My reply will attempt to address points raised by Deputies in the debate but they will appreciate that time will not permit me to respond to everything.
Deputy Michael McGrath suggests that there is no evidence yet of a coherent response by Government to the threat of a hard Brexit. This point was made also by both Deputies Doherty and Burton, but I would advise them that our planning ahead of the negotiations is currently intensifying at both political and official level. This work is still challenging as it is still not known what kind of relationship the United Kingdom wants to have with the European Union.
I have recently responded to Deputy Michael McGrath on the issue of financial services and Brexit but I would reiterate that Ireland is in a strong position to build on its successful track record and to compete for future mobile investments in the international financial services, IFS, sector. Ireland is now recognised internationally as a leading global centre for internationally traded financial services. In March last year the Government launched the IFS2020 strategy, a whole-of-government approach to driving the growth and development of the IFS sector in Ireland.
Specifically in the context of the Finance Bill, Deputy Michael McGrath referred to the retention of the SARP and FED programmes as being dressed up responses to Brexit. However, a fundamental issue that needs to be addressed regarding Brexit is uncertainty. The early announcement of the extension of these schemes was intended to address uncertainty, as it relates to them.
A number of Deputies have criticised the extension of SARP and cast it as purely a tax relief for high income earners. Selective figures were quoted by Deputy Doherty. However, he failed to take account of the jobs retained as a result of the measure, which if added into the equation, brings the cost per job to about €7,000 each. If such jobs were lost, in the absence of SARP, the Exchequer would incur much more significant costs.
The Deputy also raised the issue of funding for small and medium sized enterprises, SMEs, as did Deputy Burton. This Government has already been supporting increases in SME credit to viable businesses through the entry of new SME credit providers, particularly non-bank finance providers. The success of this policy can be seen in the number of new credit providers active in the market, the increase in credit provision and the reduction in average interest rates for SMEs.
Moving on to the budgetary process itself, Deputy Michael McGrath stated that the budgetary process is not fit for purpose, notwithstanding the work of the Committee on Budgetary Oversight. However, significant reforms have been made. Of course, the budgetary process for 2017 still has a long way to go. Scrutiny and consideration of the Finance Bill, the Social Welfare Bill and the Estimates are a key part of the budgetary process.
A number of differing views regarding the universal social charge, USC, emerged during the debate. Budget 2017 is the third step in a long-term process of unwinding the USC. It is my intention to continue the process of reducing the USC in future budgets, and Deputy Michael McGrath and Deputy Michael Healy-Rae will be aware that this is not a measure I have considered in isolation, but as part of a wider medium-term income tax reform plan.
Deputy Cullinane referred to the changes to the USC as base narrowing, but that is not the case. While the lower rates of USC have been reduced in this budget, easing the tax burden on low and middle income earners, the entry threshold of €13,000 has been maintained.
I would like to clarify a number of points regarding the help-to-buy scheme that many Deputies have raised. First, in regard to the completion of an economic impact assessment, independent or otherwise, such an impact assessment was considered, but it would be difficult to isolate the impact of a help-to-buy scheme without taking on board other structural factors affecting the housing market. A straightforward analysis of the help to buy scheme in isolation might suggest that it would increase prices, but this does not take on board the other impacts on the housing market that will arise as the many additional measures that the Government has announced with regard to housing take effect. I would point out that the help-to-buy scheme is just one of 84 measures included in the Action Plan on Housing and Homelessness. While there may be a short-term price impact in certain segments of the market, this assumes an absence of a supply-side response.
As regards consultation with the Central Bank, I personally discussed the scheme with the Governor in order to confirm that any rebate of tax under the scheme would be reckoned in full in the calculation of the deposit required to be eligible for a mortgage under the Central Bank’s macro-prudential rules. It was only ever in this context that I had approached the Central Bank. Deputies will be aware that I have reduced the minimum loan-to-value ratio for the scheme from 80% to 70%, following concerns raised by the Central Bank after the scheme was announced in the budget.
Several Deputies asked for clarification on the position of individuals who may have bought properties earlier this year. To be eligible, a first-time buyer must have signed a contract on or after 19 July. In the case of an individual who is building their own home, they must have drawn down the first tranche of the relevant mortgage on or after 19 July 2016.
A number of Deputies called for the extension of the living city initiative to towns. Changes were announced to the initiative in the budget which aim to get the design of the initiative right so that it can be more effective. Once this is achieved and evidenced, it will then be possible to consider how, or if, the initiative could be extended to other locations. A number of Deputies also criticised its extension to landlords but this measure has to be seen in the context of increasing housing supply and rental accommodation.
Deputy Louise O’Reilly raised the issue of certain homes in her constituency that are affected by pyrite. The issue is not a matter that is proper to the Finance Bill but I will relay her concerns to my colleague, the Minister for Housing, Planning, Community and Local Government, Deputy Coveney.
In response to Deputy Calleary, I can say that the Department of Finance received social housing proposals from both the Irish League of Credit Unions and the Credit Union Development Association. While the Department of Housing, Planning, Community and Local Government is the Department primarily responsible for the formulation and implementation of policy and for the preparation of legislation on housing, Department of Finance officials are working closely with them. A number of meetings have taken place to examine how credit unions can assist in the area of social housing. Ultimately, however, any funding mechanisms required will have to be put in place in the first instance by credit unions themselves, with the support of their members and with agreement of the Central Bank. Both Departments will continue to contribute to this process.
