I apologise for my late arrival. I endeavoured to get here as quickly as possible but I am glad that the debate started. I heard the contributions made by Senators Cox and Ross. Senator Ross raised some interesting points to which I will endeavour to respond but he will appreciate that I do not have some of the details with me. However, there are a number of issues which I wish to put on the record.
When I was here on 13 May last, the topic of debate was "Banking: Recent Developments and Future Challenges". At that time, as well as giving a historical perspective and overview of the future challenges facing Irish banking, I adverted to the emergence of serious allegations against the banking sector which have been a cause of considerable concern not only to the Government and Members of the Oireachtas but to the public at large. At that time, the allegations included reports of over-charging on customer accounts and the existence of a very sizeable number of bogus non-resident accounts in certain banks in the late 1980's and early 1990's. More recently, newer allegations relate to the use of these bogus non-resident accounts for the purpose of evading DIRT and it is on these I will concentrate mostly today.
The allegations against Irish banks are wideranging and very serious. They cut to the very core of the basic trust society must have in its banking sector. I would like to emphasise to the House that the Government is fully conscious of the wideranging public concerns about the recent developments in regard to these allegations.
Before going into the detail of the Government's most recent responses to these allegations, I wish to set out the background to DIRT and the position in regard to the Revenue Commissioners and the Central Bank. Prior to the introduction of deposit interest retention tax in 1986, banks paid interest gross to their depositors without deduction of tax but were obliged to report to Revenue any case in which interest exceeding £50 in a year arose. Building societies, in contrast, deducted tax on the interest due to their depositors and shareholders under a "composite rate" arrangement and were not obliged to make returns of interest to Revenue. At that time, banks did not have to return details of deposit interest over £50 where the account holder served a notice on the bank declaring on a form, known as Form F, that the beneficial owner of the interest on the account was not ordinarily resident in the State. However, under section 17 of the 1983 Finance Act, a bank was obliged to require an affidavit from a person claiming non-resident status where the bank was not satisfied that the person was non-resident. These claims and affidavits were to be retained and made available to the Revenue Commissioners if requested.
A budget day financial resolution in 1986, which was incorporated into Chapter IV of Part I of the Finance Act, 1986, introduced deposit interest retention tax. The introduction of DIRT was intended to harmonise the tax treatment of deposit interest across the range of financial institutions, to increase tax revenue and to counter tax evasion more effectively. With effect from 6 April 1986, a retention tax, at the standard rate of income tax which was then 35 per cent, was deducted at source out of interest paid or credited on bank and building society deposits in the beneficial ownership of residents. The composite tax arrangement with the building societies was terminated from that date.
DIRT required financial institutions to deduct tax at source from deposit interest earned by individuals who are tax resident in Ireland. Between 1986 and 1993, the rate of deduction was the standard income tax rate and the DIRT was deducted in two half-yearly instalments in October and April. From 1986 onwards, banks and building societies were treated in the same way, both deducting tax from the interest paid to residents and the obligation to notify Revenue of deposit interest was done away with.
Companies could offset the DIRT tax retained against liability to corporation tax. In addition to DIRT, between 1986 and 1993, individuals liable at the higher rates of income tax were liable to tax on their gross interest at the difference between the standard rate and the appropriate higher rate and were obliged to declare this to Revenue when completing their tax returns. In other words, the depositors faced an income tax liability at their marginal rate in respect of the interest income, with credit for the DIRT already paid.
DIRT does not apply where the account holder is non-resident and makes a formal declaration to that effect to the financial institution. The law requires that the declaration should contain, inter alia, the name, address, and country of tax residence of the person entitled to the deposit interest. The financial institution has a duty under the legislation to satisfy itself that a deposit is exempt from DIRT before it pays any interest gross. To qualify for exemption, the deposit taker must hold a valid declaration in respect of the deposit showing the name and address outside the State of the person beneficially entitled to the interest. That declaration is made available to the Revenue Commissioners on request.
The advent of EU wide capital liberalisation from 1 January 1993 led to the very real danger that Irish depositors would choose to evade tax by transferring their funds to other EU countries without declaring interest on these foreign accounts to Revenue. It was considered that a tax driven outflow of funds would lead to upward pressure on interest rates as well as an unacceptably high loss of tax revenues. In order to deal with this situation, the DIRT régime was altered in three principal respects. These measures were intended to protect Exchequer revenues to the maximum extent consistent with the need to avoid significant capital outflows.
