining at the fastest rate in the euro area, by 2.8% in the year to October on the harmonised measure and by 6.6% using the national measure. In addition, we are also seeing the benefits of our labour market flexibility. Much available evidence points to recent downward pressure on wages in the economy. Unit labour costs, wages adjusted for productivity, are forecast by the European Commission to fall in Ireland this year, uniquely in the euro area. It is predicted they will fall by a cumulative 5% by 2010 and 2011, the largest fall in the euro area over the two years.
A highly educated workforce as well as the policies outlined in the Government's smart economy document will also help. While the falls in domestic prices, easing wage pressures and improvements in productivity are helpful, we must not be complacent as further improvements in our competitiveness are essential to take advantage of the global recovery.
I thank the Minister for his reply. The previous question also alluded to the following matter. The biggest single element is the differential between the euro and sterling. Given that North and South comprise one island, people have easy access to crossing the Border. If the Minister cares to shop for a day or afternoon in Grafton Street and to visit a range of UK owned multiples he will find that products priced there at €100 are more than likely available in the North or UK for approximately £65 sterling. This means, allowing for competition differences and the fact that costs and VAT are somewhat higher, that a product priced at approximately £65 sterling should not cost any more than €80. This would allow for a good return and mark-up.
The Deputy is making a statement and must put a question to the Minister.
We are finding that such products are priced at €100, thus there is gross profiteering by shops, in particular multiples of UK high streets. Does the Minister propose to do anything about this? This is driving people, whether in Dundalk or Dublin, to cross the Border to purchase pampers and so on. I accept the purchase of alcohol is a factor in this regard. A pair of shoes costing €100 in any particular shop in Grafton Street are available for £65 sterling. There is a huge difference between the cost of pampers North and South of the Border. Anyone within a 40 or 45 mile drive will inevitably end up in ASDA in Enniskillen or Sainsbury's in Newry. Retailers are also shopping in these outlets.
The Deputy must put a question to the Minister.
They are able to purchase goods at retail prices that are cheaper than wholesale prices in the Republic and the Minister is doing nothing about this. What does he propose to do?
Where do I begin? First, a new shopping centre was recently opened in Dundalk and, in fairness to individuals living there, they are shopping locally because they know how much damage is done to their local economy by cross-Border trade. I wanted to mention that in passing.
As far as the general question raised by Deputy Burton is concerned, a few points need to be made. First, when a currency depreciates as rapidly as sterling has it takes a while for the stock prices to reflect that depreciation in the importing State. There has been considerable evidence of a reduction in prices. Traders have reduced their prices. One of the reasons for the reduction in the cost of living in this State is the depreciation of sterling. For example, it is noteworthy that the cost of clothing has fallen to a far greater extent than has the cost of food, which reflects that most clothing originates in the sterling area.
Deputy Burton asked what I am doing about this. This is a matter for the Government collectively rather than a distinct responsibility of the Minister or Department of Finance. The Government must ensure that our competition laws are vigorously enforced in respect of abusive behaviour.
I have many connections with Dundalk. I am married to a man from Dundalk and I am aware of what the traders in Dundalk are experiencing. Despite their great efforts they are losing a huge amount of trade and are at the pin of their collars to survive. Platitudes will not get them very far. We have a Competition Authority and National Consumer Agency. The Competition Authority takes action against the Kennel Club to ensure there is more than one licensing authority for championship breeds in this country. That is the type of play-acting in which the Competition Authority has been engaging.
A question to the Minister, please.
Does the Minister propose to ensure consumers receive a fair deal in terms of the manner in which rates of exchange in respect of the euro to sterling are calculated? We are being ripped off. If one looks at the websites which compare prices in respect of cosmetics or clothes, or even items in respect of which VAT is not payable, one will see that the mark-up from sterling to euro in the case of the Republic of Ireland are extraordinarily high. Does the Minister intend to introduce proposals to address this?
The question should be directed to the Minister for Enterprise, Trade and Employment.
The Minister correctly indicated that what Ireland is trying to achieve or must achieve now is the equivalent of a devaluation. We must do it by pushing down wages, prices, fees and charges. I wish to put two simple suggestions to the Minister. Would he consider leading this by at least agreeing to a freeze on every charge made by the State, so that no charge would be increased by the State? Second, would he consider an initiative to target rip-off wherever it is occurring, be it in the board rooms or on the high street? I can offer an example. I went into a shop today and was told by the proprietor that his rent had increased by 100% last December. Although trade has collapsed, there is no question of him negotiating an agreement to reduce it. Is that not immoral? It is economic suicide for this country if some people can increase their rents in that manner at a time when the Minister is, rightly, trying to get costs down. Will the Minister take the lead in a campaign to drive down these costs, which are really hurting our ability to trade our way out of this problem?
I have taken the lead in so far as the Department of Finance funds different branches of Government. It is very important that we ensure that the cost of government is reduced. It is also important that citizens reflect on the fact that there has been a fall in the cost of living and that the provisions in the budget will have to reflect that. Above and beyond that, I agree there are issues about charges by the State. In preparing budgets and examining departmental estimates it is essential to examine appropriations-in-aid as well as amounts taken in taxation to ensure that they are not simply used as a substitute form of taxation instead of real cost economies in the particular operation. Local authorities have an important role to play as well, and members of local authorities will have to face up to their responsibilities in their management of the authorities.
