Recommendations Nos. 1, 2 and 3 are related and may be discussed together.
Finance Bill, 2002 [ Certified Money Bill ]: Committee and Remaining Stages.
I move recommendation No. 1:
In page 11, between lines 30 and 31, to insert the following:
The next €15,000
30 per cent
the middle rate
This recommendation seeks the creation of a middle tax band between the 20% and 42% bands. Those on middle incomes are still paying a much higher proportion of their income in taxes than those on lower or higher incomes. The recommendation endeavours to push out the limit from €20,000, the cut-off point for the 30% rate of tax. It seeks to have the next €15,000 taxed at 30% and income thereafter taxed at 42%. This would create a reasonable amount of income before taxpayers enter the top level of tax.
The purpose of these recommendations is to provide for a third tax band of 30% interposed between the standard rate band of 20% and the higher rate band of 42%. As I have said on the many occasions we have debated this proposal, I have been engaged in a radical reform of the tax system during my tenure as Minister for Finance. Tax credits have been introduced and increased, tax rates have been substantially reduced and there has been significant widening of the standard rate band. All these measures have made the tax system inherently fairer, improved the incentive to work and contributed to the development of the economy. In particular, the changes in bands and credits have been of considerable benefit to those on lower incomes, over 380,000 of whom have been removed from the tax net altogether since I took office.
In the Dáil we had a discussion on amendments identical to these recommendations which were tabled with a view to assisting those on middle incomes. Regardless of what one might regard as middle income, the fact is that the focus of the Government's actions over the last five years has been to reduce the tax burden for the large number of taxpayers whose earnings are below the minimum threshold for the middle rate proposed by the Senator, that is, €43,000.
The Senator will be aware of the Government's target endorsed explicitly by the social partners in the PPF to move over time to a position where at least 80% of taxpayers pay tax at no more than the standard rate. Senators might also be interested to learn that for the present year the Revenue Commissioners estimate that close to 80% of taxpayers will earn less than €40,000, or about £31,500. These are the people the Government has specifically targeted in its tax reforms over the last five years. I said before that I am not opposed, in principle, to a third rate, but I also said this should only be considered when the present process of reform is completed. The fact is that in present circumstances the proposal would mean, in effect, a cut of 12 percentage points for higher rate taxpayers at a time when greater prudence in managing overall Government finances is called for. The proposal would cost €750 million in a full year – more than the entire income tax package of budget 2002.
Internationally, we are now ahead of the field in terms of the tax burden imposed on those who might be regarded as being on middle to low incomes. According to OECD data, a single person on the average production or industrial wage known as APW in Ireland has the lowest tax wedge in the European Union. The European Union average tax wedge is 45% while the figure for Ireland is 28.8%. Provisional data from the European Union relating to the same year show that the EU average tax wedge for the year 2000 for the single low paid person on 50% of the average production or industrial wage is 35% while Ireland's tax wedge on the same income is only 14.8%. For a married couple on 50% of the average production wage, the tax wedge in Ireland is 3.8% while the EU average is 32.2%. On incomes up to €30,000 for a single person and €50,000 for a married couple persons are better off in Ireland than in the United Kingdom.
The approach to tax reform comes down to one's judgment. I have often said that I will be happy to be judged on the combined effect of the five budgets for which I have been responsible. Each of my budgets must be taken as part of a sequence. The tax strategy I have pursued is bearing fruit in terms of higher take home pay and increased incentive to work and I am confident that the considered judgment of the electorate will be favourable when the general election is held. It is not possible to do everything at once. I am prepared to consider the question of a middle rate in a future budget.
We have debated this question before in this and the other House when the Fine Gael Party brought forward this proposal for another rate of tax and could debate it at length today. Some of my most strident critics would have to say I have done something to alleviate the tax burden. I think the people have noticed this. If one has been carrying an eight stone bag of potatoes on one's back for a couple of years, one will definitely notice when it is removed. The tax reductions have been so significant that people have noticed the difference in their take home pay and there are indications that they are appreciative of this and recognise that there has been an effective cut.
In previous years former Ministers for Finance, because of pressures from their parties, Cabinet colleagues, the social partners, lobby groups, etc., tinkered around with the tax system in that whatever amount one was going to put into tax reduction, whether £50 million, £500 million or whatever, one gave a little bit to everyone and one did a little bit here and there. I decided a long time ago when in Opposition, for the best part of my political career, that this approach was to be avoided and that one would never achieve anything by going a little way down the road with everyone, although one would certainly not cause oneself any political difficulties by so doing. That is a golden rule of politics, if one makes no radical decisions, one hits no trouble. However, the only way to avoid controversial decisions is not to make any. If one makes 100 decisions, one is doing well if 51 or 52 are right, although 48 or 49 will be wrong. The only way to avoid making 48 wrong decisions is not to make any decisions. That is the textbook approach to politics taken by politicians the world over, by some in Ireland also. I do not subscribe to it.
