The Finance Bill provides a statutory basis for the taxation provisions which were announced in the 1987 budget. It also contains a number of other taxation proposals to improve the operation of the system and eliminate abuses. Some of the proposals in this Bill have major significance for the development of sectors of the economy. Before summarising individual aspects of the Bill, I would like to speak briefly on recent financial and economic developments.
When we took over the reins of Government last March, we inherited huge economic and financial problems. There was no possibility of short-term solutions to these problems; equally, it was of critical importance that we should take immediate steps, however unpopular, to arrest the decline. The lack of confidence in the economy had been demonstrated clearly by the huge outflows of capital and if this trend were sustained, the economy would wither downwards to a very low ebb. We had, therefore, to follow a twin strategy of immediate improvement in the public finances while at the same time focusing special attention on development areas to generate more economic activity and to open up new employment opportunities.
We had no reasonable alternative and the great majority of the public support our approach despite the unwelcome consequences of the necessity to cut back on services. People recognise that we had to change direction. The scale of borrowing could not be sustained because the accumulating debt would absorb most of our resources. The deteriorating financial situation was destroying confidence in the economy. Potential investors were doubting our ability to face up to our problems. Their concern is reflected in a fall off in investment, heavy outflows of capital and diminishing opportunities for employment. This is a depressing catalogue and people generally welcome our determination to break out of this bind even if this involves sacrifices in the short term.
It is still very early but already there are positive responses to our decisions. The focus of attention has been largely on the downside effects such as the cutbacks in the public service. These are regrettable but unavoidable. On the positive side, we have already seen a substantial downward movement in interest rates and we can look forward to a continuation of this trend. It is of critical importance for the development of the economy that interest rates come down as this will encourage further investment.
Confidence in the economy will grow as we demonstrate our commitment to proper management of the public finances. We have set difficult targets in the budget but we are on course and we intend to stay on course despite the pressures for relaxation. There is no merit in setting targets if they are not achieved and, unfortunately, in recent years there has been a succession of large overruns. This has had a very damaging effect because it has called into question repeatedly our willingness to face up to realities. We have paid a heavy price for this poor performance in terms of lost investment, rising debt obligations and the undermining of national morale.
Financial discipline on its own is by no means enough to get us out of our difficulties. We must at the same time give a major impetus to the economy. From the outset we have given special attention to development of areas of the economy which, we believe, have strong potential. These include tourism, food processing and the development of financial services. Special measures to promote these sectors are incorporated in the Finance Bill and I will deal with these later. The focus of attention on these areas will pay worthwhile dividends and there is already evidence of this.
The budget strategy is the basis for optimism in the recovery of the economy which has been in a depressed state for several years. While some of the factors responsible for this have been outside our control, we have compounded our difficulties by misguided policies and by failing to take corrective action. As long as there are doubts about the determination of the Government to manage the public finances with prudence, the economy remains in the doldrums because of the prevailing lack of confidence. This Government have already demonstrated firmly their commitment to good management of the public finances, despite the unpopular consequences, and this will bring its due reward in improved economic performance.
While this Bill was being debated in Dáil Éireann, I listened to repeated calls for tax reform. We all favour tax reform but there appear to be widely varying views about how it should be achieved. Too many critics ignore the budget realities and it is much easier to call for tax easements and incentives than to propose tax increases.
I recognise the significance of taxation in the economy. I acknowledge that there is need for improvement and that some of our tax rates are unduly high and have a significant disincentive effect. Reform of the taxation system is a Government priority because this is an essential element in achieving the scale of economic progress that we need. We are not in a position in the short term, because of the budget situation, to reduce the overall burden of taxation to any significant extent. This, however, does not rule out or defer the issue of reform; on the contrary, there is scope, I believe, for significant adjustments which will result in a fairer system. There is a general recognition that reform must involve widening the tax base. I agree with this but I would emphasise that widening the tax base means imposing new taxes or withdrawing concessions.
There is continuing pressure for tax incentives to encourage business and we now have a wide range of these incentives in our tax code. They are expensive in terms of tax foregone, and they are a factor in our high tax structure. We cannot have more and more incentives and lower tax rates at the same time. Incentives are necessary but they must be on a selective basis. There is a clear limit to the extent to which incentives can be allowed; the deciding factors in each case must be the balance of advantage to the economy and the need to protect the tax base.
