I thank the Deputies who contributed to the debate. I will respond in detail to as many Deputies as possible.
I want to set out again the context in which the Bill is being framed, which is, of course, Brexit. The immediate threat is Brexit and we still are uncertain as to how it will play out. We hope that the withdrawal agreement will be ratified but it is only prudent to remain cautious until this has taken place following a vote in the House of Commons and House of Lords. Until the withdrawal agreement is fully ratified, the risk of no deal remains and this budget and the Bill are, and must be, predicated on this. Budget 2020 was published on 8 October on the basis of a no-deal Brexit and makes more than €1 billion available for spending in the event of no deal. It is striking how many twists and turns there have been in regard to Brexit in the short time since the budget was published on 8 October.
While Brexit is the immediate threat, climate change and the environment is the defining threat of this generation. The Government will respond partly by increasing expenditure on climate action measures, as the Minister has indicated. There will also be a regulatory response. However, given that we are discussing the Bill, I wish to make it clear that the Government firmly believes that the response has to involve a carbon tax increase. The Bill commences the incremental process of increasing the carbon tax by €6 per tonne on an annual basis to 2029, bringing carbon tax to €80 per tonne by 2030. The Minister, Deputy Donohoe, said that he had decided to delay its application of this increase to other fuels until May 2020, after the winter heating season. This is to protect those who rely on fossil fuels for heating during the colder months and I agree completely with this.
The Government was not able to commit to across-the-board personal tax cuts at this time of economic uncertainty, as to do so could undermine the sustainability of our public finances. That said, Ireland has one of the most progressive income tax systems in the developed world, the most progressive within the EU and the second-most progressive within the OECD. In 2018, it was estimated that the top 1% of earners in Ireland, who are in receipt of 12% of total income, paid more than 25% of all income tax and USC.
The Government is committed to creating a supportive environment for enterprise and employment. The Bill provides for a number of significant enterprise taxation supports by way of broadening access to the key employee engagement programme, KEEP, the employment investment incentive, EII, and the research and development tax credit. The Bill provides for the income tax measures announced on budget day, applying increases to the home carer's credit and the earned income tax credit. It also provides for the extension of the help-to-buy scheme to the end of 2021.
I reiterate that the Government's position remains that workers start to pay the higher rate of income tax at too low an income. When economic conditions allow, the Government remains committed to tax cuts that are focused on raising the level the higher rate is applied at, ultimately to €50,000, to ensure that Ireland remains competitive with neighbouring jurisdictions.
I appreciate there are concerns about the size of corporation tax receipts and over-reliance on them. The Government recognises the potential risks associated with the concentration of corporation tax receipts, and a paper examining options to address fiscal vulnerabilities was published on budget day. While corporation tax receipts are concentrated, this concentration has been relatively stable over time. Corporation tax receipts represent a sizeable element of overall tax receipts, at approximately 19% last year, but, to put this in context, income tax and VAT still account for approximately two thirds. Ireland's corporation tax, as a proportion of economic activity, is broadly in line with that of other small, open European economies. We are not complacent about the risks associated with heavily concentrated corporation tax receipts, and actions have been taken to mitigate vulnerabilities through broadening the tax base, prioritising paying down the level of debt and running an Exchequer surplus. It is worth noting that while corporation tax has displayed remarkable growth, other tax heads such as income tax and VAT have also continued to grow, albeit not at such an accelerated pace. Income tax and VAT grew at 6% and 7% last year, respectively, compared to corporation tax growth rate of 27%, part of which was attributable to one-off factors such as the introduction of new international accounting standards.
Ireland's number one attraction from a corporation tax point of view is the certainty we offer investors through stable, consistent and transparent policymaking, and our corporate tax regime is only certain if it is defensible. This Bill includes a number of significant changes to address the issue of tax avoidance. There are some changes relating to IREFs to address aggressive tax planning activities identified by Revenue on examination of IREF accounts filed this year. The Minister also indicated his intention to make some further amendments on Committee Stage to ensure that the aggressive activities of some entities do not negatively impact on bona fide, third party lending in vehicles funding much-needed development projects. There are also amendments to the REIT regime and to the taxation of securitisation vehicles to strengthen anti-abuse measures and ensure appropriate taxation is collected. Transfer pricing rules are being updated and extended.
As part of Ireland's commitment to implementing the anti-tax avoidance directive, ATAD, new anti-avoidance measures are being introduced this year in the form of ATAD-compliant anti-hybrid rules. As well as tackling avoidance, these reforms enhance the legitimacy of Ireland's corporation tax regime internationally.