Due to pressures successive Ministers for Finance have always done small things, whether they had a small amount of money or no money. I decided we would never reform the tax system if we took that approach. I, therefore, adopted this approach and I am nearly at the end of the process. My goal has been to put the tax system on proper, sound and solid foundations which will make it easier for subsequent Ministers for Finance in that it will prove exceptionally difficult to make another hames of it, because it will be so simple and effective and one will be able to do particular things within the tax code. With a little more work it will be possible to use it to do a lot of different things, including marrying it with the social welfare code and integrate with other areas to do specific things.
I said during a Committee Stage debate on one occasion that one would be able to give tax relief to those with curly black hair if one chose to do so if one made the taxation system simpler. To do this, one has to make a number of big changes, of which I have made some, some of which have landed me in political hot water. However, no one ever made an omelette without cracking a few eggs. One cannot get to the end game, or what I hope to achieve, unless one does a few big things.
As regards tinkering with the system in having part of a middle rate band – the proposal in the recommendation is the same as that made in the other House which would cost €750 million, but what the Senator has in mind is a middle rate band for a small amount of income – that is a mistake successive Ministers for Finance have made, that is, doing a little bit for everyone. If one does a little bit here and there, one moves away from the main goal. If I had started to do things like that, I would never have got the standard rate of tax down to 20% and the top rate down to 42%.
It is simple enough to reduce tax rates, but I did not do this. I increased the amount of income one has to earn before one reaches that stage by increasing the tax bands or credits as they are now known. The great advantage of tax credits will be that when one gets to the end game, one will be able to identify those with black curly hair and give them a tax break. The other aspect is widening the standard rate band from 1980-81, the dark old days in terms of equality and everything else, but that was the tax system in place. No one ever suggested that we should double the tax bands. For some reason the Government at the time decided not only to make an adjustment for the Murphy judgment, which was necessary, but also to double the tax bands for the first time in the income tax code. I have just returned to the way it was – one band for everybody, although I have not completed the process and have yet to remove more items from tax allowance certificates. Mortgage interest relief and medical insurance relief, which are deducted at source, are no longer included in one's tax credit document as it is now called. I have also streamlined items such as medical expenses, etc.
My goal is to have a simple and effective system with a low tax rate which leads to a high compliance rate. I have said over the last year since Fine Gael announced a proposal for a middle rate that there is nothing sacrosanct about the rates payable. Why 20% or 42%? Before I was elected to the House, between 1973 and 1997, the top rate of tax, payable on very small income, was 77%. A 10% surcharge was levied in order that the 70% rate became 77%, the 35% rate became 38.5% and the 45% rate became 49.5%. It lasted for a number of years. The rates were reduced to 58% before we came into Government in 1987.
Those on the left have always amused me because they have never said that a tax reduction by a Government is wrong. Yet I have never seen them put it up when they came into Government. It has always been wrong. The 77% rate was thought to be sacrosanct and the 58% rate even more so. Why should the 58% rate be sacrosanct? Why should it not be 68% or 59.5%? God gave us the Ten Commandments only; he did not send us the tax bands – we had to make up those ourselves. These are not tablets of stones which must be abided by and they are not in the Constitution.
Look at the furore I caused when I reduced the rate from 48% to 46%. I did that because we had promised to do so during the general election campaign. Was I to ignore our manifesto and the vote of electorate and go along with some of the social partners who did not want to do it that way? There is nothing sacrosanct about tax rates. I could have easily reduced the rate to 42% if I did not increase the bands. There is nothing sacrosanct about the 20% rate either. If I accept this recommendation and make adjustments, I would dilute my resources rather than clearly focus on what I want to achieve.
I do not have a principled objection to a 30% tax rate at some time in the future, but my goal was to reduce the rates to 42% – or 40% if possible – and 20% during my term of office. The rate has been reduced to 42% as promised. Economic circumstances meant I was not able to reduce it to 40% in the last budget. I have reduced the PRSI rates for employees quite significantly. Our main adjustment of abolishing the existing self-employed and propriety director thresholds only requires a few more steps to be completed.
I have not completed the reform of the desperately complicated PRSI system. I intended to do more with this in the recent budget. Depending on the electorate I might be in a position to complete the programme. I regard PRSI reform as part of the reform of the taxation system. I oppose this recommendation.