I welcome discussion on tax reform; I see a need for change, and rational discussion can help this process. Discussion serves no purpose, however, if it ignores the budget arithmetic and degenerates into a succession of calls for concessions of one kind or another. There are no comfortable solutions and nobody should be under any illusion about this. In the present budget climate, if we are lowering taxes significantly in one area, we must expect increases elsewhere. We cannot ignore this reality.
In our Programme for National Recovery we have given a commitment to rapidly reach the stage where two-thirds of taxpayers pay income tax only at the standard rate. It was not possible to fulfil this commitment in this year's budget. Income tax reductions, however modest, are costly. We had to make choices between lower borrowing and lower taxation and the priority had to be to reduce borrowing. I think most people would agree that this was the prudent approach. As the public finances and the economy improve, we will be in a better position to reduce the burden of income tax and to fulfil our commitment.
In the course of the Dáil discussion on this Bill there were several references to tax arrears. Our problems of high taxation cannot be resolved simply by collection of outstanding taxes. There has been considerable misunderstanding about the scale of arrears and some of the figures mentioned are wild exaggerations. Uncollected tax is a serious problem and any tax reform package must incorporate measures to improve collection. Significant progress has been made in recent years. There must be further improvement and this will be a priority with the Government.
Any reference to the general economic and financial situation is incomplete without adverting to the problem of unemployment. It is the central priority and all our efforts must be concentrated on new opportunities for employment. There are, unfortunately, no overnight solutions but the steps we have already taken and the further measures over a wide range, which are now under consideration, will have a very positive impact over the next few years. The unemployment figures are most disturbing but there are some encouraging signs. I am confident that, as the Government's economic and financial strategies begin to take full effect, they will have a definite and significant impact on the employment figures.
I would now like to outline individual sections of the Bill and to draw the attention of the House, in particular, to the more significant items. The earlier sections deal with income tax. Section 1 provides for the renewal for a further year of the special PRSI tax allowance, which was first introduced in 1982. The exemption from income tax available to lessors of agricultural land, who are aged 55 or over or who are permanently incapacitated, is being raised from £2,000 to £2,800 in section 2.
New arrangements for the income tax credit for farm tax are specified in section 3. While the farm tax has been discontinued, amounts due in respect of 1986 remain payable. A number of farmers have yet to make their payments. To qualify for a credit against 1986-87 income tax liability, however, the farm tax due should have been paid by 5 April 1987 under the terms of last year's Finance Act. The deadline for payment is now being extended to 30 June 1987; there will be no further extensions. In their own interests, therefore, farmers still owing farm tax from last year should arrange for immediate payments, as they have been encouraged to do so by the IFA. There are also outstanding arrears of health contributions and levies to be paid by farmers. It is an understandable source of frustration to the general body of taxpayers that they are not being paid. It is now time that the farming organisations again showed responsibility in forthrightly encouraging their members to settle all outstanding arrears.
Section 4 abolishes in relation to Irish people working abroad the "place of abode" test for residence in the State for tax purposes. This change will enable people working abroad to visit home and transfer savings without being subject to Irish tax simply because they maintain a place of abode and make short visits home. In section 5 the ceiling for relief on dividend income from an Irish manufacturing company is being increased from £7,000 to £9,000 where the company has an approved profit-sharing scheme for its employees. This is intended as an incentive to companies to introduce profit-sharing schemes which are of benefit both to the companies and the employees and do much to improve industrial relations. To counter a potential abuse, there is also a provision that this relief is to apply only in respect of bona fide ordinary shares.
Section 6 implements the restriction on mortgage interest relief announced in the budget. It provides that the relief will be restricted to 90 per cent of mortgage interest actually paid or 90 per cent of the relevant relief ceilings, whichever is the lesser. Mortgage interest relief would cost about £160 million in the current tax year if no action were taken. This restriction will claw back a small proportion — £10 million in 1987 - of this cost. This clawback has been designed very carefully, so as to ensure that the biggest clawback comes from those who enjoy the biggest benefit from the relief. The new restriction must be seen in the context of the recently announced cut in the mortgage interest rate and the likelihood of further cuts. A primary objective of the budget strategy is to force down interest rates and the success of this strategy in the home loans area will continue to be of substantial benefit to mortgage holders generally.
The requirements for pay over of retention tax by financial institutions are being altered in section 7. The arrangements for crediting interest adopted by some financial institutions meant that they paid over to the Revenue Commissioners tax on less than 12 months' interest for the tax year 1986-87. This section provides that these institutions will have to make up any shortfall in their 1987 payment by an extra payment in October next and it also protects the yield for future years.
