I move: "That the Bill be now read a Second Time."
The Finance Bill 2010 ensures that all sectors play their part in the critical task of stabilising the public finances. We know from our experience of recent decades that unless we restore order to the public finances, our economy will not recover. The extraordinary budgetary adjustments the Government has introduced during this economic crisis have halted the deterioration in the budget balance and boosted international confidence in our ability and willingness to put our house in order.
The benefits of these decisive actions can be seen in the sharp drop in our borrowing costs over the past year. Had we not taken strong measures in December's budget and convinced international markets of our determination to correct the public finances, we surely would not have escaped the jump in borrowing costs that some other euro area members have suffered over recent weeks.
We must remain steadfast on the path to fiscal correction set out in the budget. We are setting the seeds for economic recovery and new job creation. The unemployment rate will peak this year at just over 13%. This is less than projected last April but it is still unacceptably high. That is why we must continue to encourage employment growth through targeted measures that will build on our existing strengths and put us in the position to take advantage of the recovery that my Department and the Central Bank are forecasting for later this year. The Finance Bill 2010 does exactly that.
The Government remains committed to providing a pro-enterprise environment and to maintaining our relatively low tax burden on business. This will assist us in maintaining and enhancing our competitiveness. Unless we sharpen our competitive edge, we will be unable to return to the tried and tested strategy of export-led growth. With this in mind, the Bill extends the existing scheme of tax exemption on the income and gains of new start-up companies over the first three years of operation. It will now be available to companies which commence trading in 2010.
The Bill also contains measures to facilitate the development of Islamic finance in Ireland. Islamic finance covers any financing arrangement that is compliant with the principles of Sharia law. Islamic finance is the fastest growing sector of the international financial services industry and it is important that we be in a position to attract this new type of investment into Ireland. Under these provisions, the tax treatment applicable to conventional finance transactions will be extended to embrace Islamic finance.
I have received a number of proposals to establish a medium-term national savings product as an additional source of funding for capital investment. In the budget, I announced the introduction of a national solidarity bond. The Bill gives effect to that announcement. The national solidarity bond will be marketed by the NTMA to small investors over the next few months. Unlike some other NTMA long-term savings products such as savings certificates, the bond will pay interest on a periodic basis over its lifetime in addition to interest at the end of its lifetime.
In my budget speech, I promised to bring forward a package of measures to improve the effectiveness of the Revenue Commissioners in tackling the shadow economy, addressing smuggling and excise frauds, and dealing with tax avoidance schemes, all of which are a matter of acute current public interest and concern.
The Revenue Commissioners' experience from dealing with a series of investigations over the years is that offshore vehicles have commonly featured as a key element of the tax evasion process. In the context of the property-induced crisis with which NAMA is now involved, we are concerned that similar offshore vehicles have been used to evade tax. The Bill facilitates access by Revenue to information in the possession of NAMA about any offshore entities or vehicles involved in transactions that are now under its scrutiny.
There are a number of other Revenue powers or measures included in the Bill. One in particular will allow for a substantial increase in the fines that a court may impose on those convicted on indictment of certain offences under excise and custom law. These provisions will be particularly important in the fight against tobacco smuggling which has become a significant problem with serious implications not only for the health of our citizens, but also for the Exchequer.
While we continue to battle our way through these challenging economic conditions, we must remain aware of the longer term but perhaps even more difficult challenge posed by climate change. It is the responsibility of governments everywhere to change behaviour to reduce our greenhouse gas emissions. Accordingly, this Bill provides full details of the carbon tax I announced on budget day. The tax has already been applied to petrol and auto-diesel. It will apply to kerosene, marked gas oil, liquid petroleum gas, fuel oil and natural gas from next May and the application of the tax to coal and commercial peat will be subject to a commencement order.
