In recommending the Bill to the House, I am very conscious of the fact that this is an important fiscal occasion which marks the outcome of years of study and of full consultation between Government, both this Government and our predecessor, on the one hand, and the corporate sector and their advisers on the other.
History is being made by the Bill, which provides for a major reform of the structure of company taxation which has been with us now for well over 50 years. As from 6th April, it is proposed that the present triple company tax structure comprising income tax and corporation profits tax and, more recently, capital gains tax, will be replaced by a single tax structure. The new corporation tax will apply to the trading and other profits of all resident companies and to the Irish profits of most non-resident companies operating here. Corporation tax will have as its foundations the general rules and principles of the income tax and capital gains tax codes but corporation profits tax will be no more. Yet, as in the case of corporation profits tax, the new corporation tax will, for simplicity, be charged for companies' accounting periods and not for years of assessment as under the income tax and capital gains tax codes.
The study and endeavour devoted to the reform of our company taxation led first to the 1972 White Paper which was published by my predecessor and subsequently to this Government's 1974 White Paper containing the proposals for a corporation tax. The present Bill which gives effect to the proposals set out in the 1974 White Paper reflects the close involvement of the corporate sector and its advisers. It is particularly gratifying to note that the fruits of this lengthy study and collaboration have been generally welcomed. Quite a large contribution to this success has, undoubtedly, been made by Dáil Éireann and its Special Committee through their intensive examination of the Bill which resulted in a number of amendments, some of which were significant in terms of benefiting taxpayers. I hope that this House will agree with me if I say that the present Bill, and the steps that have led up to it, are a model for the co-operation between Parliament, the administration and the public which is essential for the proper functioning of democracy.
I now turn to the Bill itself which, at first, may appear to be formidable and overwhelming by its sheer size and unavoidable complexity. I propose to direct the attention of the House, first, to the major policy objectives of the Bill. Then, I will turn to each of the 16 Parts and five Schedules of the Bill and will pinpoint substantive departures from existing provisions. I might mention at this stage that by far the greater portion of the Bill is devoted to adapting existing tax law for the purposes of the new corporation tax. I trust that the House will find my directions and explanations helpful in its consideration of the Bill at all Stages.
As I mentioned at the outset, the Bill is designed to refrom the existing system of company taxation by the introduction of a single tax structure. Apart from some aspects to which I will refer in a few moments, the Bill does not make any significant changes in the incidence of tax. Thus, the maximum rate of the new corporation tax on company income is being fixed in the Bill at 50 per cent—which is the equivalent of the maximum combined rate of company income tax and corporation profits tax now— while the present effective rate of tax on companies' capital gains is being maintained at 26 per cent. Likewise, under the new system, shareholders will effectively retain the tax reliefs and credits available to them under the existing system. Thus part of the new corporation tax—corresponding to income tax at the standard rate of 35 per cent on the sum of the distribution and the tax credit in respect of it—will be imputed, that is credited, to the shareholder in respect of that distribution.
The first of these main policy objectives embodied in the Bill is, therefore, the reform of the structure of company taxation in order to make it more straightforward for all those who have to operate it. Provision is also now being made to put certain concessional administrative arrangements on a statutory footing so that entitlement to the reliefs in question will be clearly known. The provisions involved are sections 20 and 31 and Parts XI and XII, to which I will refer again later. Linked with this domestic tax policy objective are important considerations of international tax policy because our adoption now of an internationally known and widely operated company tax system will be conducive to concluding satisfactory new agreements, with countries investing here, for the avoidance of double taxation. This aspect cannot be over-stressed in view of our growing trade contacts with further countries which can be expected to give rise to questions of double taxation to be solved in due course. As Senators may be aware, the enactment of this Bill will require the renegotiation of all our existing agreements. However, I should emphasise that our adoption by this Bill of what is known as the "imputation system" of company taxation—because as I have mentioned it imputes, that is credits, an appropriate proportion of the company tax to the shareholders—is in basic accord with the system favoured by the EEC Commission. Furthermore, our new system of company taxation will be similar in structure to that already in operation in Belgium, France and in Britain.