While I am dealing with the retention tax, I want to take this opportunity to state publicly that any activities by financial institutions aimed at avoiding the tax will be dealt with by legislation. I have in mind here, particularly, transactions which are, effectively, deposit taking and re-lending. The regulation of the banking sector is a matter for the Central Bank and my Department will take up with the bank, for immediate action, any case where it considers that activities proper to approved deposit takers are being carried on by others.
I will also be concerned to ensure that the return on all deposits taken by relevant deposit takers, in whatever form, attract the tax, and I will introduce, with retrospective effect, whatever measures are necessary to achieve this. I draw the attention of banks and other financial institutions to section 32 (2) of the Finance Act, 1986. This requires a relevant deposit taker to treat every deposit made with it — and the term "deposit" is very widely defined — as a relevant deposit unless it is satisfied it is not a relevant deposit.
Chapter II of the Bill contains important amendments to the business expansion scheme. This scheme provides for relief on certain conditions for an individual who subscribes for unquoted ordinary shares in an Irish resident company engaged in manufacture or in certain service sector activities.
The scheme has been successful to date in generating additional investment for the activities to which it applies. Since the relief was introduced in January 1985, over 140 companies, and investments of about £12.5 million, have been approved.
Up to now, the business expansion scheme has been confined to the manufacturing and international services sectors. The Government propose to extend it on a selective basis to certain other areas which we have identified as offering significant potential for increasing output and employment. The areas in question are shipping, trading houses and export tourism.
I do not need to outline to the House the difficulties which have beset the shipping industry in recent years. Positive action is required to enable the industry to recover from these difficulties. In order to revitalise the industry, the Bill provides that shipping will now come within the ambit of the business expansion scheme and, furthermore, the 10 per cent rate of corporation tax will apply to shipping activities.
Senators will note the provision that the acquisition of a ship will qualify under the scheme only where such acquisition would be eligible for a grant under a grants scheme administered by the Department of the Marine. This will ensure that all proposals to raise money under the business expansion scheme to buy ships will be vetted in accordance with strict criteria by the Department of the Marine. It will also guarantee that revenue foregone under the scheme will be subject to the same level of scrutiny as the direct expenditure of Exchequer funds in the form of grants.
The business expansion scheme is also being extended to trading houses and to export tourism. I will return to the trading houses at a later stage. The Government have already highlighted the importance which they attach to tourism and they have demonstrated their commitment to the industry with a special package of measures to attract substantial additional numbers of tourists this year. Already, these measures are showing results.
The qualifying activities under the heading of tourism are set out in section 11. The term "tourist traffic undertaking" has been defined in very broad terms to ensure that a wide range of tourist activities can be covered. There is a requirement that in order to qualify for the benefits of the business expansion scheme a company must obtain approval from Bord Fáilte for a three year development and marketing plan which is primarily designed to increase tourist traffic and revenue from abroad. The purpose of this is to ensure that qualifying companies are committed to the essential purpose for which the scheme is being extended to the tourist sector, namely, to bring in more tourists from abroad. It will also mean that the expertise of Bord Fáilte in the tourism area will be availed of in deciding on applications for relief under the scheme.
The export tourism activities provided for include the promotion of qualifying activities abroad. I draw Senator's particular attention to this provision, which I consider a very important one. It is vital not only that we have facilities for tourists who come to our country but also that these facilities are vigorously marketed abroad. The application of the business expansion scheme to promotional activities should give an additional impetus to this most necessary function of selling Ireland as a holiday resort abroad.
I am confident that the extension of the business expansion scheme to export tourism activities as defined in this Bill will give a major boost to tourism in Ireland, to the benefit not only of the tourist industry but also of the economy as a whole.
Chapter III of the Bill gives effect to the scheme of tax deduction at source on professional fees paid by certain public sector agencies. These fees are paid normally to either individuals who are taxed as self-employed or to companies who are liable for corporation tax. Under the system of tax assessment for the self employed, current tax payments use as a basis for calculation earnings generated in a period which can date back over two years in some instances. Under corporation tax, payments are due six months after the end of the accounting period to which they relate. This contrasts with the deduction at source on current earnings under PAYE. The new system provides for deduction of tax on account, at source, on the publicly funded professional fee payments to which it applies. Accordingly, from 6 June tax on account is being deducted at source at the rate of 35 per cent from all payments for professional services made by the bodies specified in section 14 of the Bill. The new system is estimated to yield £25 million in 1987 and it is an important element of the budget for this year.
