Corporation Tax Bill, 1975 (Certified Money Bill) : Second Stage.

Question proposed: "That the Bill be now read a Second Time."

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.

This Bill is generally welcome. The content of it has been on the boil for many years. The Minister has referred to the White Papers of 1972 and 1974 so the White Papers published by both the previous Government and the present Government have been used as a basis for this Bill. Generally speaking, it is not a Bill which can be regarded in any way as controversial. Its purpose is to simplify corporation taxation. The difficulty of simplifying taxation for companies can be gauged by the fact that it has taken a Bill of over 250 pages to simplify it. It certainly will make taxation somewhat simpler for most companies, for ordinary companies which are paying tax in the ordinary way. Nowadays there are so many extraordinary companies, so many companies with complex activities that, although this Bill may succeed in simplifying the system to some extent, there are bound to be anomalies. There are bound to be special cases which will not be entirely covered by this Bill and will create difficulties. That is not to say I am criticising the Bill. It makes a very creditable effort to deal with all the cases that can arise and to deal with company taxation in a reasonable way. The effort to simplify has been a very difficult one but it has to a considerable extent achieved that objective, both to simplify and, to an extent, to consolidate the corporation tax. Although it is not a consolidation Bill it goes a long way towards being a consolidation Bill. It has included sufficient provisos, definitions and special cases to anticipate most of the problems that are likely to arise in the next few years and to be comprehensive in dealing with these problems.

There are a number of features in the Bill which are especially welcome. Part II which deals with group relief is certainly a welcome provision. It is only equitable that trading losses between one member of a group and another should be capable of being set off and similarly in regard to the payment from one to another of certain payments without paying income tax. This is not only an equitable provision but it is a common-sense one and it will lead to less activity on the part of group companies in attempting to make arrangements to achieve the objectives which are now provided for in this Bill.

One criticism of the Bill is in regard to section 101—surcharge on close companies, undistributed investment and estate income. This provision can produce very undesirable results. It is not, in my view, in the public interest that this should be applied to trading companies without certain provisions to deal with special cases. It is surely equitable in suitable cases that tax legislation should not discourage the retention of earnings because section 101 seems to do this. In suitable cases if earnings should be retained in a company so as to facilitate development and expansion, then the Bill should facilitate this rather than discourage it. This Bill does, in fact, discourage a company keeping assets within the company. It forces the company to dissipate its assets rather than retain them for development and expansion.

It is significant that there is in the 1972 Finance Act in the UK an almost identical provision but there is one major difference: in the UK there is a provision which allows a company in suitable cases not to distribute all the profits but retain some of them. Schedule 16 of that Act provides that the distribution of income can be reduced and, accordingly, need not be subject to income tax if it would prejudice the requirements of the business in regard to both current requirements and future development. The Revenue Commissioners in these cases can allow a close company to retain some of its income and not to be charged income tax on it, if it is seen that this is necessary either for the current requirements or the future development of the company. It is remarkable and certainly it is not for the first time, that in drafting legislation the Department of Finance should copy almost exactly the part of the United Kingdom Act which charges tax, which takes in income but leaves out the provision which provides for mitigating circumstances and for not applying the provision to the full harsh extent.

The effect of this section as applied here without the proviso in the UK means that the State will take in even more money. All of us are conscious or should be conscious of the huge slice of the GNP—the 60 per cent— that the State is already taking. This proviso will leave less to private enterprise, less for industrial and commercial activity and less for activity which could help our economic expansion and help to bring down the very high unemployment rate. It is unfortunate that in this country there should be a proviso which is more severe than in the United Kingdom and more severe than in most other countries which are far more wealthy than we are and could afford possibly this kind of a situation. We need capital formation in this country. We started so many years behind most other industrial countries and this kind of situation, which may not be very large and which may not be very important in the whole economic scene, is nevertheless a step in the wrong direction, one that will discourage rather than encourage development within the companies covered by this section.

Again, I think it will do a bit more. It will discourage to a certain extent the whole principle of incorporation. If incorporation is going to lead to a situation where taxation will be more severe then if the individuals simply did not incorporate their activity, then it will discourage incorporation which is a very important vehicle and a very important means of promoting economic, commercial and industrial activity. Although this point only applies to close companies and in the perspective of the whole economic activity of the State it may be relatively small, the principle involved is a bad one. It is one which the Minister should look at again before putting through a Bill which in its general content is a good one and a helpful one in many respects and which simplifies a very complex problem.

I think most of the other points which I would like to raise are points which arise on Committee Stage and I will wait until then to do so. Apart from that the Bill is a very comprehensive and good one and will be most helpful to industry and commerce in the future.

I join with Senator Ryan in his general commendation of the Bill. I think the Minister is entirely correct in saying that the occasion is an important fiscal one in bringing together two old taxes applicable to corporations and one new tax which he had the honour of introducing recently and making them all applicable to corporations.

Like Senator Ryan I think many of the provisions in the Bill are good. They will encourage investment and will be beneficial in simplification and administration in assisting companies by removing anomalies. I think the group relief for companies is an outstanding example of such. The quite generous treatment of losses, where one can either treat them as allowable against other income in the same year or income out of the same source as the preceding year, or carry them forward, or even opt again, having made one decision, to go back and reverse it, is all very good. The lowering of the charge and returning to the position where a small portion of corporation income was not subject to any tax, but at a higher figure, and the tapering provisions, are all welcome. Our criticisms, which the Minister anticipated, are grave in their implications. The Bill cannot be seen as being designed to assist the encouragement of investment and to get greater efficiency in the utilisation of resources and to do equity.

On the general question of tax avoidance, the elimination of anomalies—there is a whole host of them in this—a lot of them are coming in sensibly to guard against the abuse of the reliefs being provided by the Bill. As such I could not have any objection. However, where there is tax avoidance—and let us call is tax avoidance—designed to protect commercial situations which would otherwise be in great difficulty, I defend that tax avoidance and I criticise any attempt to attack it in the manner the Minister has sought to attack it in the Bill. I should like to speak about the provisions in regard to close companies. I have no up-to-date figures but the Revenue obviously have more up-to-date figures than those published in the white paper—I was calling it the yellow paper because of the yellow cover it had issued in 1974.

The great work that was done by earlier committees and the Commission on Income Tax, and their various lengthy reports which led on to the first white paper in 1972, provided a great deal of material which is basically required when making any important changes. One of the items thrown up in the research was that 80 per cent of the companies surveyed —presumably this means on the basis of information available to the Revenue—were close companies. Therefore in looking at this Bill those of us who are directly concerned with companies know that the provisions with regard to close companies are the most important provisions of it. They must be looked at on Committee Stage with the greatest of keenness.

I accept that in general the Minister, with one single and insufficiently explained distinction, has accepted the findings that there were no excessive retentions by close companies surveyed as compared with other companies. Close companies are under the control of a certain number of people, brothers, sisters, cousins and aunts and so on. They are family companies. Sometimes people when they do not want to say any more about it, say that for technical reasons the provisions of section 530 were not altogether and always adequate. We know some of the technical reasons were the way the company's shares could be held so that if a dividend were declared it could not reach a surtaxable person. Another technical reason was that they were all held in a discretionary trust which could not get into the sur-tax bracket. There were a couple of technical reasons and more that the Revenue know that I do not know—they have not told me. There are a couple of technical reasons maybe the Revenue do not know that I know and I do not propose to tell them because these technical reasons may have their utilisation in time to come. As I understand the scheme of this Bill, the old sur-tax direction system was really a stick which, once somebody stood up to it, in many cases could not be brought to bear on the frightened friend, the corporate structure; but the scheme got away with a good deal of money under the threat of the stick. In general, the Minister has accepted it and he is right in doing so.