As a result of the European Court of Justice's ruling against Ireland of 16 July 2009, the VAT legislation must be amended to allow public bodies, including local authorities, to be subject to VAT where they engage in activities that lead to a distortion of competition with private operators. Examples of services that will now be subject to VAT include waste collection, landfill and recycling; off-street parking; toll roads; the operation of leisure facilities; rent from certain lettings of commercial property; and the supply of staff and data. It should be noted that such services are already subject to VAT where they are provided by a private operator. This seems to have escaped comment in much criticism of this measure. The standard or the reduced VAT rates will apply as appropriate. The changes will apply from 1 July 2010. Education, health, water and passenger transport services will not, however, become subject to VAT arising from the judgment.
Business customers who charge VAT will not be affected by this change since they can claim for any VAT charged by a public body. The impact on private individuals, VAT-exempt entities and other non-registered bodies will depend on whether the VAT is passed on by the public bodies, which in any event should be limited somewhat since public bodies providing the affected services will have entitlement to deduct VAT on their inputs.
The Bill abolishes six tax reliefs, as recommended by the Commission on Taxation. This is in addition to the announcement in the budget that mortgage interest relief will be abolished on a phased basis and the removal of a number of property based reliefs in the health sector in the Finance Act 2009.
The effect of these changes has been to remove unnecessary costs and distortions from the tax system. I am committed to continuing this process. To that end, I will ask each of my colleagues in government to assess the effectiveness of tax expenditures within their sectors, with particular reference to those that the Commission on Taxation recommended should be removed from the tax code. My Department will review the outcome of that sectoral analysis and I will report to the Cabinet by the end of June 2010. This new approach will place the onus for objectively justifying the retention of any expenditure on the sector benefiting from the relief. My Department will then be in a position to present the Cabinet with an analysis on which to make well-informed decisions about the future of tax expenditures in good time for the 2011 budget.
I will now describe some of the main provisions contained in the Bill in the time available to me. Part 1 of the Bill covers the income levy, income tax, corporation tax and capital gains tax. My budget day announcement that an exemption from the income levy would be provided for certain capital expenditure incurred by farmers in meeting the requirements of the EU nitrates directive is in section 2. This section also makes a number of technical amendments to the income levy, including placing the levy on the same footing as income tax for double taxation agreements and cross-Border worker relief.
Two tax reliefs recommended for abolition by the Commission on Taxation are dealt with in section 4. It ends the tax relief for long-term care policies and the benefit-in-kind relief relating to the loan of certain art objects.
Section 5 contains a number of changes which will simplify the approval of qualifying health expenses for tax relief purposes. The requirement for approving medical institutions is removed. Instead, maintenance or treatment costs will now qualify for relief where they are necessarily incurred in association with the services of a practitioner or diagnostic procedures carried out on the advice of a practitioner. Nursing home fees will qualify for relief provided the nursing home concerned provides qualified nursing care on-site 24 hours per day. I am also amending the legislation to clarify that tax relief is available in respect of private contributions made towards the cost of the upkeep of an individual under the fair deal scheme.
Section 6 provides for the changes to the mortgage interest relief regime announced in the budget. To support those who bought their homes at the peak of the housing market, relief is being extended until 2017 for those who took out a qualifying home loan in 2004 or thereafter. To provide encouragement to those who may wish to purchase in the next three years, relief will be available at current levels until 2017 for loans taken out between 1 January 2010 and 31 December 2011. This is an extension of six months on my budget day announcement. It has been made because it is more convenient to have such a cut-off point at the end of a calendar year. A reduced rate of relief will apply for qualifying loans taken out after this date, but before the end of 2012. This reduced rate will be 15% for first-time buyers and 10% for non-first time buyers with ceilings of €6,000 for married couples and €3,000 for single individuals applying in both cases. Loans taken out in 2013 or after will not qualify for mortgage interest relief. Mortgage interest relief will no longer exist for the tax year 2018.
Section 9 enhances the current remittance scheme which provides an incentive for foreign employees to undertake an assignment in Ireland. The scheme is being extended to include European Union and European Economic Area nationals while reducing from three years to one year the amount of time they have to spend in Ireland.