The three principal changes are as follows. Special savings accounts or SSAs were introduced on 1 January 1993, subject to final liability DIRT at the low rate of 10 per cent. This rate was increased to 15 per cent in the 1995 budget and was further increased to 20 per cent in the 1998 budget. This latter increase is with effect from 6 April 1998. SSAs are targeted on the more mobile funds held by small to medium investors and offer a higher net return than ordinary deposit accounts. There are a number of conditions, most notably that an individual may hold no more than £50,000 in an SSA. However, a married couple may hold two individual SSAs separately or two joint SSAs, each with a maximum of £50,000.
Standard rate DIRT tax now satisfies the depositor's full liability to income tax in respect of his interest income, even if he pays income tax at the higher 46 per cent rate on his marginal income. In other words, DIRT became a final liability tax. However, the interest subject to the standard rate DIRT remains liable for PRSI and the other levies and must be included in the taxpayer's return of income. This measure was designed to reduce the incentive for depositors to transfer funds into either low DIRT SSAs or foreign accounts.
Companies may now operate DIRT free accounts, although the interest income is subject to corporation tax. This measure provides a cash flow advantage for businesses, and so reduces the incentive for them to operate overseas accounts.
Since the introduction of DIRT, there have been two special categories of individuals who could receive a refund of DIRT paid. These are individuals over 65 years of age and disabled individuals who would not be liable, or fully liable, to income tax on their deposit interest because their taxable income would be too low. Such individuals are entitled to a subsequent refund or partial refund of the DIRT paid over to Revenue. Almost £12 million in refunds were paid in 1997, representing approximately 7.25 per cent of the gross DIRT yield.
Since its introduction in 1986, the DIRT system has collected approximately £2.5 billion for the State. While the annual yield was as high as £271 million in 1990, the amount of money collected has since fallen. The reduction in the yield reflects, among other things, the significant decline in interest rates, the introduction of the special savings accounts with their low rate of DIRT and also the general decline in the standard rate of DIRT. The yield to date for 1998 is £66.7 million. However, this does not include the October payment, which accounts for somewhere in the region of two-thirds of the total yield.
At present, it is the general practice of member states not to tax the interest income of non-residents and this has created opportunities for evasion leading to an erosion of national tax revenues. Member states have experienced large capital outflows to other member states from individuals seeking to evade domestic tax. It is anticipated that this problem will be reinforced by the adoption of the euro, which will create a single currency market within the participating states, thus allowing investors to move their funds to other member states without any exchange rate risks.
In the past, the European Commission has favoured tackling the problem by way of an EU wide withholding tax, at a minimum rate of 15 per cent. However, when the issue was last discussed in 1994, a withholding tax solution was not acceptable to certain member states. Like other member states we do not tax non-resident deposits. However, at the ECOFIN meeting in December 1997, member states agreed that a common EU framework to ensure a minimum of effective taxation of interest would be pursued. It was agreed that the Commission's proposal, based on the co-existence model, would form the basis for progressing the matter. The adoption of the co-existence model would give member states the option of either applying a withholding tax, levied at a proposed 20 per cent minimum rate by the paying agent, or of providing information on savings income to other member states, or using a combination of both systems. This model envisages that each member state will be required to either operate a withholding tax or provide other member states with information on savings income paid to residents. The proposal would also take account of the need to preserve the competitiveness of EU financial markets.
Ireland, in principle, has no objection to a common EU framework provided that it is effective in safeguarding tax revenues but does not at the same time undermine the competitiveness of member states' capital markets. Ireland supports the general thrust of these proposals. At this stage the draft directive is under active consideration by an EU Council working group. While it is the intention of EU Finance Ministers to complete the process by the middle of next year, there are a number of significant issues which still need to be resolved.
The report in The Sunday Independent last April that there was a sizeable number of bogus non-resident accounts in the AIB and other banks in the late 1980s and early 1990s has given rise to considerable and understandable concerns. I want to make very clear once again the Government's complete intolerance of those who engage in tax evasion and those who assist or abet tax evaders. Senators will appreciate that the pursuit of particular tax cases is a matter for the Revenue Commissioners. It has always been accepted that neither the Minister for Finance nor the Government gets involved in such cases for sound and obvious reasons.