I agree with Senator Eoin Ryan that there must be in the case of close companies, to prevent unfair tax treatment, inequities between people who are not incorporated and those who are incorporated. I accept all the types of provisions about loans, provisions for interest-free things, things that are never repaid, cancellation of debts. I am not saying I accept every detail of it but, in general, where one finds this kind of thing the Minister is entirely right to try and maintain equity in these cases between the individual position and the position of the person who is in the close company and able to do things. There are more protections now available for minority shareholders of these companies than were being operated. Minorities have rights to come in now and criticise a lot of the activities.

The Minister ought not to have gone on and included close companies in the manner in which he did —those that have public quotations. The preparers of this Bill have done wonderful work on it. It has been thoroughly debated; at least, I calculated that each page got four minutes in the Special Committee that discussed the Bill. I do not know whether four minutes per page is sufficient time to give to a Bill. If I read one section once, twice and a third time I am told my life will be made easier by the fact that all are being brought together now and applied to companies. However, we cannot read this at all unless we have also the Capital Gains Tax Act and the Income Tax Acts beside us. We must read them all together. The application of it to the companies is simple, but discovering what it all means is not so simple. When we get down to the detail of it there is a lot to be said for maintaining encouragements to companies, whether close or not, to get into the capital market. There is a lot to be said for our doing more of that.

One of the reliefs referred to in the accounts of the earlier reports was designed to encourage flotation of companies in Ireland, Let them get to the public free of financiers' claws and let shareholders come in more. What is a 20 per cent relief to the individual shareholders? It is maintained in the present code while we may retain that, if it is not regarded as useful, should it not go at least to the future if it is thought that the people who brought the shares and debentures must still be entitled to have it? Why do this and, at the same time, restrict close companies who go to the market, when you consider the various factors which are operative on them? They are subject to the closest scrutiny. We generally get it wrong and adverse to the promoters of the company from the financial scribes.

The Stock Exchange must comply with the takeover panel. The Stock Exchange requirements are very severe. How much of the close company provisions are really required in the case of Irish companies, and in particular the percentage? Once a genuine offer has been made to the public this ought to get it off the close company's tax. If this could not be done without exposing companies to people draining away tax-free profit in some fashion, I would not advocate it. I welcome any measure which would control that type of situation. I suggest there are sufficient controls, but that aspect should be examined.

If the last inquiry found that they were not retaining an excessive amount of profits, would the Minister tell the House if the figures have been brought up-to-date to show that they have been retaining an excessive amount of profits? Else why is there the 20 per cent surcharge? If I am correct in interpreting the section the surcharge arises where only the unearned income is in excess of the distribution. Companies might be accumulating cash for various purposes. They might be planning a very large-scale development; they might have justifiable reasons for having it in cash. Are there any tests of length of time, whether this surcharge should not arise if, after a period of years, they had failed, taking one year with another, to make such a distribution? Then, clearly, they would be hogging the stile to avoid higher incomes being paid by the main owners of the company.

With regard to the application of the Capital Gains Tax Bill, capital dividend is not defined. We ought to find out what a capital dividend is. A capital dividend is thought to be a profit made out of a capital asset. We introduced, and passed the Capital Gains Tax Bill, so we may not be without hope of a like success with regard to the Corporation Tax Bill before the House. We amended the Capital Gains Tax Bill, which became an Act in 1975, and we stated that the capital gains tax would be chargeable on any and every gain accruing on or after 6th April, 1974.

There are provisions in the section whereby a capital gains tax has been paid. I should like to read more about what the Queen did about the Royal Commissioners' advice in 1955. Did she take that advice? I do not always bow down to what is done in Westminster, but I was just interested in that paragraph and the reason behind it. Outside reasoning was brought into this House, and referred to as the Russell Report, about the treatment of illegitimate people. I took considerable time off to get the views of illegitimate people. It was quite clear from the information I gathered that Lord Russell had made a very inadequate study of the whole matter, and many of his recommendations, which are regarded as gospel when quoted in this House, did not stand up to the analysis. Therefore I should like to know what the Royal Commission said about them in 1955.

Are we agreed that capital dividends realised represent capital profit and therefore if distributed represent capital gain? Some Members of the Oireachtas might have thought this measure should have been introduced in 1922. It was passed and enacted in 1975. We honestly said in it that it would come into effect only on 6th April, 1974. Now we are saying that a capital dividend, even if it arises out of a capital gain made in 1922, 1932, 1942, 1952, 1962, 1972, 1973, if it is distributed, will be treated as taxable in the hands of the recipient and more than that if the capital dividend has been gained as a result, for example, of holding, buying and selling securities issued under the authority of the Minister for Finance —that is not a chargeable gain even if this was going on at the moment, because we so enacted to facilitate and encourage people to give their money to the Government—or stocks issued by the local authority or a harbour authority, Land Bonds under the Land Purchase Act, for the man who has been making money out of them would be hard enough to meet; debentures and so on issued by the ESB, CIE, Agricultural Credit Corporation, Bord na Móna, although it is only fair to say that they would be very clever indeed if they made capital gains from these.

However, there are people specialising in gifts and they have capital reserves made out of realisations of this kind. If they were to do this now they would not be subject to capital gains tax but when they distribute it as a capital dividend, it is their dealing companies who are caught for income tax.

To return to the main theme, if they are distributing capital dividends now must it not be from something which was not subject to taxation when they made that money which is now available for capital dividend? If I am right, then capital dividends, in so far as they derive from capital gains made before the date the Government said capital gains were to be taxed, which was April, 1974, should not be subject to tax when distributed; nor, if they were made out of what were not to be chargeable gains, should they be taxed? That is taken care of for the future under the adaptation of the Capital Gains Tax Act. I hope that the matter will be clarified.

The Minister will expect me to talk about something that was not in the first White Paper or the second White Paper, that was published under his own authority in March, 1974, and which appeared for the first time, in the document which was circulated, I think, on 27th November, 1975. We do not want to have a discussion in detail on the Second Reading of the Bill. The Minister is aware that something happened between March, 1974, and November, 1975. But one thing which did not happen and that everybody did not know was that many professions were permitted by their code to incorporate. That was known. There could be no question of a "discovery" by the Revenue Commissioners or anybody else because that had been known for years. But it could be done only under certain conditions—for example, the acceptance of unlimited liability, a factor not to be disregarded. There would be the liability of the members, a restriction on the kind of persons with whom they could associate. There was one brilliant suggestion that those involved in such corporations might start owning stallions thus ensuring that they got more money from that than from quantity surveying or engineering or any other professional activity. Certain professions could not incorporate. One is precluded by statute most definitely under the Companies Act, 1963, which prevents chartered accountants from incorporating. I am never clear as to why the Minister when he was in practice did not incorporate himself as a corporation, or why I did not do so: I do not think we would be allowed to do it. I am not sure: I do not think it was a statutory prohibition; it was more a professional thing.

I thought I would find, if not in this Bill, in the Finance Bill some recognition of the essential similarity of people who are conducting businesses which are vocations or professions which would bring the two together so as to give the favourable treatment enjoyed by the one equally to the other. Instead of this I find those who were in the unfavourable position, who got as near as they could to getting into a favourable position, are treated as dogsbodies. I do not understand the position as regards accountants and solicitors.