Section 11 provides for the abolition of tax relief on service charges. This change is in line with the recommendations of the Commission on Taxation. Provision of such relief is inconsistent with the overall thrust of having persons meet the economic costs of the services provided. Relief can be claimed this year for service charges paid in 2009 and relief can be claimed next year for charges paid in 2010. There will be no relief on charges relating to the year 2011 which would have been claimed in 2012.
An anti-avoidance provision, section 12, tightens up the rent a room scheme.
Section 15 makes a number of amendments to certain pension-related tax provisions and introduces a requirement for the electronic delivery of certain information in respect of small self-administered pension schemes. Sections 16 to 18, inclusive, are designed to prevent abuse of certain types of share-based remuneration schemes for employees.
As I announced in my budget speech, the Government wants high earners availing of tax incentive schemes to contribute more in the current difficult economic circumstances. Therefore, I am abolishing, with effect from tax year 2010, the loss relief available to owners of significant buildings and gardens who are passive investors. Details of the changes are set out in section 20 along with some transitional arrangements.
The effective income tax rate paid by persons subject to the restriction of reliefs or horizontal measure is increased from 20% to 30% in section 22. I regard this provision as an important move in ensuring all parts of society play their part in addressing the difficulties facing the public finances. The windfall tax, a special rate of 80% capital gains tax, which was introduced as part of the NAMA legislation, is amended by section 24. The provision will ensure that material contraventions involving a rezoning are covered by the tax. The amendment also ensures that the sale of once-off sites below an acre in size and €250,000 in value are not subject to the windfall tax.
Section 25 provides for the termination of the scheme of capital allowances in respect of child care buildings. The scheme, which was previously open-ended, now has a termination date of 30 September 2010, unless certain qualifying conditions are met. This measure is in line with the termination of other capital allowance schemes in the Finance Act 2009. The abolition was also recommended by the Commission on Taxation.
Enhancing the attractiveness of Ireland as a location from which to conduct international business is an important theme of the legislation. The tax treatment applying to the new management company passport regime introduced by the European legislation, the UCITS IV directive, is clarified in section 27. The section also exempts investment undertakings from the requirement to obtain and maintain declarations of non-Irish tax resident unit-holders where the investment fund in question is not marketed in Ireland to address the disproportionate administrative burden this places on industry.
Under section 28, an existing provision which removes the charge to Irish tax on the profits of a trade exercised in the State where it is exercised through an independent Irish resident agent in certain cases is being extended to include companies authorised under the European UCITS legislation.
Finally, section 29 removes the requirement for non-resident companies receiving dividends from Irish resident companies to provide a tax residence and-or auditor’s certificate to obtain exemption from dividend withholding tax, DWT, at source. Instead, a self-assessment system will apply.
The legislation on deposit interest retention tax, DIRT, is amended by section 33 in a number of respects. First, it removes personal retirement savings accounts, PRSAs, from the scope of the DIRT regime. Second, it requires a relevant deposit taker to obtain the tax reference number of a person making a specified deposit; this will facilitate the introduction of the national solidarity bond announced in the budget speech. Third, financial institutions will make accelerated payments of DIRT tax to the Exchequer. Finally, financial institutions must automatically issue statements setting out the amount of DIRT deducted rather than on request as at present.
As a Government we must ensure that, in the face of a growing competitive threat from new emerging markets and the aggressive marketing of established centres, the Irish Financial Services Centre remains competitive in all areas. That is why section 35 of the Bill contains provisions which will help us to attract our share of the growing market of Islamic finance. In 2007, Islamic finance was estimated to be worth approximately US $700 billion and is estimated to be growing at approximately 10% per annum. The measures in the Bill will provide level playing fields for all commercial financial product providers to ensure the tax benefits that accrue to conventional financial products are also available to Sharia compliant products.
These changes are a first step towards providing equality of treatment to Sharia compliant financial products. I intend to work with the Muslim community, the banks and interested parties to investigate the market for Sharia compliant retail products in the context of future finance Bills.