What about landlords? Do they not have a responsibility too?
There have been substantial decreases in rents, far above most other——
They are household rents. I am referring to commercial rents for businesses.
I am sorry, the Deputy's question was about the retail sector. I understand that the Minister for Justice, Equality and Law Reform intends to commence the relevant legislation with regard to greater flexibility early in the new year.
Is that after the NAMA valuations are done?
No, there is no connection as I understand it.
It is keeping the valuations up.
The Minister brought forward legislative proposals and is considering their implementation. There is considerable evidence of a reduction in commercial rents, notwithstanding upward review clauses.
Most traders have one opportunity between now and the January sales.
8 Deputy Seán Sherlock asked the Minister for Finance if he will introduce measures to ensure that persons living here, but who are non-resident for tax purposes, make some contribution to the Exchequer; his views on the introduction of a flat fee for tax exiles along the lines of a similar measure introduced in the UK in recent years; if he has studied and will comment on the application of this measure in the UK; and if he will make a statement on the matter. [44880/09]
The taxation of individuals in the State is in line with that prevailing in most other OECD jurisdictions, that is, individuals who are resident in the State for tax purposes, based on the number of days of presence in the State, are taxable here on their worldwide income; and individuals who are not resident here for tax purposes pay tax here only on income arising in the State and on income derived from working here. In section 15 of the Finance (No. 2) Act 2008, I amended the tax residence rules to provide that an individual will be regarded as present in the State for a day if he or she is in the State at any time during the day, not just at midnight. This applies for the 2009 tax year and subsequent tax years. It makes it more difficult for individuals based in Ireland to become non-resident for tax purposes. I remind the Deputy that, as outlined above, such persons pay tax on any income earned in Ireland.
I am aware that HM Revenue and Customs introduced changes to the remittance basis of taxation, under which certain individuals pay tax on foreign income or gains only if the money is remitted or brought into the country. The charge to which the Deputy refers is not imposed on non-residents. It is levied on UK residents who are either not ordinarily resident or not domiciled in the UK and who therefore can claim the remittance basis. These individuals now must pay a fee of £30,000 to claim the remittance basis and avoid paying tax on foreign income and gains unless this money is remitted to the UK. I am not considering implementing such a measure at this time.
The Deputy might ask whether I intend to impose a charge on individuals who become non-resident for tax purposes. There is no requirement on an individual leaving the State to declare, whether on a tax return or elsewhere, the reason he or she left Ireland, so there is no way to identify someone who has left for tax purposes. Individuals are perfectly entitled to change their residence and they do so for a variety of reasons, most of which have nothing to do with tax.
Would the Minister agree that in a republic it is right that everybody makes a contribution proportionate to their means, and that in the case of those who, through hard work and good fortune or through inheritance, have very large incomes and fortunes, it is a republican thing that they should make a contribution? Would he agree with very successful and distinguished businessmen such as Warren Buffett and Bill Gates that the rich have obligations to contribute to taxation? Everybody has a moral obligation to contribute to charity but in a republic there is also an obligation to contribute to the costs of the infrastructure of the state of which one is a citizen. Will the Minister outline his philosophy with regard to people making a contribution, particularly as next Wednesday it is quite likely he will ask people on very low and modest incomes to make an enhanced contribution or to take cuts in income?
I agree with the sentiments expressed by Deputy Burton that in a republic such as ours there is an onus on all persons who are citizens and who are resident here for tax purposes to comply with their tax obligations. That is the law of the State and I agree with it. The law of the State in this regard is no different from the laws of other states. However, there is a difficult issue to be resolved relating to tax administration, which is that persons might reside in different places and the law must strike a balance in that regard. One can tax a person on their income that arises in Ireland, and all persons resident here, irrespective of duration, pay tax on income they receive in Ireland.
However, in the case of the overseas income of persons who are not resident here, there is a difficulty under the OECD arrangements. Under the current arrangements there must be reciprocity. If a person spends the majority of their time elsewhere, they are clearly not living in Ireland for the purposes of taxing their worldwide income. That is the practical difficulty which any Minister for Finance faces in this area. A rule was introduced by a previous Government which enabled midnight to count as a day for tax purposes. I eliminated that last year, which is a substantial restriction on the scope for any possible abuse of this provision. However, it is a fact that if one does not live half the days of the year here, one does not pay tax on one's overseas income. There is nothing unusual in that. The rule does not just apply in Ireland but in many countries throughout the world.
Will the Minister comment on the proposal by the Commission on Taxation to move to a more economic definition of where people's interests lie as a basis for deciding whether they pay tax? Would that offer an opportunity to trap the tax of some very prominent individuals whose business interests are predominantly in Ireland and who ought to be paying tax here?
The commission proposed a test relating to the centre of vital interests. That formula is being examined by my Department but it is a formula of vague and uncertain application.
Deputy Bruton referred not to the centre of vital interest, but the centre of economic interest, which is a different test. Regarding many of the more high-profile individuals identified as persons with connections to Ireland, it should be said that many of their economic interests do not appear to lie in Ireland. This issue is not an easy one to resolve. I am not departing from my practice of not commenting on budgetary matters.
Written Answers follow Adjournment Debate.