Let us lay down a fundamental proposition. If your activity as a professional person gets to any size at all you cannot spend the money you seem to be earning, but it is taxed as if it were all available for expenditure. The reason you cannot spend the money is simply because you have not got it; it is a most excellent reason for not spending money. People owe it to you. But staff must be employed— I am speaking for one profession; many other professions can speak for themselves—the Minister must be paid stamp duty at every twist and turn for this document and that. If you file anything in the courts it means more stamps. Actual total outlay is going up all the time if the business is going well. A considerable time may elapse before you gather in all the money owed to you. It is no good saying that the 18 months will help very much—it will help because if you are to end up with crumbs you will not reject the crumbs. I do not object to crumbs, but crumbs they are in relation to the real problem.

The real problem is to put sole traders engaged in professional activities in the position, in so far as they can, to incorporate, or get the assistance of incorporation, to get partnerships and be in some position to have some form of option and election. Service companies were talked about here. We are not jazz band players or dancers with a short life: we do not start earning any money for many years. I got £3 a week when I was 25 years of age and I could not believe it. I had been supported by my father up to that age. I was fortunate to have been able to do this. The point I am making is that all that time was spent educating us only to be told at the end of it that our work is unearned income. The hardest-working people in the country are the professional people and now they are being told if they want to form themselves into corporations that their income is unearned, and that they must distribute it.

If that is not so I am quite content to accept the full application of the close company provision and I do not ask for any amendment—although I think it desirable—of the limitation on dividends on investment income or rental income. If any of these companies have rental income or investment income and are avoiding paying tax on it for that reason, surcharge them.

I am speaking of companies whose money is locked up in hiring telex machines or buying typewriters, for work in progress. Somebody gave me figures which I have here. There is no connection whatsoever with my affairs, not even the remotest, because the document starts off with "Fees received, £1 million" that demonstrates my point to a nicety. They produced this for me and on a simple inflationary basis, this firm would have a net profit of £150,000 in the first year and that net profit is increased up to 1979 to £440,000 which represents 15 per cent. In the first year they would have had no overdraft. The only money they have in the bank is called partners' tax. The only money they have is what is owed to the Revenue Commissioners. At the end of the term they owe the Revenue Commissioners £311,000 and they have an overdraft of £320,000, so their profits have gone up from £150,000 to £440,000. That is the basis on which partners are treated at the moment. And can anyone blame a group of partners faced with figures like that?

I am talking about all the professions. I would be interested to know how section 162 gets reconciled with special encouragement to engineers for their export services. On the one hand they are being given export tax relief for services rendered in designing engineering products abroad and in another section they are told that there are some bodies avoiding tax and they will be surcharged. Will the surcharge be charged after the export tax relief? What about the export income earned by all these people who get no relief for the export income? What about the chartered accountants? The Minister has been good enough in his opening speech to thank the various bodies who have assisted him, the Government and the Revenue Commissioners in producing this largely splendid Bill. Does the Minister not think that the standards of chartered accountants demand a very high degree of education and continued research which does not immediately earn income for them? Has anybody made a computation of the amount from it? If some blighter has got away with some trick that we do not know about and has made a large amount of money, then apply section 530 to him and get rid of the technical defects of that section. If we all put our heads together we could surely get rid of them.

I know that the EEC Joint Committee which the Minister has referred to are considering this. We will have to die in the ditch rather than agree to this provision because it would ruin us. I do not mean the professions, but the Revenue Commissioners would be ruined as well as everyone else. If we adopt this and we harmonise the system of company taxation in precisely the manner proposed, bang goes our export tax relief, bang will go the enjoyment of passing on the relief to the recipient of the dividends. As proposed in this Bill one thing it does, subject to certain derogations, is the introduction of an imputation system, which is what we are doing, whereby recipients of dividends would be entitled to tax credit of between 45 per cent and 55 per cent of corporation tax on a sum representing the distributed dividend increased by such tax. If I understand that and if the amendment of the Minister's is right and there is to be a 58 per cent effective tax on these companies, we will be over the limit of 55 per cent. Is that correct?

It is only a draft.

It is only draft. We have enough to divide about without dividing over the perimeters of 45 per cent and 55 per cent. I thought that the general principal of an imputation system is that all company profits, whether distributed or not, are chargeable to corporation tax at the same rate and that a certain proportion of the tax relating to the distributed profits is available and is set off against the liability of the shareholder on the dividend he receives.

I refer to the considered and weighty words in paragraph (13) of the first White Paper. Are we not, in relation to the service companies, departing from the principle of the imputation system? We are here distinguishing between the profits which are and are not distributed.

I think the provisions with regard to close companies help enormously in relation to these service companies. If there is an income receipt, a dividend which is discharged which is less than the rental incomes you are getting or the investment income you are getting, then they are surcharged. But you will not get many such cases. There may be the oddball who has put property in and chooses to have it like that, but he can be dealt with and probably will be dealt with under the company provisions anyhow, but the normal run-of-the-mill man needs this because inflation is increasing his costs, he is paying increased wages and increased rates, and the more he tries to organise his payments the more difficult it is to try to get together the different skills. They teach each other and it takes quite a bit of time before all that mutual education is turned into cash. By that time you would be in a bank-assisted situation. If all the accounts of all the professions were made available to the Revenue and put together in one big box and shook up and a general balance sheet produced, you would be surprised at what would finally emerge from an overall survey of the implications of this.

I ask the Minister most earnestly to strike out this section this year. I ask him to give consideration—he could not do it now, he had not enough time—to a system. I do not distinguish a person who is carrying on a practice on his own. It is increasingly difficult on him. It is not like a doctor whose facilities are, on the whole, being provided by his hospital and so on. He is not involved in this too much. Is not the barrister taxed on a cash basis? I would not mind a shift over to a cash basis but there are a lot of implications in that for the taxpayer. All of this is being pushed off the tax basis and we are paying tax on what we have not collected. It is no good saying that maybe we will get better at making them pay. That is going to be rather hard on goodwill.

There is one point to which I should like to come back. A Frenchman once said to me—I did not professionally advise him—that he was very struck by the high quality of the professional advice he was getting in relation to his company's formation in this country, high ethical standards, a great grasp, the fact that people said: "Do not go there, do not do this", even though it might have been to their advantage to do it. They were giving advice contrary to their own interests which is the test he applied as to the ethical standards of the advisers in question. I remember years ago one international company saying that there were certain countries they could not go to because they could not find professional people they could trust. The Minister—I do not remember precisely the words—was reported inThe Sunday Press, I regret to say, as saying that too many people were hanging out at the stations and this was why such a high proportion of the gross national product had to go in public expenditure. We need to be more self-reliant. I claim that the professions are among the people who are entitled to engage in a bit of wealth creation if they can and do it legitimately. There are enormous problems. Even if they build up tremendous assets, they have one great difficulty in that they cannot ever sell the damned things. Who is going to buy them? Take, for example, succession in most professional practices now. If they are of any quality, the fellow whom you want to get has not got any money to give you, so it is a very great problem to see at the end of the day how you are going to be paid off, even if there is value in there which is not in a monetary form. So at some stage the thing must be monetised in some fashion.