A number of Deputies have referred to the phased reinstatement of full interest deductibility for residential landlords as being part of a budget for landlords. It must be remembered that landlords are an essential feature of a functioning housing market. The rental sector in Ireland is not dominated by large institutional investors. Statistics from the Private Residential Tenancies Board, PRTB, show that over 68% of landlords have a single tenancy.
I welcome the comments made by Deputies Michael McGrath and Peter Burke on the importance of the 12.5% corporation tax rate and the recognition of the measures that Ireland has taken to implement the OECD BEPS project. I can also assure the Deputies that we will constructively engage with the Commission’s new CCCTB proposal while assessing whether it is in Ireland’s best interests. Deputy McGrath also notes the importance of our financial services sector. It is for that reason that I have moved to ensure that certain financial services vehicles are being returned for use in the areas that they were originally envisioned. By moving to tax profits on Irish property transactions in section 110 companies and Irish real estate funds, I have achieved a balance between protecting the Irish tax base and providing certainty to the international financial services sector.
I appreciate Deputy Donnelly's acknowledgement that section 21 of the Bill has addressed some of the issues that have arisen with these companies. It is important to recognise that the amendment was carefully drafted to guarantee that it achieved the policy objective of ensuring that the section 110 regime could not be used to erode the Irish tax base in regard to Irish property transactions while maintaining the regime for the wider securitisation industry.
It is for that reason that certain types of bona fide securitisation transaction have been excluded from the amendment. They have not been excluded to provide a tax avoidance mechanism and will not be able to be used for any tax avoidance opportunity whatsoever. In eliminating the section 110 regime for all use in the domestic economy it is important to note that Ireland, both in its domestic legislation and double tax treaties, maintains the right to tax land in the State. As is the international norm, we do not maintain the same taxing rights over loans that derive their value from other sources, for example, a business in the State. It would, therefore, be inconsistent to exclude other classes of domestic assets from the section 110 regime.
Deputies Richard Boyd Barrett and Paul Murphy claimed that Ireland was a tax haven. The OECD, the European Union and our tax treaty partners do not regard Ireland as a tax haven and have said so on a number of occasions. That Ireland is a tax haven is a baseless and fundamentally incorrect claim. I welcome the approval expressed by a number of Deputies for the proposal relating to the imposition of a 20% withholding tax on Irish real estate funds where they make property distributions to non-resident investors. The exemption from capital gains rate has been legislated for to encourage sustainable investment focused on the long-term holding and management of income-producing rental property.
Deputy Richard Boyd Barrett referred to the proposal at EU level for a financial transaction tax. The international financial services sector in Ireland generates direct employment for approximately 38,000 people in over 400 companies. The focus of the Government is on job creation. We are not in the business of attracting brass plate entities to Ireland which already has a tax on financial transactions and a stamp duty on transfers of shares in Irish incorporated companies which currently stands at 1%. The yield from this charge in 2015 was €424.13 million. The Bill also includes provisions to extend the bank levy to 2021, a move which will see the State collect a further €750 million from the financial sector during the period.
Deputy Joan Burton noted the use of losses in the Irish corporation tax system and, in particular, the build-up of losses in certain sectors. The availability of relief on losses incurred in a business is a well established feature of corporation tax systems worldwide. On the effective rates, an analysis conducted by my Department has shown that our headline 12.5% rate is very close to the effective rates paid. Any calculation of effective tax levels must only consider profits legally taxable in the relevant country.
In response to Deputy Michael McGrath, the reduction in the rate of capital gains tax applicable under the entrepreneur relief scheme from 20% to 10% will be of great benefit to many business people disposing of their business. I intend to extend the scope of this relief in future budgets from €1 million upwards. I am aware of the situation in the United Kingdom. In response to Deputy Paul Murphy, I add that the reduction in the rate of capital gains tax chargeable under the entrepreneur relief scheme to 10% is intended to support and encourage those considering starting or growing businesses in Ireland and will make Ireland more competitive internationally.
Deputy Paul Murphy mentioned the standard fund threshold for pensions. At the end of the day, the level at which the standard fund threshold is set is a matter of judgment. It is currently pitched at the right amount.
In response to Deputy Michael McGrath, the cost of reducing exit tax in line with the reductions being made to DIRT would be considerably more than the cost of changing DIRT alone.
I can advise Deputies Thomas P. Broughan and David Cullinane that the new group A tax-free threshold should result in those inheriting comparatively modest family homes in more expensive areas facing a reduced capital acquisitions tax liability.
Several Deputies raised concerns about the measure aimed at those with tax liabilities on their offshore assets. Let me stress that the legislation proposed will essentially provide for less favourable rather than more favourable terms.
As I said in my opening statement, there are still a small number of matters under consideration for inclusion on Committee Stage. I thank colleagues who contributed to the debate, including Deputies Peter Fitzpatrick, Michael D'Arcy, John Paul Phelan, Sean Fleming, Mick Wallace and all of the others who have contributed today. They have raised certain issues with which I might be able to deal on Committee Stage, which is the reason they are not included in my pre-prepared remarks. I thank all colleagues for their participation in the debate on Second Stage. I will be open to their advice as we go through Committee and Report Stages.