The Revenue Commissioners have a wide range of powers to combat tax evasion. They have powers to access bank accounts although only in certain specified circumstances which I will outline. The powers available to Revenue were last added to significantly in 1992 when the Taoiseach was Minister for Finance. These new powers included provision of third party returns to Revenue on an automatic basis, reporting by domestic institutions which act as intermediaries in the opening of foreign bank accounts by Irish residents, provision of information on dealings by related parties such as suppliers, extended inspection powers in relation to certain tax records and accounts and attachment of amounts owed by third parties to a defaulting taxpayer. These were added to further in 1993 and 1995 when reporting arrangements and other duties were imposed on certain company advisers.
The Taoiseach was Minister for Finance in 1992 and most Members of the House will recall the criticisms which he faced from many quarters when he brought forward the proposals to strengthen Revenue's powers to collect the State's taxes. The reaction in 1992 was mild compared with the furore in 1995 when the then Minister, Deputy Quinn, brought forward measures in the Finance Bill which became known as the "whistleblowers' section". In fact, some enterprising student might find it interesting to go back many years and assess the reaction both inside and outside the Oireachtas to any proposals at various times to strengthen Revenue powers.
I referred earlier to Revenue's powers in relation to bank accounts. The main power is in section 908 of the Taxes Consolidation Act, 1997. This section, which emanates from the Finance Act, 1983, empowers Revenue to apply for a High Court order to require a financial institution to furnish certain information regarding an individual who is ordinarily resident in the State. The preconditions necessary to make an application to the High Court are that the individual failed to deliver a required return of income or such return is unsatisfactory and the authorised officer is of the opinion that the person has undisclosed accounts with the institution, or the institution has information which indicates that the individual's return is false. Where an order is given the High Court may, on application by the authorised officer, freeze bank accounts of the individual concerned.
Similar powers are available under section 907 of the Taxes Consolidation Act. Under this section, which was introduced in 1993, the appeal is made to the Appeals Commissioners rather than the court and the authorised officer must send a copy of any application to the taxpayer and the bank before the hearing. The taxpayer and the institution may also attend and present arguments during the hearing of the application and there are no account freezing powers. It is important to emphasise that neither sections 907 nor 908 applies to non-resident accounts.
The general right of a Revenue officer to enter a business premises to examine records, a basic requirement in relation to audit, does not apply to a premises where banking business is carried on.
Following the report of the McCracken tribunal, the Minister for Finance asked Revenue and the Department of Finance to look at whether new powers are needed for Revenue in tackling tax evasion. This is a wide ranging review and includes the question of extra powers in relation to bank accounts and the examination of the affairs of banking institutions. The outcome of this review will be examined in the light of the report of the Moriarty tribunal so that whatever measures are considered necessary in this area can be taken.
Senators will be aware that the Moriarty tribunal is charged with looking specifically at "whether the Revenue Commissioners availed fully, properly and in a timely manner in exercising the powers available to them in collecting or seeking to collect the taxation due by Mr. Michael Lowry and Mr. Charles Haughey "and also the adequacy of the current tax laws for the protection of the State's tax base from fraud and evasion in the establishment and maintenance of offshore accounts. Many aspects of the problems relating to offshore accounts will be similar to those relating to the issue of bogus non-resident accounts which are being examined by the Committee of Public Accounts.
I assure the House that the Government will be fully supportive of any measures which can assure that the liability of persons and companies to tax can be reasonably and effectively pursued. Any such proposals would need to be carefully examined to ensure they would be effective, could not be easily circumvented, would not needlessly disrupt the affairs of compliant law abiding taxpayers and would be proportionate in their effect on the financial sector when measured against the problems to be tackled.
As part of the ongoing review of Revenue powers officers from the Department of Finance and Revenue visited a number of other countries to compare Irish powers of access to bank information with those in the UK, Germany, the Netherlands, Sweden, France and New Zealand. This review found that all these countries, except for Sweden and New Zealand, adopt a policy similar to Ireland of providing the tax authority with the minimum access to bank information necessary to properly administer the tax system. However, within these parameters the tax authorities in the UK, the Netherlands, Germany and France appear to have greater access powers than the Revenue Commissioners have under existing Irish law.