I suggest that the Minister has obviously been made aware by somebody who got excited at some terrific coup that somebody carried out. From my own knowledge I do not think that these professions are in any position to take blows of this kind at all. They are finding it increasingly difficult, where they are in the non-company situation, to retain profits with a 77 per cent applicable rate. They should be encouraged into the company situation in the absence of proper provision for profits. One of the proper provisions for profits, of course, is the extraordinary low limitation on the deferred annuity. I know the Minister increased it—I think he increased it twice in the last phase—but how can one get any kind of proper provision with these limitations? It is all right if the Minister's amendments were now being applied to people aged 25 years and the inflation rate brought under some kind of control. Start applying it to people who like Mr. Wilson, think life is over at 60 and you will find what kind of a pension you can provide for yourself. These restrictions are very bad. In particular, I cannot see why there should not be proper provisions for partnership pensions. There should be recognition that people engaged in these professions, vocations and business generally are in the same position as the closed companies that were examined and reported on between 1966 and 1967. The report, published in 1972, said that there was no unreasonable withholding of profit. That is recognised by the Minister in the provisions in this section because he is really only trying to get at the case where there is too much cash. With regard to that situation, I should like to have a great many more figures to see the position of the public companies. They become vulnerable in all sorts of ways unless they know what they are going to do with their cash. Their shareholders will be wondering why they are not getting dividends and so on. I do not like that piece and I press the Minister to withdraw that section. When we get to that section, of course, we will talk much more about it.

I compliment the Minister on the amount of work put into this Bill and on the patience with which he listens to disagreeable people like myself.

First of all, it is obviously highly desirable that a Bill of this kind should be brought in to bring company law structure in relation to income tax, corporation profits tax and capital gains tax into one statutory instrument. I should like to comment, as my colleagues have done before me, on what I regard as the disincentive aspect in this legislation. It is a matter to which I have adverted in the course of debates on other finance legislation that the Minister brought before the House. I fear that the sense of balance between taxation for revenue purposes and taxation related to economic development has been lost. The Minister has gone overboard on the taxation aspect related to revenue without sufficient cognisance being taken in recent years to the aspect of how and in what manner taxation legislation impairs economic growth.

A very real example of that, in my view, is section 101 in this Bill. Nobody objects to the 20 per cent surcharge across the board in relation to investment companies, but what the Minister proposes to do in section 101 is to have this surcharge also applied to trading companies. That is all very well, but it ignores the fact that trading companies, from the point of view of expansion and giving further employment, may wish to retain profits.

The Minister can say to me that this is a tax avoidance measure and that people can easily form themselves into trading companies and evade legislation. That is the revenue answer, but it is a lazy revenue answer, particularly when one can see that the United Kingdom has attempted to grapple with this problem, and here we are bringing in a crude surcharge instrument applying to all trading companies in regard to these undistributed profits. In other words, section 101 of this legislation makes no distinction between investment companies and trading companies. The UK legislation does draw a distinction. In the United Kingdom, for instance, a company's distributable income can be reduced to the extent that its estate income cannot be distributed without prejudice to the company's business. In other words, where the business requirements of the company dictate it, then the surcharge does not apply and regard is had to the requirements of the company's business and the criteria of whether it is necessary or advisable from the point of view of the development of the company or its expansion are taken into account. All this makes sense from the incentive point of view. There is no point in applying the same criteria across the board in a crude manner to what I might call, legitimate and non-legitimate trading companies in the real sense of the word. It is certainly wrong to put legitimate trading companies into the same bracket as investment companies by applying across the board the same 20 per cent surcharge principle. In fact, in the United Kingdom's tax legislation these business requirements and criteria in respect of expansion and development are taken into account. In practice that means thatbona fide trading companies in the United Kingdom are not taxed at all in respect of such retained profits. They are not taxed over and above the normal corporation tax rate. That is the fact of the matter. It may be too late but I make an appeal to the Minister to take that into account.

I appeal to the Minister to look at the United Kingdom legislation and to adopt the criteria that they have adopted in regard to undistributed estate income. It is important that the Minister should take a new look at this because, as it now stands, it operates as a disincentive as far asbona fide trading companies are concerned, that their undistributed estate income that may be retained for all sorts of legitimate reasons related to expansion, development, the giving of employment, is liable under section 101 to a 20 per cent surcharge over and above the ordinary corporation tax rate. I have asked the Minister to look in particular at section 101. It is yet again an area where I feel the balance is being thrown towards the taxation revenue side without sufficient regard being had to the whole purpose of economic development. The balance, in other words, needs to be redressed here by taking into account bona fide trading companies retaining some income for legitimate business and expansion purposes. I would also support my colleagues in regard to section 162 concerning professional service companies who fulfil a very real function in our circumstances. Within our economy at the present time job opportunities are bad and there is one particular area we should be encouraging. It is an area in which we have a certain advantage. We have a good educational system and we should obviously be encouraging people into the various professions and encouraging professional people then to form companies in order to give a greater range of expertise in their service to the public. We should be encouraging a higher degree of professional expertise here by the amalgamation of various professional services into one company or into a number of companies. This type of development is one we should be encouraging rather than discouraging.

Again section 162 is part of the anti-avoidance mentality that overbalances this section in the anti-avoidance direction because it is overtly concerned with tax and revenue rather than with a sensible development which would lead to professional people coming together to provide a range of professional services under the umbrella of one company. Again, I would like the Minister to look at the United Kingdom legislation in this area because the crude instrument is being applied here of a surcharge across the board. I know that the Minister reduced the impact somewhat in the other House so that the effective liability is now down from 60 per cent to a gross rate of 50 per cent. It is a very marginal improvement. The fact of the matter is that the increasing capital needs that arise in the case of professional services organisation means that this type of retained income is higher in this type of organisation than in other types of organisation. I am not suggesting that a surcharge should be eliminated, but I am suggesting that, instead of the crude across-the-board approach that is being adopted, sufficient regard should be had—it should be written into the legislation—for aspects of retention of income related to matters such as work in progress and debtors and, indeed, to other aspects required to keep a professional service company going. In other words, you do not take a simplistic anti-avoidance tax attitude but that one writes into the tax measure criteria that can be taken into account in assessing the legitimacy, or otherwise, of the retention of the income involved and that criteria for the legitimate retention of income should be written into the section and be adopted by the Revenue Commissioners in making their assessment.

I make those two points on section 101 and section 162 on the basis that they are both examples of a rather crude approach being written into legislation instead of the more refined or sophisticated approach of taking criteria into account in respect of both trading companies and professional companies, criteria having regard to the legitimacy of the reasons behind the retention and, taking that into account one would then arrive at a more real assessment related to the real taxable income involved rather than penalise desirable developments in the economic sense, in the case of trading companies and in the economic and social sense and socially in the case of professional companies.

This is one of the biggest Bills ever to come before this House, running into more than 250 pages. It is so big in fact that it is quite impossible for anyone, especially a layman, fully to appreciate all its effects and all its implications. However I welcome it as a measure which performs a very useful and a very necessary consolidation job and also as a measure which should help to prevent tax evasion especially by diverting profits to subsidiary companies and service companies. But, apart from these two effects, I think the Bill is limited. It should have been all-embracing. A complete review of the whole taxation code is necessary, if not essential and I do not think we should wait until the EEC performs this job of harmonisation because it will take very many years indeed to complete.