As the new company tax system is to take effect from 6th April, 1976, Senators will appreciate my anxiety to have the Bill enacted before then. This is most desirable particularly in view of the international aspects to which I have referred.
I might mention that the Oireachtas Joint Committee on EEC Secondary Legislation are at present studying detailed proposals made in an EEC draft directive on company tax harmonisation. These proposals have important implications for Ireland and will therefore call for very careful examination. That is all I wish to say at the moment about those proposals.
A second policy objective is to foster continued business investment and greater efficiency. The Bill consolidates the very valuable tax allowances and reliefs available at present and provides significant additional reliefs for closer co-operation between companies so as to meet the intense market challenges both at home and abroad. Group relief has been pressed for by business interests over the years but the existing triple tax structure made it impossible to legislate for it. However, it is now being provided and is an important feature of this Bill. Furthermore as I mentioned in Dáil Éireann, group relief is obtainable, on an administrative basis and within the parameters of the relevant Parts of the Bill in respect of periods not coming within the provisions of the Bill. The Revenue Commissioners will give sympathetic consideration to any documented claims made to them for group relief in relation to trading losses, unused capital allowances, unrelieved expenses of management and charges on income and for the deferment of the charge on capital gains arising out of inter-group transactions. I am pleased that the group relief provisions which are set out in Part XI have been warmly welcomed and I am confident that they will provide an incentive to greater efficiency in the use of scarce financial resources, manpower and know-how in the corporate sector.
Worthy of mention in this connection also are the special provisions being made in the Bill for small companies. These will result in a reduced rate of corporation tax of 40 per cent on a company's income where its total profits, that is trading and other income as well as capital gains, for a 12-month accounting period do not exceed £5,000 and for marginal relief where the profits exceed £5,000 but do not exceed £10,000. This compares with a threshold of £2,500 at present for the application of the full rate of the combined company taxes.
A third policy objective is to protect the Exchequer and taxpayers generally from possible abuses of the valuable reliefs—whether they are existing reliefs which are effectively being maintained or new ones—being provided in the Bill. It is necessary also to counter arrangements between companies and their shareholders designed to obtain unfair tax advantages. As in the case of the first two policy objectives mentioned, I am sure that this third one will be wholly endorsed by this House. As guardian of the public purse, I must be ever vigilant to ensure that the intentions of the Legislature in taxation matters are not thwarted by the remarkable ingenuity—regrettably sometimes misapplied—of companies, their shareholders and advisers. Complex anti-avoidance provisions must, therefore, form part and parcel of any comprehensive tax code and the present Bill is no exception. These intentions were foreshadowed in the 1974 White Paper.
Since then, my attention has been drawn to new misapplications of the tax code and I have taken the opportunity presented by the preparation of this Bill to counter these. I suggest that the necessary additions to the complexity of the Bill are but a small price to pay for greater tax fairness. Needless to add, I will continue to keep a close watch on the situation and will not hesitate to take any action found to be necessary.
It would be appropriate at this juncture to deal with some specific anti-avoidance provisions of the Bill which have been given prominence in the debates in the other House and in the Press, namely, the provisions of section 162. This is one of the many provisions needed to counter tax avoidance by individuals who can extract income without incurring further liability to tax from companies which they control. It is specifically concerned with closely controlled professional and service companies. Section 162 now provides for a straightforward surcharge of 20 per cent to be applied to 80 per cent of the after-corporation-tax professional or service income—instead of to all of such income as the provision was originally drafted—of such companies, where the income is retained by them for more than 18 months after the end of the accounting period in which it arose. As a result of the amendment made on Report Stage in Dáil Éireann, the combined effective rate of corporation tax, and the surcharge where the income is wholly retained will now be only 58 per cent, as compared with 60 per cent originally proposed. This rate of 58 per cent compares for example with the maximum rate of personal income tax, 77 per cent which could apply to the income in question if it arose directly to the individuals concerned. I am convinced that the section as it now stands makes due provision for retentions for genuine purposes by such companies. The effective tax rate of 58 per cent must, by any yardstick, be viewed as being extremely favourable particularly when the present timing of company tax payments is being maintained under the Bill.