Ireland's existing, but limited, arm's length pricing rules for manufacturing cease at the end of this year with the ending of manufacturing relief. The opportunity is now being taken to introduce general transfer pricing legislation in section 38. This will cover arm’s length trading between associated enterprises for cross-border and domestic transactions, but small and medium enterprises are excluded. The provisions will align Ireland’s tax code in this area with international norms, namely, the OECD transfer pricing guidelines.
A number of significant enhancements are being made to the scheme of tax relief for the provision of intangible assets introduced last year. The amendments in section 39 include additions to the list of specified intangible assets that can qualify under the scheme and a reduction in the period from 15 to ten years over which the assets must be held to avoid a clawback of the relief. The aim of these amendments is to increase the effectiveness of the scheme and to enhance its ability to attract international business to Ireland. Section 40 extends from seven to ten the categories of energy-efficient equipment eligible for the existing accelerated capital allowance scheme. The new categories included in this scheme are refrigeration and cooling systems, electro-mechanical systems, and catering and hospitality equipment.
My budget speech included an extension of the existing scheme allowing start-up companies three years' relief from corporation tax. Section 41 gives effect to this announcement by including companies commencing to trade in 2010. It is important that the annual Bill includes measures which ensure that Ireland can continue to attract internationally traded services. Three consecutive sections — 42, 43 and 44 — are aimed at this objective. Unilateral credit relief, in respect of royalty flows from residents in non-treaty countries, is extended to all trading companies. This relief, currently available to companies entitled to the 10% corporation tax manufacturing regime, expires at the end of 2010. The measure extends the relief beyond that date and to all trading companies. Unused credits in respect of foreign tax on branch profits will be permitted to be carried forward and credited against corporation tax in succeeding accounting periods. Finally, section 44 permits a company to carry forward excess losses of a foreign branch that were disregarded under section 847 of the Taxes Consolidation Act 1997.
Changes are proposed in section 46 to the current tax treatment of dividends received by companies here. The amendments involve charging tax at 12.5% instead of 25% on foreign dividends paid out of trading profits from countries with whom Ireland does not have a tax treaty; simplifying the arrangements under which foreign dividends are treated as sourced from trading or non-trading profits; and providing tax exemption to foreign dividends forming trading income received by portfolio investors, that is, companies with a holding or voting rights of less than 5%. I am confident that measures such as this will improve the international business environment here and help to encourage the creation of high quality employment in the economy.
Section 50 contains a number of changes to the existing research and development tax credit scheme. The main change deals with a position where a company or company group is carrying out research and development activities in different facilities in separate geographical locations and the activities in one of those facilities is permanently discontinued. Section 52 makes two amendments relating to the date of disposal and acquisition of an asset. The first amendment avoids a position where a person disposing of land under a compulsory purchase order could have been due to pay the liability before receiving compensation for the land. The second amendment ensures that the proceeds from a compulsory purchase order are liable to capital gains tax where the individual making the disposal dies before receiving the consideration.
I am aware that there has been some concern among farming organisations that the date of the disposal of lands for a CPO, rather than the date when the compensation was received, should determine the rate of tax applicable to the disposal. I am pleased to inform the House that the Revenue Commissioners have confirmed that the rate of tax which will apply to land acquired under a CPO is the rate when the land is disposed of, which in most cases will be the date when the acquiring authority enters on the land.
Part 2 of the Bill deals with customs and excise.
The legislation for the introduction of a carbon tax and for the consequential necessary legislative changes arising from this tax are set out in sections 60 to 83, inclusive. Section 84 confirms the budget day announcements reducing the rates of alcohol products tax. Sections 85 to 88, inclusive, provide for the updating of excise law provisions to reflect new European legislation on excises including the new computerised excise movement control system. Sections 89 to 96, inclusive, change the penalties applicable to certain offences under excise and custom law, increasing substantially the fines which a court may impose on persons convicted of such offences on indictment. Included here is section 92, which places on a clear legal footing the arrangements under which Customs can obtain information in respect of goods and passengers in advance of their arrival.