That complete review should take account of the present discrimination in taxation against the home market. It is quite true that originally, in order to help the economy and to boost exports, taxation relief in respect of exports was essential but it was only a temporary measure. Today most of the companies facing severe economic difficulties and problems are involved in the home market and the Minister should have given some consideration in this Bill to the position of native companies manufacturing for the home market. Company taxation should be related to employment growth. If we are to make any progress in the economy in the next few years we must plan, as the experts tell us, for the creation of 30,000 jobs every year. If this is to be done my personal view is that company taxation and profits should be related to some extent to the creation of that employment and relief should be given.

There is another very important aspect to which I should like to refer. It is something that is not in the Bill but which should be in the Bill. There are some tens of thousands of workers who have not gained in full or in part out of the national wage agreement. Most employers who have not implemented the agreement in full have claimed inability to pay and in a great many cases, through the machinery provided in the agreement, this has been demonstrated as absolutely correct. They cannot pay, or they cannot pay in full, but has the Minister, I wonder, given any consideration to the possibility and desirability of giving some kind of tax relief to those companies which have demonstrated their inability to implement the national wage agreement in order to enable those companies to pay the increases to their employees.

I hope that I have not been overcritical. The measure is a most welcome one and will effect improvements in the present taxation situation. I hope the Minister will, if he has been unable to help the economy in this measure, as I think he might well have done, in the future will have another look at the overall situation especially in respect of the views I have expressed.

Like other speakers, I am overwhelmed by the size of this Bill and I am prepared to support it, not because I understand the detailed legislation it contains but mainly because I am happy that the Bill has been gone through in the other House in Special Committee and the Committee appear to have done a very detailed and expert job and, as the Minister has pointed out, have made many important amendments. This procedure is something which the Independents in this House have been advocating for a long time. We have advocated that complex measures should be dealt with in Special Committee during their passage through the Oireachtas and I am very pleased to see that this is becoming a practice now. I hope that this practice will be continued, because we seem to be faced with legislation of ever-increasing complexity and it is essential that it be dealt with by a committee of experts who have the time, freedom and ability to discuss the measure in detail. Then it makes the non-expert Members of the Oireachtas more confident that we are not being conned by the Minister, by tax advisers or by any particular group of people.

It seems to me that we have very little information available on the connection between taxation and employment and economic growth. I just wonder whether there is acorpus of knowledge which could be put simply and straightforwardly so that when new taxation legislation is brought before the Oireachtas then we could have some way of judging how this will affect both the employment situation and the overall situation of economic growth. It is a pity that something was not done in the Minister's introductory speech to remedy this, and perhaps he would do it at a later stage.

There are just a couple of minor queries which I would like to raise and they concern certain types of exemption contained in the Bill. There is the exemption for public utility companies, and these companies are defined in section 79, the first section dealing with special exemptions. The definition of public utility company is "a company which carries on in the State any tramway, dock or canal undertaking". That must be a very limited class of companies, because tramways have gone, canals are now mainly used for pleasure cruising, and I am not clear in what sense the word "dock" is used. Does it mean any harbour board or authority or company which may be, for example connected with the Dublin port? Presumably it has a restricted meaning in this section. In the same section there is an exemption for a company which carries on a railway undertaking, and there seems to be a very good argument here for reviewing taxation legislation where it is concerned with our public transport companies, because all our public transport companies, our rail and bus transport companies, CIE, our air transport company, Aer Lingus, all of them, as far as I can see, are going to run permanently at a loss. In the case of CIE it is a very big deficit every year. There is a very good argument for making public transport companies completely exempt from any form of taxation. After all, if they are taxed on their profits or their income or in any other way, when the taxation has just got to be refunded to the company by means of an ever-larger subvention. Perhaps the Minister could say something about the taxation of our public transport companies as well as this very narrow class of public utility companies.

Also, I am perplexed by something which was raised in the Special Committee, and it concerns the exemptions for charities and, in particular, the exemption for donations for research purposes so that these will escape liability for corporation tax. Somewhere in the discussions the Minister pointed out that in section 10 he had included an amendment so that these donations were exempt, and he makes the rather sinister remark: "This preserves the existing position. We are not proposing to amend it. We might be tempted to do so, but not here." I hope he will not be tempted to do so, because it is one of the important ways that educational institutions have of receiving money.

Could I just intervene to say I was referring to the representations which were being made that it should be extended. I was not contemplating the withdrawal of it.

I am glad to hear that because I interpreted his remarks in the Special Committee in another way. It is very important to our educational institutions, which are under considerable pressure, that this facility which they have been afforded by successive Governments should be maintained and I am glad to hear the Minister say he will consider at a later stage extending this facility. But the point I was going to make on that particular issue is that, even under the amended section 10, I cannot see where the exemption lies. I am sure it is there, but it is so complicated to try and figure out what exactly is going on in section 10 that perhaps the Minister could send me a short explanation of exactly where the exemption comes in. I am not in a position to make detailed comments about legislation of this type. I am very pleased that we had a Special Committee to go through it in detail, and I am therefore confident that, in view of their deliberations and conclusions that this particular Bill is worth supporting.

I have very little to say on this Bill because most of what I wish to say has been said already, and the Minister in his introductory remarks anticipated some of the objections to the Bill that might possibly arise.

I would like to give a general welcome to the Bill. I think that, as the Minister said in his speech, it is the work of many years of intensive study and consultation, and I would also like to pay a tribute to the Dáil Special Committee which considered this Bill. They sat for a number of weeks and saved both Houses of the Oireachtas a considerable amount of detailed work. Their work demonstrates again how useful Committees of both the Dáil and the Seanad can be in dealing with technical measures of this type.

The Minister stated during the course of his speech that the main purpose of this taxation code was to encourage investment and efficiency. In general he has probably achieved his objective. Nobody, whether a corporate body or an individual likes to pay taxation. At the same time we must accept the fact that taxation must be levied and collected. I should like to think that the Minister, in this and in other Bills he has introduced over a period of months, would use the taxation code as a flexible instrument to encourage investment in development, to avoid tax evasion and to ensure an equitable distribution of the nation's income.

I should like to comment on specific sections without going into any detailed discussion, because this is essentially a Committee Stage Bill. With other Senators, I welcome the change to a single tax system for companies instead of the present triple taxation system. It is a long overdue measure and the Minister and his advisers are to be congratulated on bringing this into effect. I also welcome the provision for group taxation relief—again a long overdue measure—which will ensure and encourage companies to make the best possible use of their financial resources.

I would particularly like to welcome the consideration given to small companies. This is something I have advocated for a long number of years. I suggest to the Minister that some provision might be made to allow for inflation in the ceilings which he sets out in the Bill, that is, that up to £5,000 per annum profit corporate taxation would be 40 per cent; over £5,000 and up to £10,000 there will be marginal reliefs. These might seem adequate in present circumstances but if we are going to live with inflation— and I think we are going to have to live with it for many a long day, although we might disagree on the rate of inflation—some provision might be made to relieve small companies to cushion them from the worst effects of inflation. All companies start small. One of the purposes of our tax legislation should be, first of all, to encourageentrepreneurs to set up small companies and to encourage small companies to grow. In our particular circumstances, with our largely diversified population mainly in small towns and villages throughout the country, the establishment, encouragement and development of small companies is very greatly desired.