I thank the Minister for his extensive reply. The Minister said there was nothing sacred about tax bands. Unfortunately, we now live in a society where there is nothing sacred about the Ten Commandments. We have debated this at length in this House and I do not want to prolong this discussion. I am glad to hear the Minister say that he does not object in principle—
I have said that before.
I did not hear the Minister say that before. The Minister also said that he will consider this in future budgets. In view of that, I will not press the recommendation.
As the Minister knows, this subject is very dear to me. As a practising accountant, I have dealt with many clients who were resident in the Republic but worked in Northern Ireland. The Minister has almost equalised our tax rates with those in the North during his term of office. When I first entered the House, the difference between the take home pay of those on either side of the Border was tremendous. The Minister and I agree with this recommendation in principle. If we are serious about equalising our rates with those in Great Britain and Northern Ireland, the first thing the Minister should do is reduce the top rate of tax to 40%, as it is in Northern Ireland, when funds become available to him.
The tax credits system and increase in the bands have ensured that individuals earning up to €30,000 or married couples earning up to €50,000 are now better off than people in Northern Ireland. When the Minister is back in the House this time next year, I hope that he will have reduced the 42% rate to 40%. He can then consider a third band.
I wish to record my thanks to the Minister for the way in which he has looked after the aged in the five budgets he introduced. I think I am correct that he has doubled the age allowance since he first became Minister for Finance.
I move recommendation No. 4:
In page 13, before section 6, to insert the following new section:
"6.–The Principal Act is hereby amended by the insertion of the following section after section 476:
476A.–Where an individual who subscribed, as part of the initial public offering, for shares in Eircom plc, has sustained a loss ("the loss") and such individual is not entitled under any other provision of this Act to relief for such loss than for the 2002 year of assessment the individual may in computing his or her liability to tax take a deduction equating to the amount of the loss at the standard rate.'."
This seeks to give effect to the Fine Gael proposal that those who bought Eircom shares and cannot avail of the capital gains offset should be allowed to offset their losses against other income taxes. I have no doubt that institutional investors in Eircom would be able to offset their losses against capital gains taxes. I suspect that most institutional investors sold their shares when they showed a profit. The Minister will rightly say that other ordinary shareholders could have done the same.
I speak on behalf of those who invested in Eircom with a view to a long-term investment. They did so because the Government promoted the scheme heavily and some investors might have believed the Government was underwriting the shares. The majority of people who lost money in the Eircom floatation were probably buying shares for the first time. A relation of mine invested his entire retirement lump sum in Eircom in the name of his three children, believing that he was making a long-term investment for them. Buying shares was the easiest thing for these first time share buyers to do. Having bought the shares, however, many of them did not know how to dispose of them. They were not familiar with stockbrokers, etc.
There is a difference between capital gains and income taxes and I know the Minister will have a difficulty with this recommendation. I believe there should be some concession for the ordinary person who bought Eircom shares and lost about one third of their investment. In view of that, I ask the Minister to look sympathetically at this recommendation.
This is possibly the barmiest suggestion I have heard in this House in nearly 20 years. I thought the Fine Gael Party had dropped the idea that those who lost money on the stock exchange should be compensated by the taxpayer. I gather it is still party policy. I am an Eircom shareholder and I have lost at least one third of the value of my investment. If this compensation was to take place, it would be the most diabolical precedent not only for future privatisations, but for any kind of investment in the stock exchange by individuals who are supposedly not aware of the facts and dangers of dealing. If this was to happen, all future privatisations would be subject to the caveat of the Government bailing people out if they lose money. All future Governments would say that they would not do this and that this was a once off. However, all future would Governments would be under pressure and parties would probably promise to do so at election time.
Although the Minister cannot say it, this must be seen as a straightforward electoral bribe of 485,000 discontented people who lost money. It is the action of a troubled Opposition party wondering who are the malcontents in society, identifying them and telling them they will give them their money back. That is what has happened. It is unscrupulous, unfair and will not happen. It will not happen because the Government has had the guts to stand up to it. If Fine Gael gets into power, no coalition partner will agree to it. It is another little flag flown by Fine Gael to titillate the electorate which will be dropped after the election because, in negotiations, the Labour Party, the Green Party or perhaps even the Progressive Democrats will reject it.
It is a non-runner politically and financially because nobody in any country in the world that I know of is compensated for capital losses of income on the stock exchange. It is a ludicrous and lop-sided suggestion, as the party itself knows. The problem is that it lacks credibility, which is why I am surprised that it is being proposed today. Even those of us who lost money, substantial sums in some cases, do not believe that the taxpayer owes us compensation.