There has been a considerable amount of misunderstanding about the new system and some exaggerated comment as to its effects. I would like to stress the following points in relation to the scheme. No additional tax liability whatsoever arises; this is no more than an accelerated payment of tax. There are adequate safeguards to ensure that there will be no hardship. For the large majority of those liable the withholding tax is not a significant imposition that will in any sense disrupt their business.
The tax is not inequitable; it is not disruptive and it will not affect employment. Its operation will be monitored closely and I will welcome submissions from people who may feel that the relieving clauses do not properly deal with this situation and that consequently they are in a situation of hardship.
Senators will note that section 14 enables the list of accountable persons who will operate the tax to be extended by regulation subject to the approval of Dáil Éireann. While the major public sector bodies paying significant amounts of professional fees are already included, I have arranged for a study of fees payable across the public sector with a view to possibly adding to this list at a future date. There were proposals in the course of the debate in Dáil Éireann that payments made by the Voluntary Health Insurance Board for doctors' fees should be subject to the withholding tax. In principle, I agree with this; in practice, however, these payments are now made to the insured persons so that there is not a direct link between VHI and the doctors. I will look at the present arrangements to see what can be done.
I would now like to move on to Chapters IV and V of the Bill and to draw specific attention to the principal items under these headings. Section 25 provides that the restriction whereby capital allowances are determined on a "net of grant" basis will not apply to companies in the food processing sector which purchase their own plant and machinery. This reflects the special priority which the Government attach to investment in the food processing sector. This is an area where, for export purposes especially, we have significant potential to achieve a higher added value content and large scale investment is necessary for this purpose. Already there has been an announcement of a major development in meat processing and we look forward to further progress in this very important sector.
There is provision in section 27 empowering the Minister for Finance to extend by order the definiton of designated areas for urban renewal. It is essential to provide attractive tax incentives to promote the proper redevelopment of inner urban areas. The response to the provisions incorporated in last year's Finance Act is most encouraging.
I referred earlier to the extension of the 10 per cent rate of corporation tax to shipping and this provision is incorporated in section 28. This concession is being accompanied by measures designed to curtail certain tax avoidance activities in the sector. These measures impose restrictions on relief for trading losses of shipping companies and capital allowances in respect of ships used in a 10 per cent shipping trade.
The intention underlying the anti-avoidance measures is to confine the tax benefit of capital allowances on ships and any accumulated trading losses within the shipping trade. It has been possible up to now to set these allowances and losses against income other than shipping income by means of group relief and, in the case of capital allowances only, leasing arrangements. The result is that other companies or individuals can reduce their tax liability artificially and the profits of shipping companies for tax purposes have been artificially increased.
The extension of the 10 per cent of corporation tax to the income of trading houses is proposed in section 29. Trading houses are defined as companies carrying on a trade which consists exclusively of the sale by wholesale on the export market of Irish manufactured goods. It is envisaged that these will be private sector companies with no State participation.
The aim of the Government in promoting the establishment of trading houses is to develop a co-ordinated export marketing function for Irish manufacturing companies. Many such companies, although their products have strong export potential, lack the resources and often the capability to exploit this potential. This is largely a function of size, but the result is that smaller companies are put at a serious competitive disadvantage. Trading houses will act as conduits for goods manufactured by such companies.
Section 30 relates to the establishment of an International Financial Services Centre in the Customs House Docks site. This development has already received considerable publicity. The special needs of the Custom House Docks site were recognised and provided for in the package of tax incentives contained in the Finance Act, 1986, for the physical redevelopment of the site. In order to promote this redevelopment, however, it has been necessary to identify and target a specific economic activity which can be attracted into a portion at least of the accommodation being provided on the site. It is obviously desirable that this activity should be new rather than that the site should attract operations already established elsewhere in Dublin or elsewhere in Ireland which might be willing to relocate. The Government believe that the establishment of an International Financial Services Centre offers the best potential for development of the site.
A low rate of corporation tax is recognised to be a necessary precondition for the successful operation of such a development. Accordingly, provision is being made for the extension of the 10 per cent rate of corporation tax to income derived from certified international financial services to be carried on in the Custom House Docks site. In defining the services to be permitted, certain services for Irish residents and certain dealings in Irish currency are not included. To qualify for the 10 per cent tax rate companies will require a certificate from the Minister for Finance and, in addition to the legal requirements, companies will have to satisfy certain criteria before a certificate will be given.
Furthermore, in so far as banking functions may be located in the Custom House Docks site, they will be subject to the licensing and regulatory authority of the Central Bank on the same basis as banks located elsewhere in the State. The requirements of the relevant European Communities Banking Directives will be fully met. The Government have notified the European Commission of the initiatives contained in sections 28, 29 and 30 and the normal procedures involved in such notification are being applied.