I should like to emphasise to some degree what Senator Alexis FitzGerald said about what appears to be retrospective taxation on capital gains profit. I am sure the Minister has had this complaint ringing in his ears since he first introduced the Bill, but I think it should be emphasised, because it seems to show a certain discrimination and a lack of progressive thinking in regard to taxation. As I understand it, section 84 of the Bill taxes as income capital gains earned before 6th April, 1974, the date of introduction of the Capital Gains Tax Bill, if distributed on or after 27th November, 1975; but if the capital gains tax is distributed after that date they encourage tax at the rate of 35 per cent or greater, not 26 per cent as set out in the Capital Gains Tax Bill. This seems to be an undesirable anomaly. While I know the Minister is anxious to get this legislation through, I suggest this might be looked at and if what I and other Senators have said is tenable, rectified at an early date.

Something similar arises on sections 88 and 89, which provide for the issue of bonus shares. Bonus shares are issued and treated as income under section 88. Under section 89 a person not liable to tax has no method by which he can recoup the taxation liable under issues made under section 88. This seems to be unjust and might be rectified.

I should like to see the Bill provide for the continuation of tax relief on exports and on certain trading profits in Shannon Airport. I go quite a way with Senator Kennedy's comments on export reliefvis-à-vis tax relief to companies operating in this country and supplying the home market. I see certain difficulties in any sudden change in this legislation. I can say categorically from my own experience that the main incentive to foreign companies to establish here has been the tax free provisions. Capital and other grants are welcome, but the main consideration to outside companies to set up trading or manufacture operations here has been export tax relief. This is something we should be slow to change, particularly in present circumstances with high unemployment when every effort must be made to induce both native and foreign companies to set up manufacturing units here.

A very strong argument could be made for Irish companies manufacturing goods which substitute for imports. If it is a valid argument to allow taxation relief on the export of goods, the argument is equally valid in regard to the replacement of imported goods. It may not be possible to do this under present legislation, but it should be thought about. Unfortunately, one of the lessons we have learned in regard to the establishment of outside or foreign companies is that—I do not want to overplay this, because it has tended to be overplayed—if there is a branch of a foreign company here and if there is a recession, there is a tendency to shut down first the outside companies in other countries. We have suffered to some degree in that respect.

I do not go along with the point of view that says all foreign companies should be discouraged because if they set up branch companies here they will close down at the first illwind that comes along. That is not the case. Good companies have continued to operate their branch companies here, but some companies have not done so. For that reason every possible encouragement should be given to native Irish companies who cannot by their very nature pull up their roots and go out of the country. They have been here for generations. All their capital is usually invested in their promises and plant and machinery. They cannot just fold their tents and steal away. Any encouragement which can be given to Irish native companies should be given. At the same time we must accept the fact that, if we are going to make any sizeable dent on our unemployment problem, we must encourage the setting up of foreign manufacturing and trading units for many years to come.

Other Senators made comments in regard to the proposed discriminatory taxation in regard to close companies and professional service companies. I accept, and most Senators would, that the Minister would not have introduced what appears to be discrimination in regard to these two instances if there was not clear evidence that the companies were being used to avoid or evade taxation.

In his understandable anxiety to close off these tax havens the Minister should not, so to speak, throw the baby out with the bath. Senator Ryan and Senator Alexis FitzGerald made the point that any trading group which wish to expand must have capital available for investment. Regardless of whether they are in stocks or building, or anything else there must be a certain amount of capital for this consideration. I should like to see this attitude even in a professional company, and in this regard I do not share Senator Alexis FitzGerald's view that these people are necessarily the hardest-working section of the community. I can think of other sections which work at least as hard and are not as well paid. The Minister might examine this point again. Saving and investment are desirable and necessary for expansion in any form of company, whether it is a trading company, a service company or a manufacturing company.

I have no other comment to make except to congratulate the Minister. Whatever we might say or think, and some people have been severely critical of his taxation proposals, the Minister has shown a doggedness and perseverance in going through with them. He and his advisers are to be congratulated for trying to bring more realism into our taxation code and making it more equitable.

I shall not delay the House very long. This is a complex piece of legislation and one which would take a long time to study. The House should be grateful to the Dáil Committee for their excellent work in going through the Bill so thoroughly.

The effort the Minister is making in this Bill to prevent the incidence of tax avoidance is laudable and is something which is very necessary. In this day and age, when there is such heavy taxation, no one likes to think that some individual or company is dodging tax and, consequently, making others bear an unfair burden of tax. Tax avoidance measures should be pursued ruthlessly in order to ensure that everybody pays his full share. However, one must ask whether those measures will stimulate industry. We are now living in very difficult economic times and there are more than 118,000 unemployed. It is vital, therefore, that any proposed legislation should contain measures which would promote employment and be aimed at attracting foreign companies to set up industries. At the same time Irish companies, if they can invest money in industry, should be similarly encouraged and not be weighed down in the early years by heavy taxation. In the past Irish companies were often bypassed with regard to incentives while every encouragement was given to foreign companies. Very often Irish companies that had been giving good employment were neglected in this regard.

I was interested in Senator Russell's comment about the small industrialist. This type of person is of vital importance particularly in rural parts. Another matter which the Minister must take into consideration when granting tax exemptions and so on is the matter of the transportation of goods to the ports. Mention was made of products for export. While there may be criticisms in this regard, we must appreciate the importance of exports in the provision of employment. Ireland being an agricultural country, many of our exports have an agricultural base. The home market would not be able to absorb all our agricultural products so in the absence of an export market we would have unemployment.

Some help must be given to small industries located in rural parts which experience difficulty in transporting products to the ports. The greatly increased petrol prices mean much higher transportation costs. Most people are aware that our roads are not suited to the juggernauts now coming into the country. It is very difficult to get into Dublin from the Cavan area because the north-western road has not been improved.

If the Senator kept to the high road of the Bill it might be more appropriate.

I am doing my best to keep within the ditches at least. We are often inclined to forget the role played by firms here in promoting abroad an extension of our exports. This is true in the case of the whiskey industry which has great potential. It would be wrong if distillers and beer exporters were to be taxed further merely because they are exporting. Irish whiskey has a worldwide reputation and it would be wrong to impose further taxes on the industry before it has been properly developed.

The Minister has put a great deal of effort into the Bill. If it prevents individuals and companies from avoiding their fair share of tax, it will be welcome.

When I heard the Minister say in his speech that the present Bill reflected the close involvement of the corporate sector and its advisers I must admit I shuddered. For the corporate sector to be involved would be bad enough but to have its advisers involved also goes beyond my worst fears.

On occasion Parliament can be regarded as the trade union for the better-off sections of the community, for the well-entrenched Establishment and in particular for financial interests. That would be true of most democracies in respect of taxation legislation. That may be regarded as having a slightly Marxist tinge and I have no objection to its being so categorised.

Having heard Senator Alexis FitzGerald's contribution I have been slightly mollified because the consultation and collaboration was not as close as the Minister may have the House believe. I have seldom heard him moved to such heights of eloquence—indeed I might say, passion—in defence of certain interests. Senator FitzGerald has one other vocation open to him if he wishes for a change. He would make an excellent shop steward. Senator Kennedy may have wished that Senator FitzGerald had chosen that particular profession.

The Minister made the point, also, that the Bill might appear to be formidable and overwhelming in size and complexity. It is not a question of "might appear"; it actually is formidable and overwhelming in sheer size and complexity. It should cause both Houses to look very closely at their procedures because this type of legislation does not fit easily into the structures which we have for examination and debate. The Dáil made a wise decision in establishing a special committee. There may not be any need for that in this House but we require some new system for examination of Bills of this complexity and size and indeed, importance, since it proposes to set up a tax structure bringing together the various anomalies, inconsistencies and incompatabilities of half a century. This legislation may itself last for half a century so it might merit even closer scrutiny than it has received up to now.