I went into Eircom, as did everyone else, for a quick gain because I thought it was cheap. Let us be honest and admit that it was cheap. There is a myth being peddled, mainly by those proposing this motion, that it was too expensive. Eircom shares were cheap on the day and the evidence is clear. For nearly all the first year, they were far above the €3.90 flotation level. We forget this now because we are haemorrhaging losses. Those who bought at that price had the opportunity to get out at any stage during that period, but we did not because we were greedy and wanted more. The myth is abroad that the Government sold it at too high a price and that there was too much hype. However, the institutions, to which Senator Doyle referred, the experts themselves, bought in at the offer price and the majority did not sell, but held on and suffered losses also. We bought them and lost out. That is what happened.
Imagine if we lost money on Aer Lingus, Aer Rianta, the ESB, or any other company that was floated. Would we be compensated for it? Where would it end? If we bought shares in the banks because they were hyped and made a loss, would that be next?
Or if one backed a losing horse.
Indeed. That could be next. We could claim to be poor, unfortunate people who did not realise what we were doing when we followed the advice of the stockbrokers who were promoting the shares. Will we tell the Government that, because it compensated people for Eircom losses, it must compensate us for this and every loss on the market? It is cloud cuckoo land and pure bribery of an electorate which does not attach any credibility to this proposal. If it was credible, people would be tempted by it. It has flopped like a burst balloon as it should have done once it was seen for what it was.
We must put a lie to the claim that the shares fell because of the Government. We cannot honestly make political capital by sustaining that case. In retrospect, we know the reasons the shares fell were multitudinous but were nothing to do with the Government as it was totally out of the scene. It did its best by the taxpayer and attempted to give a reasonable price to the buyers. The Government's first duty, as it is of any Government, was to the taxpayer. If Fine Gael in Government acts as if its first duty is to those to whom the company was sold, then Eircom will have been given away for nothing with no return to the taxpayer.
The price of the company's shares was fair, as the Minister can confirm. There were two conflicting pieces of advice.
That is correct.
One recommended about €4.20 and the other about €3.70, while the offer price was €3.90. The Department of Finance was said to favour the higher price with the Department of Public Enterprise suggesting the lower price, but a compromise was reasonably chosen. Senator Doyle should remember the taxpayer. A fifth of the people bought these shares meaning that the other four fifths sold them to us. It was the property of taxpayers and the Department of Finance, whose duty it was to seek the maximum price from institutions all over the world, not just from Irish buyers.
Those of us who bought it were very sore. It may have been the biggest investment of our lives, but, having seen a large profit presented to us, we cannot ask for our money back because we now have a loss. That would be against every rule of the market economy. No stock market, exchange or shares could operate under such a system. We should not believe that this is a once-off because there are no once-off deals in Government. I remind Senator Doyle that income tax was a once-off deal. It was meant to be a temporary measure.
Let us put this one to bed. It was a bad company. What was wrong was that it was badly managed and had a bad board of directors. There were other reasons as well. Telecommunications companies plunged in the market at that time. Eircom was taken over because it was badly managed and the board threw in the towel. We are sorry and angry that we invested in it, but our anger should be directed against those who directed and managed the company, not the Government. We should not join in the cry of those who say that they should get their money back from the Exchequer every time they lose on the Stock Exchange. It is a non-runner and should be killed.
The intention of this recommendation is to give income tax relief at the standard rate to individuals for the amount of any capital loss sustained on the disposal of Eircom plc shares, provided that the individual had subscribed to those shares as part of the initial public offering of them. The text of the recommendation also provides that the capital loss must not otherwise be capable of being relieved for tax purposes and that the loss relief should be given for the 2002 income tax year. It is not clear if the intention is to give income tax relief only for the element of the capital loss incurred on the Valentia takeover or how individuals who suffered a loss on the disposal of the Vodafone shares – the shares received by Eircom shareholders following the disposal of the Eircell business – would be addressed.
In considering an identical proposal on Report Stage of this Bill in the other House, I explained that, apart from those persons who are actively engaged in a trade or profession of dealing in shares, any gains and losses arising from shares come within the capital gains tax system. Our income tax and capital gains tax systems, which have co-existed since 1975, do not allow crossover for income tax purposes. As far as I know, that is also the norm in other jurisdictions. Even within our own income tax system, there is only limited crossover between different categories of losses and income. For example, a landlord who incurs a loss in renting property can only set that loss against other rental income. He cannot set the loss sideways against any other income he may have.