I now turn to specific issues raised in the House yesterday evening. Deputy Michael McGrath referred to supports for small businesses. The Minister introduced new measures to enhance the research and development credit for micro and small companies on budget day. The Deputy expressed his hope that the KEEP programme will function more as intended and attract more and more participants. As he will be aware, in June of this year, the Minister asked departmental officials to host a town hall-style meeting with representatives of the SME sector to put industry expertise to the fore when designing the changes to the various SME incentive measures that we see set out in the Bill.
I share the Deputy's hope. In moving on the proposals most sought by the sector, my expectation and that of the Minister is that KEEP, the EEI and the other measures will strengthen the support offered to Irish entrepreneurs and innovators.
Deputies Michael McGrath and Ó Cuív referred to the rate of VAT on food supplements. Domestic VAT legislation does not provide a zero rate for food supplement products; instead, there is a legislative provision for zero rating of food. Article 110 of the EU VAT directive is the basis for the zero rate for food in Irish VAT law. Under that article, member states that on 1 January 1991 were applying zero rates or reduced rates of VAT lower than the minimum rate of 5% may continue to apply those rates. Member states are not permitted under the provision to introduce new derogations or extend the scope of existing derogations. The legislative provision for food and drink was in place on 1 January 1991, but there was no legislative provision for food supplement products and, as such, they cannot legally be zero rated.
Deputy Michael McGrath welcomed the introduction of the de minimis relief for bookmakers but believes it does not go far enough. The aim of the relief is to alleviate any disproportionate impact of the budget 2019 betting duty increases. It takes account of concerns raised by industry and others on behalf of small rural independent bookmakers by having regard to the general competitive advantages held by large retail and online bookmakers.
Deputy Michael McGrath called for the provision of transitional arrangements in section 60, which apply to cancellation schemes of arrangements. The measure differs from changes in previous Finance Acts, which mainly dealt with rate changes, as it seeks to address a gap in the legislation with immediate effect and to provide a level playing field in the form of transactions that have similar outcomes - that is, the sale and acquisition of a company - being subject to similar tax treatments. The Minister, therefore, has decided not to provide for transitional arrangements in these circumstances.
Deputy McGrath also referred to the changes to VRT relief on hybrid vehicles. The VRT relief for hybrids and plug-in hybrids were due to expire at the end of 2019. In the Bill, the Minister is extending the relief for a further year until end 2020. However, in the context of ensuring value for money for taxpayers and in light of trends in the emissions profile of certain hybrid models, the relief will now be subject to CO2 emissions thresholds of 80 g/km for conventional hybrids and 65 g/km for plug-in hybrids.
I welcome the support of Deputies Michael McGrath and Pearse Doherty for the changes made to the REIT and IREF regimes on budget day. As the Minister stated, the changes to the IREF regime were made at the earliest opportunity after analysing the first sets of IREF accounts that were filed earlier this year. Officials in the Department of Finance have been instructed to continue their analysis of the sector, as evidenced by an additional provision introduced in the Bill to ensure that more data are collected from funds operating within the regime. This additional information will inform future policy decisions.
I welcome Deputy Michael McGrath's continued support for the 12.5% corporate tax rate and note his comments regarding the ongoing tax reform work at the OECD. We recognise that further change is coming in international taxation and the Minister's priority will be that Ireland's interests are protected as this important work develops.
In response to the comments of Deputy Paul Murphy, I point out that IREFs were introduced in 2016 to prevent international investors avoiding tax in respect of Irish property. The changes being made in the Bill are to ensure that the regime operates as intended and represent further actions to support the original policy intention. This further demonstrates the Government's continuing commitment to addressing aggressive tax planning.
Deputy Pearse Doherty raised a question about a particular REIT. The Deputy will be aware that I cannot comment on a specific taxpayer. The changes made to the REIT regime apply to all current and future REITs in Ireland. The Deputy asked why we did not provide for the higher rate of stamp duty on the sale of that company. The rate of stamp duty payable on the acquisition of the stocks and marketable securities of Irish incorporated companies is normally 1%. The higher rate only applies in limited circumstances as set out in section 31C of the Stamp Duties Consolidation Act 1999. That measure is aimed at entities that deal in land or that develop land for non-residential purposes, so not all entities deriving value from property are encompassed by it. The targeted transactions under section 60 have a similar effect as the sale and transfer of shares and, as such, will be liable to stamp duty at the normal 1% rate for the sale of shares.