This international comparison will provide very useful background for the completion of the review of our own Revenue powers. Senators will acknowledge that in completing this review the Government will have to ensure that a balance is struck between having wide ranging powers to reassure the public of the equity of the tax system and the need to encourage taxpayers to be compliant and to make it possible to settle liabilities. Revenue attaches great importance to promoting voluntary compliance as well as increasing powers.
While the public climate at present may dictate additional Revenue powers, and there appears to be scope for such moves, the poor reception in the business community in the past must be borne in mind. The extra powers which have been given to Revenue in the past have been used wisely by them. I have no doubt that any further powers will be used just as wisely, but as a people we must decide carefully how far we want to go in giving the State wide ranging powers of surveillance.
While the Revenue Commissioners have come in for a certain amount of criticism over the last year or so I must say I am very aware of the proficiency, expertise, perseverance and balance shown by Revenue in pursuing its task, something which is well recognised even beyond these Houses. They have improved their performance and delivery of services in the past ten years and over that period the amount of taxes collected by Revenue has more than doubled to £19 billion gross.
Developments which have been implemented by Revenue in recent years include the introduction of a self-assessment system, the use of targeted and random audits, more effective enforcement through the sheriffs and other mechanisms, the extended use of the tax clearance system, the development of a new prosecution system and a charter of taxpayers rights.
In view of these developments, we can compliment Revenue on the organisational changes they have made to ensure that the tax system works far better now than it did ten years ago. The challenge of managing and administering the tax system over the years should not be underestimated. I firmly believe that in recent times the strong growth in tax revenues is due in no small part to the determination of Revenue to continue to improve the tax collection system. Vast strides have been made in this area which is strongly reflected in the advances made in overall tax compliance. The greater efficiency and effectiveness achieved by Revenue has been one of the significant contributing factors towards the achievement of national budgetary and economic objectives.
The role of the Central Bank has come in for some scrutiny in recent weeks. Some of the comments made in relation to the Bank fail to recognise the objectives set for it by the Oireachtas. I emphasise, therefore, that the Central Bank's role in relation to the financial services sector is that of prudential regulator. The purpose of this regulation is, as the Governor of the Central Bank correctly pointed out to the Committee of Public Accounts recently, the protection of depositors' funds and the stability of the financial system as a whole.
Although prudential supervision plays a critical role in helping to avoid bank failure, it should be stressed that the object of this supervision as it exists in Ireland and in the EU is not the prevention of bank failure at any cost. If the main focus was on preventing bank failure regardless of cost, this could only be achieved at the expense of stifling competition, innovation and efficiency and would ultimately be self defeating. Neither is supervision designed to eliminate risk, but to set the parameters within which risk should be contained. We cannot compare banks with other commercial companies unless we first acknowledge that banks have high levels of borrowings in the form of deposits and interbank loans, even after taking into account the stringent prudential limits set by the Central Bank. This is in the nature of banking, not only in Ireland but everywhere else. The Central Bank's prudential supervision has provided Ireland with a safe banking environment for the ordinary saver, whether personal or business, and it is in all our interests to ensure that we do not lose sight of that. The expertise and experience required to conduct prudential regulation in a manner which guards against bank failure is invaluable, and I have no hesitation in acknowledging that the Central Bank of Ireland has performed this role with distinction and success. A recent survey in the 1998 global competitiveness report of the World Economic Forum placed it third in the world in terms of its efficiency and effectiveness in this regard.
Also, the range of services which the Central Bank oversees has developed significantly since legislative provision for supervision was first made in 1971. The Central Bank's powers and duties in relation to financial services supervision are now spread across a wide range of both primary and secondary legislation. They encompass the regulation of banks, building societies, non-bank financial institutions, including those located in the IFSC, as well as investment intermediaries and the Stock Exchange. The Central Bank also operates the deposit protection scheme and has recently been appointed the supervisory authority for investor compensation under the Investor Compensation Act, 1998.
Developments in the area of prudential supervision by the Central Bank have been influenced primarily by evolving international standards as well as financial innovation in Ireland and worldwide. Most directly, however, the Central Bank has been influenced by the development of European Union law, which has been a key influence in the evolution of the Central Bank's statutory role as prudential regulator of financial service providers.