The recommendation proposes ignoring these long standing principles in the specific case of Eircom shareholders. Apart from undermining fundamental principles in the tax code, such a measure would be unfairly discriminatory. Many individuals other than Eircom shareholders have suffered capital losses on their shares in recent times and they will not necessarily have other current or future capital gains to absorb these losses. It must also be added that the recommendation does not deal with Eircom shareholders outside the tax net.
The House will appreciate that, while it is targeted at the specific case of Eircom shareholders, the recommendation, if accepted, would inevitably trigger calls for special treatment for other investors who find that the value of their investment has fallen and that such requests would be difficult to resist once a high profile precedent, such as this, has been set. If the case is conceded once, it would, in equity, have to apply to all capital losses and this could have serious potential costs to the Exchequer.
Investing in shares always carries a risk in that the price of shares can, and does, fall as well as rise. Compensating individuals for stock market losses, even in the single instance now being proposed, would entail taxpayers in general having to make good losses incurred as a result of a stock market gamble by others. Expecting the generality of taxpayers to do that is not realistic and it is certainly not equitable from the viewpoint of the many taxpayers who decided not to invest in the shares in question.
Persons who invested in Eircom shares did so for the same reason as anyone buying shares, that is, to make gains and earn dividends from their investment. Some Eircom shareholders made a profit when they sold their shares after the initial flotation. Others have incurred losses but providing them with compensation by means of the proposal now before the House would, apart from the other considerations I already touched upon, represent a commitment of Exchequer resources for which there are many more pressing and deserving demands.
The proposal in this recommendation would also call into question the position of future flotations of State owned companies. This could not be a one-off arrangement. A precedent allowed for Eircom shareholders would inevitably compromise future Governments in relation to further State company flotations and for these reasons I will not support the recommendation, which is not a surprise.
Senator Ross outlined most of the arguments I made against this measure on Committee and Report Stages in the other House as well as the comments I made at press briefings in response to questions about the Fine Gael proposal. There is no point going over them again except to refer to the point the Senator made in his later contribution about the price at which the Eircom shares were set. If I recall correctly, approximately 550,000 persons initially applied to participate in the IPO but we must remember what happened immediately after that. The first accusation made was that we set the price too low.
That is right.
That was right because for the first 11 months the price was way above that; it went as high as 20% or 25% above the IPO price. The initial accusation was that the price was set too low, but it is amazing what happens in politics. A Cabinet sub-committee was charged with looking after this particular matter whose members included the Taoiseach, the Tánaiste, the Minister for Public Enterprise and myself. There were two sets of advisers in this matter – Merrill Lynch and AIB Capital Markets – and Senator Ross is correct that one recommended a higher price while the other recommended a lower price. This has been used by Fine Gael in the recent past and I heard its spokesperson say in the other House that the board recommended the lower price and, in future, the board should set the price. I have heard many strange comments in my time in politics but asking a board appointed by the State to decide the price at which shares will be set, while ignoring the owner of the shares, is unheard of.
I have engaged many advisers in my past professional life, from auctioneers to solicitors, but the call rests with the client who owns the house, bit of land, shares or whatever. The adviser, be it an accountant, solicitor or auctioneer, can advise the client to accept a certain price but it is the client's asset. As this was our asset, the right would have to be retained where the Government of the day, representing the people of Ireland, decides the price, not the board. To be sure that we were getting a fair price, however, we had all these advisers and the board had advisers as well. Approximately £80 million to £90 million – I will have those figures checked – was paid out to those advisers for their great advice over a period of years and to other people as well.
When the price was higher, everybody basked in the glory and said it was a great idea, but a funny thing happened when the price went the other way after about 11 months. It appeared in articles in newspapers that the person who was the cause of all this difficulty was the Minister for Finance, who held out for the higher price. That is correct but the article was not written to compliment me. I did not settle for the lower price, as other people wanted to do, because I was not prepared to wait all day. I come from a very old tradition, recognised by Senator Hayes and Senator Ross, in that my father was a small farmer and cattle dealer who believed that on the day, the man who turns up gets the bullock at the best price. If only one person turns up and the farmer is not satisfied with the price offered, he walks away and marches his bullock home again. When a price is agreed, the farmer shakes hands on it and if the price goes up, the best of luck to the person who bought it from the farmer. I come from that very old tradition so I was prepared to sit it out forever and a day to get what I thought was the best price because approximately 500,000 people applied for the initial offering but the other 3.2 million people were not in a position to go to their bank, financial institution, credit union or life assurance company to borrow money to effectively speculate.
What amused me about those on the left wing of Irish politics, the great socialist people, was that they wanted everybody to be little capitalists for a day and make a great profit. They even wanted to sell off the shares cheaply so that they could make even more profit. I am a student of the 1960s and I thought these people were against capitalism. There is no better form of capitalism than the stock market because people take a gamble. That is what happened but it went the other way and we have seen the consequences. People took the position that the price would increase, and it did increase.