The existence of an incentive such as the special assignee relief programme, SARP, is an acknowledgement that we are competing on a global basis for highly skilled and mobile executives. The competition for this talent is intense, and particularly for the types of skills required to facilitate the development and expansion of businesses in Ireland. I refer to the recent independent review. The Minister accepts that the rationale for SARP remains valid in such uncertain times. We simply cannot ignore the fact that the countries with which we compete for investment operate schemes similar to SARP. The revenue we raise from SARP employees is revenue that we would not get if their employers chose to locate them, and the economic activity they drive, elsewhere. I acknowledge that the cost of SARP was increasing at an unsustainable rate. As Deputies Pearse Doherty, Burton and Paul Murphy will recall, in the Finance Act 2019, the Minister put a ceiling on the relief that may be claimed by an individual and I expect that we will see that cap having a marked effect on the cost of the scheme from this year onwards.
Deputies Pearse Doherty and Paul Murphy criticised the decision to extend the help-to-buy scheme for a further two years. However, the relief caps out at a property value of €400,000 and is not available for properties valued in excess of €500,000. Deputy Paul Murphy suggested a property costing €400,000 is within reach for a couple each of whom earn little more than the average full-time wage.
On the comments of Deputies Burton and Healy on bank losses, Deputies will be aware that a technical paper was produced and published by the Department of Finance on the potential consequences of a measure such as that suggested. As Deputy Burton noted, however, the banks are contributing to the Exchequer through the bank levy. Provisions relating to the bank levy is being introduced in the Bill to ensure that this revenue continues to be collected. Loss relief is a long-standing feature of the corporate tax system and a standard feature of corporation tax systems in all OECD countries. Loss relief is not specific to any one business sector. It recognises the fact that a business cycle runs over several years and that it would be unbalanced to tax profits earned in one year and not allow relief for losses incurred in another.
Deputies Burton and Broughan referred to the absence of indexation of tax bands and credits in the Bill. As stated by the Minister at the time of the budget, there is a prudent rationale behind the approach taken in regard to personal taxation. It was acknowledged that the budget was framed against the contingency of a hard Brexit. In that context, it would not have made sense to provide for reductions and then be faced with the prospect of having to claw back most or all of the benefits given to taxpayers. Aside from that, of course, Deputies will be aware that successive Governments have declined to go down the road of indexing bands and credits on an automatic basis as such an approach would limit the policy choices available to the Government.
Several Deputies referred to the impact of the increase in carbon tax on the less well-off. I accept that increasing the carbon tax without taking any compensatory measures would likely be regressive because it would impose a greater burden, relative to resources, on lower-income households. To counteract this, the Government is increasing the fuel allowance by €2 per week. The increase applies from 1 January and entails an annual benefit of €56. This will leave the 22% of households in receipt of the fuel allowance better off than before the increase in the carbon tax. This ensures that the most vulnerable in society are protected from the increased carbon tax.
I remind the House that the home heating fuel increase has been delayed until May 2020, after the winter season.
In response to Deputy Broughan's query, the hybrid entity rules that are being introduced are fully in line with the requirements under the anti-tax avoidance directive. Indeed, they exceed the minimum requirements in some places. The purpose of the directive is to ensure these anti-hybrid measures, which arise from the OECD base erosion and profit shifting process, are introduced in a co-ordinated and coherent fashion across the EU to ensure common standards. The Minister has chosen to exceed the minimum standard in the anti-hybrid rules by including optional defensive rules to prevent Ireland being used as a location for hybrid entities of companies established in other countries. As he has said on many occasions, Ireland is fully committed to the ongoing process of international tax reform and to ensuring Ireland's tax system is transparent and in line with agreed international standards. Like the controlled foreign company rules that were introduced last year, the anti-hybrid rules are intended to prevent aggressive behaviours. Therefore, no specific yield estimate has been attached to these rules.
We are conscious of the need to evaluate the research and development tax credit regularly. However, it is important to recognise that this generous tax credit is one of the few corporate tax credits we have in Ireland, particularly when compared with other jurisdictions. We are mindful of the need to maintain a competitive corporate tax regime to attract substantive investment that creates high quality employment in Ireland.
Given where we are in respect of Brexit and in light of the need to address climate issues, I consider that the Finance Bill 2019 strikes the right balance. As the Minister has said, we will consider any suggestions that are made during the Committee Stage debate, including any amendments that are proposed. I commend the Bill to the House and look forward to Committee Stage.