I will now deal with the main provisions of each of the 16 Parts and five Schedules of the Bill and, as promised, I will pinpoint substantive departures from existing provisions. As a further measure to facilitate Senators' consideration of the Bill, I should mention that I am making available, in advance of the Committee Stage and in expansion of the lengthy explanatory memorandum which has already been published with the Bill, over 130 pages of detailed examples showing how various sections of the Bill will operate. These sets of examples will be supplied directly to individual Senators on request.
Part I of the Bill introduces a new tax, which is to be called corporation tax, in lieu of income tax, corporation profits tax and capital gains tax, and which will apply to the profits of all Irish resident companies and of all non-resident companies operating in this country through a branch or agency. In addition, it provides for the basic rate of corporation tax. Part I also contains the definitions of the principal terms "profits" and "company" which are used in the Bill as well as the provisions governing income tax on annual payments made or received by companies.
Part II provides that the general rules and principles of the income tax and capital gains tax codes will be used for quantifying income and capital gains for the purposes of the new corporation tax. This part also lays down the scope of the charge to the tax, the basis of and periods for assessment—generally, the company's 12-month accounting period. It also provides, subject to the restrictions imposed by Part I of the Finance Act, 1974, relief in respect of yearly and certain other interest and in respect of annuities and other annual payments.
Section 13 ensures that the effective rate of tax on companies' capital gains will be maintained at 26 per cent. To this end it imposes corporation tax at the rate of 50 per cent on only 52 per cent of the chargeable gain. The provisions in sections 16 to 19, inclusive, and in section 27 in relation to losses are designed to apply to corporation tax provisions similar to those which apply to income tax.
Section 20 gives statutory effect to a relief which has been given concessionally for income tax purposes for company reconstructions without change of ownership. The existing income tax legislation in relation to capital allowances is applied to corporation tax by section 21 which is the founding section for the First Schedule to the Bill. This Schedule contains the text of the new provisions replacing those which it has been necessary to amend. The only changes of substance are three in number. These changes, which are explained on page 34 of the explanatory memorandum, are designed to remove anomalies.
Part III makes provisions for special classes of companies. I have already referred to the special reduced rate of corporation tax for small companies. The new provisions being made for the other special classes, namely, industrial and provident societies, building societies, companies involved in partnerships and assurance companies are designed to maintain the existing position as far as possible.
Section 31 provides a new relief which will allow the actual amount of dividends or interest paid or credited to an individual by a building society to cover charges, for example, annuities payable by him. For the year of assessment 1976-77 and subsequent years, therefore, in so far as the annuity is paid out of such interest or dividends the individual will not be obliged to remit to the Revenue income tax at the standard rate deducted from that part of the annuity since that part will be regarded as paid out of profits or gains brought into charge under section 433 of the Income Tax Act, 1967.
Sections 34 to 50, inclusive, deal specifically with assurance companies and I am happy to record the fact that the single Report Stage Dáil amendment to section 43 (5) has rendered all of these sections totally acceptable to the assurance industry.
Section 52 secures that a non-resident bank, insurance company or company dealing in securities will be prevented from getting tax relief for interest on borrowings made by the Irish branch of such a concern and used in the purchase of Irish Government and other Irish securities which are tax free in the hands of nonresidents.
Parts IV, V and VI replace, with suitable adaptations, corresponding provisions in existing legislation governing export sales relief and relief for certain profits from trading operations carried on at Shannon Airport.
There is no diminution whatsoever in either the scope or duration of these reliefs which are being effectively maintained under the new corporation tax provisions.
Section 64 deals with distributions out of relieved export profits. It contains a provision, which has no counterpart in section 410 of the Income Tax Act, 1967—which deals with such matters at present—to secure that, where the distributions exceed the distributable income of the accounting period, the tax credit in respect of the excess will be calculated having regard to any export sales relief for the immediately preceding accounting period, and if those profits are insufficient, reference will be made to the relief for the next immediately preceding accounting period, and so on.
Part VII makes provision for special exemptions—either total or partial— from the normal rate of corporation tax of 50 per cent being provided by section 1 of the Bill. These special exemptions represent the effective maintenance of existing exceptions from the normal company tax rates and are in relation to the Agricultural Credit Corporation Limited, the Voluntary Health Insurance Board, certain public utilities, the income of a company which is precluded from distributing any part of its profits to members and certain income of companies established for charitable purposes.