I was standing in the breach for the 3.2 million people who were not in a position to speculate and I used the money I got wisely. The major tranche went into the National Pensions Reserve Fund and it also allowed us to do many other things. That is why I held out for the highest price and I make no apologies for that. I said at the time that I held out for the highest price and I am proud of doing so. I got the best price on the day and I agree with Senator Ross that we could have got an even higher price. One of the advisers said we would be able to get a higher price but as Senator Ross rightly surmised, we reached a compromise, which was a reasonable way to proceed. We settled on a price in the middle range. I did not want to be in a position where the price would rise by about 100% over the following year because people would then have said that I sold off the State silver too cheaply, so I held out for the higher price.
On the question of the advisers, I read a note written in 2000 into the record in the other House. The Government could have chosen to float the company at a higher price than it did, but chose not to do so. The Government received advice from one of the giant global co-ordinators for the offer, Merrill Lynch, to float the shares at £3.27 but set a flotation price of £3.07. The other advisers recommended a lower price than the Merrill Lynch proposal. In the immediate aftermath of flotation, the shares rose in price by 20%. The shares traded well above the flotation price most of the time since flotation. In the first nine months since flotation, from July 1999 to April 2000, the shares traded at or above the flotation price on all but 12 out of the 294 trading days. The average price at that time was £3.37, a premium of 10% on the flotation price. A total of £77 million was paid to advisers, and that includes those advisers, advertising and PR consultants, etc, so it was a profitable day out for all the advisers.
Apart from those principles, I could not possibly allow a total no lose bet in terms of any future flotation because one would have to be an idiot not to subscribe. They will say that if the price goes down, the Government will compensate us. That would not be a flotation. People bought the shares and many of them got out after the first year and made a profit and some people held on.
Due to the impending election, over the past number of months I have visited various parts of the country, including Roscommon, with various candidates, including a fair part of my own constituency. I think I met only one person who did anything about his or her Eircom shares. I am not sure where that was, but certainly this is not an issue.
That person must have sold his or her shares.
I have always believed that the people of Ireland are far more realistic than the politicians or media think they are. People are far more level headed on a wide range of issues than politicians of all parties and the media, who report on such issues, think they are. If one were to ask an Eircom shareholder if he or she would like to be compensated for the money he or she lost, he or she would be a right fool not to say "Yes, of course". It is same as saying to someone, "Here is €100. Would you like to take it with no strings attached?" Most normal people would grab at that chance. I do not think the people of Ireland are exercised about this matter. For these and other reasons, regrettably, I am not in a position to accept Deputy Doyle's recommendation.
I marvel at the knowledge of the Minister and Senator Ross about buying and selling shares, stockbrokers, propaganda and so on, but these are shares with a difference. Many bought them because of the propaganda and PR that surrounded the offer to buy them. Many ordinary people, those whom the Minister's former colleague, Mark Killilea, once described as the people who take their dinner in the middle of the day, bought them. It was their first time to buy shares and they did not know when to sell them. They were caught. They were amateurs in a professional game.
I can back a horse like anybody else. I backed a few last week in Cheltenham. One of them fell at the first fence and I lost my money. I accept that, but this case is different.
The horse did not fall, the jockey fell off.
That is right, the jockey fell off the horse.
That is not the horse about which Senator McDonagh was speaking.
They can keep an eye on him for Fairyhouse.
These are shares with a difference. Those who bought them were amateurs. They were advised to buy them and believed the offer was backed by the Government. Great propaganda surrounded it. I know of people throughout the country who invested a great deal of money in them. Some borrowed money to buy them. Many on social welfare also bought them, but they got caught because they were not familiar with the technicalities surrounding shares. I bought some of them, although I am not a big shareholder. The only other shares I bought were Bula shares and I have been waiting 20 years in anticipation of a big kill. Senator Ross may tell me when is the right time to sell them.
Many who had not bought shares previously bought these shares. They were not familiar with the technicalities surrounding shares, the position regarding stockbrokers or the ins and outs of when and when not to sell. It must be admitted by the Minister and everybody else that quite a number of ordinary people who were not familiar with the share scene were caught out. They bought the shares because they believed they were a safe investment due to the propaganda and Government and media backing of the share offer. They believed they could make decent money on their investment which could go towards the education of their children, but they were caught.
Their position is not the same as that of a person who lost money having backed a horse that did not win. The position regarding these shares is slightly different. The Minister must accept this. Many who bought them were first time shareholders who got burned and will never buy other shares. That is not good for the share market and it will not be good for future flotations.