Mention of European law leads to an issue which has been the subject of a number of recent debates and that is the question of confidentiality. Indeed, the Governor referred to this in his address to the Committee of Public Accounts. Confidentiality is a core element in the prudential supervision of financial institutions, not only in Ireland but internationally. It is seen as a necessary balance to the extremely wide powers of intrusion and information gathering provided to the Central Bank and prudential regulators in other developed countries in legislation. Supervisors need access to such sensitive information relating to bank capital and high exposure loans in order to assess the risks to the financial entities they supervise.
This information has to remain confidential because it may relate to problems in a bank which the supervisor is helping to resolve and which, if disclosed, could lead to a lack of confidence in the bank and consequent loss to customers and the State. Supervisors have access to sensitive commercial data which, if released, would impinge on a bank's competitiveness.
It is, as the Governor also pointed out, the guarantee of confidentiality which facilitates and promotes supervisory co-operation with prudential supervisors within Ireland and elsewhere with a view to providing a comprehensive international and domestic framework for supervising the financial sector. International exchanges of information occur daily. Supervisory authorities must be assured that when transmitting confidential information to their counterparts elsewhere the information transmitted is also subject to stringent professional secrecy requirements in the receiving institution. This is why EU law is so strict on the issue of confidentiality and why Irish law, which reflects this EU law, is equally stringent. If the Irish regulatory authority cannot be assured of the confidence of regulators in other countries the effectiveness of our regulatory system would be severely dented.
These are the Government's most recent initiatives in reaction to the issues currently affecting our banking sector. The Government has already announced that it is fully committed to assisting the Committee of Public Accounts to progress its ongoing investigations as rapidly as possible and to reach early conclusions. The PAC's first interim report on the 1997 Appropriation Accounts recommends significant additional powers to enable the committee to proceed with these investigations. Arrangements are being made within the Department of Finance, subject to legal advice, to respond as quickly as possible to the committee's recommendations.
The committee's report includes recommendations for legislative change to allow Dáil Éireann to request the Comptroller and Auditor General to undertake an investigation of the matter of the non-resident accounts and to give the Comptroller and Auditor General investigative powers in this regard. It is also intended to amend the Committees of the Houses of the Oireachtas (Compellability, Privileges and Immunities of Witnesses) Act, 1997, which would facilitate the Committee of Public Accounts in furthering its consideration of the matter.
I assure the House that the Government is doing everything to advance these matters in the shortest time frame possible while ensuring the appropriateness of any new procedures adopted. The Minister for Finance has already brought the various issues involved to the Government's attention. It is his intention, subject to legal advice, to return to Government as soon as possible with specific proposals to give effect to the recommendations of the interim report of the Committee of Public Accounts including the necessary legislation.
Also, Senators will be aware that the Government has agreed in principle to establish a single regulatory authority for the sector at the earliest date possible. The composition and terms of reference of an implementation group to advise the Government on the establishment of this authority were made public on 21 October. The implementation group, which comprises nine members in all, is being chaired by Mr. Michael McDowell, SC. Membership is drawn from the Departments of the Taoiseach, Finance, Enterprise, Trade and Employment, the Office of the Attorney General and the Central Bank. Mr. Joe Moran and Mr. Maurice Tempany are members also. The group has been asked to report to the Tánaiste and the Minister for Finance by 28 February 1999. This is not a decision that was taken lightly. The Government recognises the fundamental nature of the issues involved.
However, currently the regulation of the financial services sector is hindered by the multiplicity of regulatory bodies with differing regulatory powers and functions. Crossovers between formerly discrete subsectors of the financial services industry are increasing with the development of hybrid financial products and increasing concentration in the ownership of financial institutions.
In a small country like Ireland there is a case from both an effectiveness and efficiency perspective for building a critical mass of skills relating to financial regulation in a single location. The Government believes that this is the case. It will not be an easy task. The issues are complex and fundamental. However, the Government is determined that this initiative will succeed and is confident that the implementation group, with its wide range of expertise, will successfully address the issues.
I reiterate that the Government is very aware of the public concerns, and the concerns within this House, regarding the allegations levelled against the banking industry and is committed to doing everything necessary to help restore public confidence.