Part VIII is a set of transitional provisions and is designed to maintain under the new corporation tax structure the tax benefit attaching to distributions which are made on or after 6th April, 1976, out of accumulated tax-free mining profits.
Part IX sets up, in the income tax code, a separate and new Schedule, which is to be called Schedule F, under which all distributions made by Irish resident companies to their individual shareholders will be charged to income tax and sets out the rules for the giving of a tax credit in respect of those distributions. The term "distribution" is necessarily wide so as to encompass the extraction of companies' profits through forms other than normal dividends. By virtue of section 2 of the Bill, distributions received by one Irish resident company from another will only be chargeable to corporation tax where such distributions must be taken into account when the income of life assurance companies is being computed for the purposes of corporation tax under Sections 38, life business, 41 (3), pension business, or 43 (2), investment income of overseas life assurance companies, of the Bill.
There are two points arising on section 84 which I think that I should now discuss as they have been the subject of comment in the other House. The first concerns the fact that "capital dividends", hitherto not subject to personal income tax, are to be comprehended by the term "distribution" and so become chargeable to income tax under the new Schedule F. This is not an unreasonable change. In 1955 the British Royal Commission on the Taxation of Profits and Income pointed out that there is not sufficient ground for treating "capital dividends" as if they were different from other dividends. "Capital dividends" must be regarded as being similar to cash dividends which the company concerned was in a position to distribute after making a general review of the current value of its assets and satisfying itself that they would be sufficient to meet the various claims upon those assets, including the claims of the share capital account. I am satisfied that to exclude "capital dividends" from the scope of the Bill would leave an opening for tax avoidance.
The remaining point concerns the Bill's treatment, as a distribution and, therefore, not deductible from the taxable profits of the payer, of any interest paid on or after 6th April, 1976, by an Irish resident company on "securities" in it held by a non-resident company which owns 75 per cent or more of that company, or where both are 75 per cent subsidiaries of another non-resident company. It has been alleged that this provision is discriminatory and severely restricts borrowing by Irish resident companies from their non-resident parent companies and representations have been made to the effect that such interest should rank as a deduction from the taxable profits of Irish resident companies. I am afraid that it would be most unwise to accede to that request. In the first instance, the provision is necessary to prevent the serious loss of revenue which could be caused by a non-resident company financing its Irish resident subsidiary by way of loan capital and extracting profits from that subsidiary in the guise of interest, which would ordinarily be deductible for tax purposes by the payer, whereas distributions would not.
Furthermore, if, as is most likely, the State of residence of the parent company is one with which this country has entered into an agreement, based on the OECD model, for the avoidance of double taxation, then credit would normally be given against the tax on the parent company for the full Irish tax underlying the distribution made by the Irish resident subsidiary to its non-resident parent. In those circumstances, I could not justify making a provision which would result in a loss of revenue to Ireland while benefiting the State of residence of that parent company.
Part X contains original provisions to counter some tax avoidance devices of closely controlled companies. Details are given in the explanatory memorandum. Parts XI and XII, to which I have already referred, also contain original provisions and these deal with special situations involving groups of companies and their treatment under the new corporation tax.
Parts XIII to XVI, inclusive, and the remaining four Schedules, deal with the application and adaptation of specific income tax and capital gains tax provisions, the administration of the new corporation tax system set out in the Bill and the supplemental and transitional arrangements necessary to provide for the smooth change-over from the present system of company taxation.
In summary, the purpose of the Bill, therefore, is to rationalise the company tax system, to provide encouragement to corporate enterprise by a comprehensive range of reliefs and to promote greater equity in the operation of the tax code through the prevention of abuse and the countering of unjustifiable tax avoidance. The new company tax code is, indeed, comprehensive and particularly fair by virtue of the wide range of appeal provisions which it contains. I trust that the corporate sector will take the opportunity being afforded by the Bill to pursue worthwhile national development.
I am sure the House will share my earnest wish to see that this valuable measure is fully availed of for the betterment of all our people and for no other end. The Bill lays the firm foundations for the achievement of that aim. I, therefore, recommend the Bill to the House.