I welcome the establishment of a consolidated tax structure at the nominal rate of 50 per cent. The Bill also deals with exceptions to the general rule that corporation tax should be chargeable at 50 per cent. In fact, all legislation deals with exceptions. In the area of taxation most people wish to have themselves identified as exceptions, where they wish to have grievances established, why they should not pay the rate which is laid down by the law. What, in the aggregate, in relation to total profit is the effective rate of corporation taxation? It is nominally at 50 per cent but what is the actual figure? Perhaps the Minister has those figures available. I think I heard him say that the effective rate of taxation is 20 per cent, if one were to take all the exemptions and allowances into account. If that is the case, it puts into proper perspective much of the special pleading and arguments which we have heard here with regard to exemptions, new allowances, special treatments and so on, for various groups and interests.

Nobody could disagree with the three policy objectives which the Minister set himself in drafting this legislation. First, it should be a more straightforward system of taxation. There is no legislation, particularly in regard to taxation, which can be drafted by human beings which will not lend itself to the O'Connell type of boast that it can be driven through. A tax consultant friend of mine told me that this Bill will provide a tax consultants' haven. He gave me some examples and I shall go into them in detail on Committee Stage but that should not depress the Minister because it is impossible to avoid anomalies occurring. He can only amend the Bill when weaknesses appear.

The Minister's second objective is to foster continued business investment and greater efficiency. Objections have been raised to this and Senator FitzGerald made several good points in regard to companies retaining cash for future investment and expansion. In the past I referred to Sweden as an example. I am going to do so again and no doubt I shall do so again in the future. Under the Swedish system there is a situation where companies are forced to invest a certain percentage of their profits on special deposit with the central bank. It is not taxed and in times of depression, in a cyclical downswing, these companies, having drawn interest on their special deposits, can withdraw their money for investment purposes. This surmounts the problem of cash being reserved for long periods of time for investment purposes.

This is something we should look at very closely indeed. The Swedes have the advantage of having proved that their system works. In the current recession they have by far the best record of any economy in Europe. They had the smallest increase in unemployment, they had the most advanced and sophisticated methods of dealing with depression, and at all times they have mechanisms available to them to bring both Government and industry into action to counteract a downward swing. Their system has been identified by the OECD as being one of the most valuable innovations in Swedish fiscal policy. The OECD have published information on it and it is available in the Library here and it is worthy of examination. It might help to surmount the criticism which Senator FitzGerald voiced earlier. It was one of the few points on which I agreed with him because it is an important one towards helping to secure an increase in employment.

With regard to taxation avoidance measures, the Minister has set a very good style in his three years in office, but he should ignore the special pleading which he has heard both in the Seanad and in the Dáil and which he will continue to hear outside of both Houses. I support him in his endeavours, particularly in regard to close companies and professional service companies, because no Senator has denied the fact that there has been abuse in these areas. What they have criticised are the measures the Minister has taken to deal with these abuses, and that in dealing with those who have abused the situation certain innocent parties are being injured.

I am challenging that there has been any widespread abuse of the tax code.

If there has not been widespread avoidance as Senator FitzGerald has alleged—I accept the point he has made—he made the point that the professions and the Minister might come together by the use of a certain section of the Bill. I am not arguing against provisions which would safeguard the innocent. I suggest that the professions involve themselves in a form of self-policing with the Minister and the Revenue Commissioners. We cannot have a situation where the majority of people see no way of avoiding taxation. Senator Kennedy made this point. People do not have available to them a panoply of advisers of all sorts, accountants, tax lawyers and so on. They must pay their tax at a time when they are being asked not just to maintain their standard of living but to endure a lowering of such standard. When tax abuses exist we cannot ask people to ask in a socially responsible way if they believe there is inequity in the taxation system. The greatest support the Minister will receive in reforming the taxation law will come from ordinary, workingclass people, particularly in the area of tax avoidance. I commend and support the Minister for his efforts in this direction. The Minister's campaign drew a large measure of support from delegates at the recent Labour Party conference. I do not say that the Minister is a hero in the eyes of the Labour Party. He certainly is not, and he knows that, but this taxation legislation merits him a place in our hall of fame.

Two Senators referred to the question of looking again at tax reliefs on export sales. It is time to have a look at this whole matter again. I can understand the reasoning behind it at the time it was introduced. I do not now fully subscribe to the belief that growth has got to be export led. Every economy in the world subscribes to that principle. It seems to me to be the creation of an economic situation in which we all take in each other's washing. We will not, because there is not sufficient washing to be done. Senator Russell's point about giving consideration to import substitution is an excellent one. There are strong economic arguments for believing that we should give as much attention to import substitution as to increases in exports.

Both have the same effect on the balance of payments. Both should have the same effect on unemployment. Certainly import substitution has a very beneficial strategic effect with regard to our economic future, not least in times of depression and cyclical down-swing. I can understand the difficulty in identifying what exactly happens to be an import substitution. That is not a difficulty which is beyond the capacity of the Department of Finance and the Department of Industry and Commerce to solve because they have published statistics showing growth in competitive imports, for example. I would hope that the Minister, within the context of the Green Paper which he is to publish shortly, might give consideration to this point and perhaps point up the difficulties of administering it and ask for a reaction. I am sure he would get a very favourable reaction from Irish industry.

Senator FitzGerald said wisely on one occasion that a Minister for Justice is in fact two Ministers wearing the one hat. He is Minister for the Interior and Minister for Law Reform. The Minister for Finance—I hope I will not be accused of getting into the area of blasphemy—is more analogous to a trinity. Apart from being Minister for the Public Service he is Minister for the Budget and he is also Minister for Economic Policy. Certainly his record in the field of taxation reform will place him in a very special category indeed in terms of political history because this Bill and the Bill we will be taking later today, taken in conjunction with the Bills which have been passed by both Houses of the Oireachtas, constitute the most radical, fundamental and exhaustive reform of our taxation system which has been undertaken in half a century. He is to be commended on that and I support him on the general purpose of this Bill.

I am grateful to all the Senators who have spoken here for the manner in which they have received this Bill. Several issues of detail have been raised which might be more satisfactorily dealt with on Committee Stage. In so far as they are of general application I will try to deal with them now.

First of all, I should like to deal with the general question of the taxation of companies in Ireland. When account is taken of all the allowances and concessions given to companies in Ireland, the effective rate of corporation tax is 20 per cent. That is the effective rate. One might pay nothing and another might pay more, but the effective rate all round on business in Ireland is 20 per cent, which is an exceptionally low rate and does not leave much room for further reduction.

Hear, hear.

That is one end of the scale of taxation. At the other end of the scale are the massively high rates of personal income taxation which we have, and which are a cause of great personal protest and sense of grievance. How can we bring down the personal rate of income tax if there is massive resistance to indirect taxation, which there certainly is, and has been most vocal in recent weeks, if there is further demand for concessions on corporation tax and if there is continued resistance to the taxation of farming profits? If somebody has some marvellous idea as to some human activity of any substance which has not yet been taxed and which can be taxed, without harm, would he please let me know it. I will not hesitate to bring in a supplementary budget to give immediate effect to any brilliant suggestion made. The trouble is that the country is suffering from a poverty of suggestion as to where additional revenue can be obtained. We have a very fertile field of suggestions as to where cuts should be made, but they cannot be made in these times without imposing a greater burden on others.