Section 33 proposes a new rate of taxation of 45 per cent on the income of banks from home loan business granted after the publication of this Bill. Income from existing home loan business will continue to be taxed at 35 per cent as heretofore and costs on all home loan business will continue to be available to be offset against income from other banking activities subject to the normal corporation tax rate of 50 per cent. There is, therefore, no reason why those who already have home loans from banks should pay more, and a tax concession is still available in regard to new loans.
The existing arrangements result from section 28 of the Finance Act, 1976, which was introduced to encourage the banks to provide home loans at competitive rates. At the time the banks considered that it would not be prudent or profitable for them to engage in this lending. Over the years, however, the banks have expanded their share of this market and this year both AIB and Bank of Ireland have substantially increased their allocation for home loan schemes. Continuation of a concession, devised when home loans were not looked on favourably by banks, is simply not justified in the present situation where the banks are setting out to be the major lenders in the home loan market and can use the favourable tax arrangement resulting from this concession to achieve this objective.
I introduced an amendment in the course of the Dáil discussion on the Bill to provide a special incentive for investment in film making. This is contained in section 35. Film making is an expensive and high risk business and it is difficult to raise adequate financing. The business expansion scheme has already proven itself a valuable vehicle for providing film finance and now we want to encourage investment from the business sector in film projects with commercial potential. This is the thinking behind the new incentive. We have the basic talents for development of a successful film industry but, without adequate financing, there can be no success. In conjunction with the introduction of the tax incentive scheme the Government are reviewing the existing range of support and encouragement for film-making, including the work of Bord Scannan na hÉireann and An Chomhairle Ealaíon.
Under the heading of customs and excise some relief is provided from excise duty on imported waste oil which is subject to processing to make it suitable for use as industrial fuel oil. This change corrects an anomaly and it also encourages processing of oil which would otherwise be dumped. The Bill also confirms excise duty increases on tobacco and certain fuels which were imposed by order last January.
Part III of the Bill deals with value-added tax. As well as giving effect to the changes announced in the budget, the Bill contains a number of technical provisions. There is a reduction from 25 per cent to 10 per cent in the rate on photographic services, waste disposal services and driving instruction as announced in the budget. In addition, I am extending the benefit of the reduction to admissions to cultural, historical, artistic and scientific exhibitions and tour guiding services. These reductions will have effect from 1 July and are intended as a further stimulus to the important services sector of the economy where I believe there is significant potential for job creation. I am confident that this will improve the competitiveness of this sector and help combat black economy activity as well as contribute to employment growth in the economy.
The Bill also confirms the reduction in the farmers' flat-rate VAT addition to prices from 2.4 per cent to 1.7 per cent which I announced in the budget. This change, which has had effect from 1 May is intended to compensate the Exchequer for the revenue foregone on the abolition of the farm tax. As I indicated in the Budget Statement, farmers retain the right to register for VAT and recover in full any VAT paid by them on their farm inputs. I also mentioned in the Budget Statement that greater use will be made of the farm profile form in assessing smaller farmers for income tax. The existing form has now been revised and the new arrangements will be put into operation shortly.
The intention is that all farmers likely to have a taxable income should be assessed. The profile form will enable an inspector of taxes to determine in many cases that no tax liability will arise. For most other smaller farmers, the inspector will be in a position to assess the amount of tax due without the need for accounts. This simplification of procedures should remove the need for smaller farmers generally to seek specialist accounting advice in relation to their tax affairs.
I have already indicated my concern that farmers should pay arrears of health contributions and levies. I served notice in Dáil Éireann that I will have to reduce the VAT refund still further if farmers do not meet their obligations.
Under the heading of stamp duties, provision is made for the continuation of the bank levy to yield £25 million and for an increase in the levy on life assurance premiums from 1? per cent to 3 per cent. The contribution from the financial institutions to corporation tax yield is decidedly small and, while this situation prevails, there is no room for any diminution of levies. It is reasonable to look to the financial sector for a bigger contribution to tax revenue.
This Bill contains some major changes in taxation. In bringing it before the House I have sought to present these changes in the context of the general Government policy on the public finances and taxation. I also have to emphasise again, before concluding, the developmental aspect of a number of the provisions in this legislation. The Government recognise that prudent management of the public finances is not sufficient on its own and that there must be a positive effort at the same time to promote development and employment opportunities.
I commend the Bill to the House.