I am talking about first time shareholders who were caught out due to their amateurism. I feel sorry for them. I know quite a number, including many friends, who got caught. Their position is more serious than that of a person who lost having backed a horse that did not win. This is a question of first time shareholders getting caught. They lost out through their amateurism. They bought the shares due to the propaganda surrounding their promotion. That is what Fine Gael is talking about and what Senator Doyle spoke about in regard to his recommendation.
There was an interesting debate on this matter, but unfortunately Senator Ross went along with the media hype against Fine Gael's proposal on this matter.
No, I led it.
If I had a portfolio of shares and bought and sold shares on the market on a daily basis like Senator Ross, who is a professional in this area, and had gains and losses, could I not write some of them off against gains for capital tax purposes?
That is the very issue Fine Gael raises on this matter.
Let us be clear on this. If the Senator was a dealer in shares like, say, a stockbroker, that would be his trade, the same as buying and selling sweets or paper, and he would be taxed on his trading profits. If, however, he was a casual investor in stocks and shares like most people here, the transaction would be a capital gain for him. All he would be allowed to offset would be his capital loss against his capital gain within the capital gains tax code. He would not be allowed to transfer the loss. If, say, he bought bank or Eircom shares and made a loss on some of them, he would not be allowed to offset the losses against his income tax on his earnings as a Senator.
I accept that.
A bank or financial institution is in the business of lending money. If a bank gave the Senator a loan of €5,000 and he was not in a position to repay it, it would become a bad debt which would be written off as such in the bank's profit and loss account. If, however, out of the goodness of my heart, I decided to give him a loan of €5,000 because I like him and he was stuck and he did not repay me, that would be a loss for me. I could not write that off against tax on my earnings as a Minister because lending money is not my business. I am trying to explain what the differences are.
An analogy was made by the Senator's party in some of its commentary that pension funds would allow for such a provision. I have provided for a gross roll up where income or capital gains tax does not apply to pension funds, but an executive tax applies when one benefits. Therefore, the situations are not the same.
I understand that. I was just making the point that if I had a portfolio of shares, I could write off losses against gains for capital gains tax purposes. If a person had only one share and made a loss on it, he or she could not write off that loss against capital gains because he or she had not made any other gains.
The person concerned would carry the loss forward indefinitely and if he or she made a gain sometime in the future, he or she could offset the loss.
I am quite clear about the difference between capital gains tax and income tax. I said the Minister would have a difficulty in accepting this recommendation and understand that. What Fine Gael is stating is that if people who buy and sell shares can get relief by way of capital gains tax by offsetting their losses against their gains, if a person has only one share and makes a loss on it, some provision should be made to allow him or her to offset that loss against tax, although I accept it could not be capital gains tax.
When one buys a new car and keeps it for five years, one sells it for much less than for what one bought it, but one is not allowed to offset the depreciated value of the car against one's earnings from one's business or profession.
I raised the question of tags yesterday and will give an example. Some local authorities moved from providing a refuse collection service to privatising it. The Waste Management Bill is important in terms of what is happening. Obviously, major expenditure will be made by local authorities to address the position. In my local authority in County Donegal over the past two years refuse collectors have had to pay an extra £15 per tonne to place waste in the council's landfill sites. Whether in providing for incineration or better engineered landfills, major expenditure will be made in this area. Our local authority intends to increase it by a further £15 per tonne over the next seven or eight years.
A refuse tag cost 50p three years ago, before it was increased to 75p. I could not believe the increase in the price of a refuse tag when my wife asked me to buy one on my way home last week. A tag now costs €2.50 and one has to pay €5 to fill a wheeled bin. Residents of counties where the service has been privatised by the local authority pay more than those in counties where ser vice charges are paid to the local authority. I cannot understand why this distinction remains, but I understand that the Minister has made a commitment to examine the matter once more. I envisage that refuse tags in County Donegal will cost between €7 and €9 by the end of this decade. The residents of counties where the service has been privatised face a huge disadvantage as they do not enjoy the same tax relief as those who pay directly to local authorities.
Section 6 of this Bill amends section 477 of the Taxes Consolidation Act, 1997, and provides for a tax credit for local authority service charges. The maximum amount of service charges qualifying for credit at present is €195. Last year, I increased the credit in respect of private domestic refuse collections and the bin tags system for taxable purposes to €195, bringing it into line with that available for local authority service charges. I am now abolishing the ceiling proposed for local authority service charges and private domestic refuse collection other than the charge under the tags system, which will remain at €195. Section 6 also brings forward the date by which local authorities must provide the relevant returns to the Revenue Commissioners from January to November to take account of the alignment of the income tax year with the calendar year.