A suggestion has been made that we should give to companies who are manufacturing for the home market tax concessions similar to those given to those who export. Such arguments have been advanced here today. You cannot do it without throwing the burden on to somebody else. It would certainly operate to defeat the main purpose of the export tax relief, that is, to promote the sale of goods abroad. Even with a population which by 1986 is likely to expand to 3,300,000 people, we will not be able to provide our people with the standard of living to which they have been accustomed, and which they certainly will be demanding to be improved, if we rely upon our home market.

To speak of giving the concessions only where goods are produced in substitution for imports, is to make a suggestion which, with respect, I think, would generate a great deal of mischief.

The clearest substitution for imports would be foodstuffs. The argument has been advanced time and time again by the agricultural community that they should not be taxed at all because they are saving us foreign currency we would otherwise have to expend on food which we would have to import if they did not produce it at home. You can be certain that if a concession is given in any area it will be quoted by other people who will try to use the example of the concession to generate muscle and support for a concession of a similar nature for themselves. If the tax relief was to be given for goods produced which could be proved to have replaced imports, you can be certain that the exporters would be looking for an even greater concession and we would find ourselves having to make actual cash payments on top of giving tax relief for exports if we wanted to generate the volume of exports which is so necessary for the maintenance of our economy.

There is truth in what Senator Halligan says—that this suggestion amounts to a suggestion that exports be given preference. This idea is strong throughout the world as we all know. It amounts to saying that the world lives by our taking in each other's washing. Of course that is exactly how the world lives. If you do not want to do that, then you can just wash your own and go back to mere self-sufficiency with all the limitations that involves. The world thrived as it never prospered before during a period of growth in world trade and growth in exports of all kinds. It suffered more than it ever suffered before in the last half century when world trade shrunk when exports fell. Whatever about the theory of it, which is very nice in a debate in Seanad Éireann, the realities of our experience point to the necessity to promote exports if we are to generate an adequate standard of living.

Senator Kennedy asked whether I would give consideration to giving tax relief to companies which were unable to pay increases to their employees, or to pay equal pay. In most cases where a company are unable to pay the increases or to pay equal pay the reason is that they have been unable to generate profits, so there is no question of giving tax reliefs on non-existing profits. What the suggestion really amounts to is the provision of a subsidy at the expense of other taxpayers to such companies as could be identified as being in need of money in order to meet pay increases or the provisions of equal pay. Again, it is something that one would like to think of, and one could do if one was in a surplus position, but it certainly cannot be done when one has to borrow £327 million on the current budget. That is the amount of money which we have not already got; any further money the Exchequer will have to pay out will have to be borrowed and there is no prospect of our being able to borrow either at home or abroad in order to provide ourselves with higher incomes. Many of the questions proposed today are what I might call policy questions and these are what I have been talking about. So far as this Bill is concerned, we have not embarked upon any radical or general policy issues. We are bringing in here a new tax which will apply to incorporated bodies. We have adopted the existing law, procedures and policies to this new tax and it is only where it was necessary to amend the existing law because of the application of corporation tax that we are making changes. Several of the issues raised here today would be more pertinent to the annual Finance Bill where the policy issues could be decided upon. Indeed, on some of the issues I would have a considerable amount of sympathy and I would be only too disposed to meet some of the points raised on a Finance Bill but it would only help to complicate the Corporation Tax Bill, which everybody has acknowledged is complicated enough already, if we were to deal with general policy issues in it as well.

Senators Eoin Ryan, FitzGerald, Russell, Lenihan and others, raised section 101 and section 162. Senator FitzGerald challenged me to say whether or not there were abuses of existing service companies.

With respect, I do not think I did. I refuted the allegation that no Senator had criticised the existence of abuses when Senator Halligan spoke, but I said I certainly challenged the existence of widespread abuses in relation to professional companies.

That is what I thought was said. I was not quoting Senator Halligan at this stage at all. Unfortunately there are abuses, serious abuses, and they are growing in number and, of course, they are bound to grow because once somebody hears how somebody else is avoiding tax he will go immediately to his advisers and ask them to structure similar schemes. There are people like doctors, to whom Senator FitzGerald referred, who have little need to have service companies to assist them to attend on patients but a number of cases have come to notice where doctors say that their own personal incomes are in the region of £3,000 or thereabouts but they have service companies which generate profits of £10,000, £15,000 or £20,000 a year. They leave the profits in the service companies undistributed and in due course they liquidate the service companies and take the assets of the service companies to themselves untaxed. There have been cases of professional firms having service companies where the profits of the firms have been in the region of £200,000, £300,000, or £400,000 to £500,000 a year, where the individual partners in these firms have taken salaries in the region of £7,000 to £12,000 apiece but have diverted the balance of their profits to their own family companies. In due course they have used the family companies either to give themselves untaxed distributions or massive loans at a very attractive rate well below the market rate.

They are collected by the close company provisions, and should be.

Many of them have not been capable of being caught.

That is in the past. The Minister is now changing it.

I am changing it and I am justifying the need for the change. Section 101 deals only with investment and estate income. It does not propose to impose a surcharge upon trading income. Section 162 is necessary to deal with the service company but we can go into more detail on this when we come to the particular section.

I assure the House that I am as anxious as anybody else to provide the capital necessary for the proper management and expansion of firms. Clearly a professional activity does not need as much capital either for fixed capital purposes or for trading capital purposes as a trading company. When existing procedures are being used in a way which clearly is for tax avoidance purposes we have to find some way of closing the gap. I share with Senator Russell and others an anxiety that as we throw out the bath water we do not throw out the baby. We want to keep the baby and multiply the number of babies in the country but we want them to be clean as well.

We have provided a reasonable amount of profit to be retained for ploughing back and even the surcharge itself is not penal. The alternative is to do as Senator Ryan suggested has been done in Britain. You can forget about all these artificial creations and look right through the companies to the individuals and bring in complicated apportionment provisions such as they have under British legislation and then the rate that will be paid on the profits will not be the 58 per cent which will be effective under this Bill but the full rate of 77 per cent. In most cases which have come to notice, indeed if not in all, the actual rate which will be paid by the people who have operated these devices will be 77 per cent and not the lower rate. so there is clearly a need to correct a development which I am sure the Legislature never intended.

Senator FitzGerald may argue, and may argue very well, that professional firms have difficulties in meeting their working capital needs because they are often substantially in arrears in collection of their fees and he mentioned that a number of firms make massive outlays on behalf of clients before they get paid. There is a lot to be said for ending that practice. The distributive trade to a large extent has curtailed the amount of credit which it has been prepared to give to its customers over recent years and maybe there is a lot to be said for the professions doing that as well. Whatever the difficulties of professional firms, there is no justification for taxing professional firms which are not incorporated at the rate of 77 per cent and taxing those which are incorporated at a rate of 50 per cent. If equity is to be achieved we must achieve it, but it is not by allowing people to use devices which should never have been allowed to exist at all. I know there are other points but I have gone over the permitted time.

If the Minister wishes to make further points it is a matter for the House to decide.

I think the most satisfactory way of dealing with them would be on Committee Stage when we would be concentrating on the effect of a particular provision and I would be only too happy to deal with them at that Stage if that is acceptable to the House.

Question put and agreed to.
Committee Stage ordered for Wednesday, 24th March, 1976.
Business suspended at 1.05 p.m. and resumed at 2.15 p.m.