Vehicle registration tax, VRT, issues are dealt with in sections 97 to 106, inclusive, including, in addition to the VRT items to which I already referred, the introduction from 1 January 2011 of a revised classification system for the registration of vehicles in the State to reflect the broader European classification system. There will be the introduction of a new requirement for vehicle insurers to inform Revenue where they issue a policy to a foreign-registered vehicle for a period in excess of 42 days. This will provide a further tool to tackle VRT evasion by State residents who fail to re-register and pay the appropriate VRT on vehicles purchased outside the State. Sections 102 and 103 confirm budget day announcements introducing a scrappage scheme, extending until 31 December 2012 the existing VRT exemption for electric vehicles and the existing VRT relief of up to €2,500 for plug-in hybrid electric vehicles.
Part 3 deals with, value-added tax, VAT. Sections 107 to 126, inclusive, set out a range of changes to VAT including, as announced in the budget, the reduction in the standard VAT rate by 0.5% to 21% with effect from 1 January 2010; the application of VAT to services provided by public bodies including local authorities; the introduction of a margin scheme for second-hand means of transport and agricultural machinery; and changes to the VAT treatment of telephone cards and prepaid top-ups for mobile telephones. Sections 124 to 126, inclusive, make amendments to the Value-Added Tax Act to facilitate the introduction of a VAT consolidation Bill later this year.
Part 4 deals with stamp duties. Section 128 allows for the exchange of data between the Revenue Commissioners and the Property Registration Authority in a new e-stamping regime. A relief from stamp duty will be provided under section 131 to facilitate fund mergers enabling the re-organisation of funds into structures now permitted under recent European UCITS IV legislation. The levy on certain life assurance premiums will be amended by section 132 to exclude pensions and re-insurance business. The payment date for the levy will also be brought forward.
Part 5 deals with capital acquisitions tax, CAT. Provisions relating to a wide-ranging package modernising CAT are covered in section 139, the full details of which are outlined in the explanatory memorandum. Delivered on an Exchequer-neutral basis, the changes will deliver significant benefits to customers and their agents including the elimination of up to 75% of the current quantum of CAT documentation combined with the use of faster, simpler and more straightforward processes.
Part 6 covers miscellaneous provisions. Section 141 gives legislative effect to the domicile levy announced in the Budget Statement in which I highlighted the importance of improving the effectiveness of the Revenue Commissioners in addressing the challenges facing the collection of taxes including dealing with tax avoidance. The Bill contains several relating measures which aim to achieve this objective. Section 143 will enable information to be given to Revenue by the Taxi Regulator about persons operating and licensed in the taxi and hackney sectors. Section 144 will enable Revenue to apply to the Appeal Commissioners for consent to issue a notice to obtain information from third parties regarding a class of persons on the same basis as they have for financial institutions. Revenue will be able to secure information from NAMA on offshore vehicles under the provisions of section 145. Where summonses and other such notices are returned unserved by the Garda, Revenue will have the authority under section 146 to serve them. Section 147 adds to the list of taxes and duties which must be paid before a tax clearance certificate can be issued. Only taxes within the control of the taxpayer are included, such as the income levy and excise and customs duties.
Double taxation treaties are widely regarded as critical pieces of fiscal infrastructure for developing substantial bilateral trading and investment opportunities by reducing tax impediments that might otherwise deter cross-border activity. Since 2007 we have grown our network of tax treaties from 44 to 56. The provision in section 149 is the final step in the ratification process for new treaties with Bahrain, Belarus, Bosnia-Herzegovina, Moldova, Georgia and Serbia. Section 149 provides for the ratification of eight tax information exchange agreements with Gibraltar, Guernsey, Jersey, Turks and Caicos Islands, Anguilla, Bermuda, Cayman Islands and Liechtenstein. Section 152 provides for the introduction of a statutory scheme providing for voluntary deductions from members of the Judiciary to cover pension-related deductions.
At this stage there are still a small number of matters under consideration for inclusion in the Finance Bill that I may bring forward on Committee Stage. I will, of course, also give consideration to any constructive suggestions put forward during our debate today and tomorrow.