The main purpose of this year's changes was to give unlimited relief for service charges paid to local authorities or private contractors. I retained the tax relief of €195 because of increases last year which resulted from difficulties in policing the tags system. Kildare County Council's charges have increased dramatically this year, for the reasons outlined by Senator Bonner, although I have not received my bill yet. I have introduced unlimited relief as various pit charges have increased and new rules and regulations have been introduced. I did not change the figure of €195 in deference to how this could be policed. Kildare County Council has privatised many of its services and one can claim tax relief on the fixed amount one pays to the private contractor. We will have to think of some way of policing a similar method of relief to apply under the tags system.
I will look at the matter in next year's budget with a view to substantially increasing reliefs, possibly in line with those which apply to the average one-off payment to local authorities or private contractors. Senator Bonner is correct that service charges have increased dramatically. I was not aware that the price of tags has increased in County Donegal, but I should have assumed that they had as overall costs for private contractors have grown. I cannot make changes at this stage, but I can make a commitment to make a change in the future.
I welcome the Minister's proposal in this section to extend relief for medical expenses to a wide range of relatives and others.
I made significant changes in this area in a previous Finance Bill and brought many reliefs together. People should be entitled to a tax break for medical expenses incurred while looking after a relative. I decided this year to extend the provision to people outside the category of dependent relative and to redefine some of the categories. These measures will be of considerable benefit to those concerned.
Is the Minister using the tax system to encourage people to provide for their pensions in this section? If that is the purpose of the section, I welcome it.
The Senator might remember that I made significant changes to the tax relief for the self-employed and directors in a Finance Bill two or three years ago. I introduced a new age-related sliding scale to determine the amounts on which one can get tax relief, I freed up the ownership of the fund and I established the improved retirement fund. The provisions of section 10 of this Bill relate to the relief on occupational pensions and additional voluntary contributions and the age-related mechanism for the self-employed in section 780 of the Taxes Consolidation Act. Self-employed people with an occupational pension will be allowed to retain any retirement annuity contract they may have, which they are not allowed to do under existing Revenue rules. The purpose of these changes is to encourage people, through the tax system, to provide for their own pensions.
I spoke earlier about putting aside money for the future, using the National Pensions Reserve Fund. I have believed for a long time that we will face a pensions crisis 20 or 30 years from now. We will have enough time to prepare for it, unlike Germany and France which did not look forward when they had largesse and are now paying a heavy price. There has been some controversy recently as regards defined benefits schemes, but I have believed for a long time that people will have to provide for their own pensions in the future. Defined benefit schemes, which are enjoyed at present by Deputies, Senators and civil servants, will be replaced by defined contribution schemes. A number of major companies have offered defined contribution schemes to new entrants in recent months, rather than defined benefit schemes. The growth of the fund will depend on how much one puts into it.
I have forecast for some time, long before I became Minister for Finance, that such schemes will be an increasing feature of Irish pensions policy. I have used the tax code to encourage people to provide for themselves, a principle which I am keen to uphold. Senator Doyle does not have any difficulty with my economic and political philosophy, although left-wing politicians and newspaper commentators seem to have such difficulties in abundance. People should be encouraged to look after themselves and this can be achieved in relation to pensions by using the tax code. I have made some changes to occupational pensions schemes to that end, although I would have liked to have done more. Further significant changes which were under consideration have been set aside for my second coming, as they would have complicated the pensions system to too great an extent at this point.
I move recommendation No. 5:
In page 21, between lines 18 and 19, to insert the following new subsection:
"(11) Provision shall be made for–
(a) a tax credit of up to €2,000 per annum for individuals engaged in the sports of Gaelic football and hurling,
(b) the relief to apply for those individuals whose names have been submitted to the Revenue Commissioners by the County Board for each County.”.
This recommendation arises from the Minister's proposal to repay 40% of tax paid over a certain period by élite sportspersons resident in this country. I welcomed this measure in my Second Stage speech yesterday, although I am not sure that it has attracted a great deal of support among Government Senators.
I agree with the Minister's comments yesterday that international golfers, athletes and jockeys have a short professional lifespan. As far as I understand it, the Minister proposes that they will be allowed, when they retire, to reclaim the tax they have paid. My recommendation proposes to give a tax credit to amateur sportspeople, the most prominent of whom are GAA players. I ask the Minister to a consider such a tax credit as a small recognition of those who entertain thousands of people on a weekly basis and as a gesture of goodwill.
I was surprised by some of the Second Stage contributions of Members on the Government side. I think the Minister was in the House for the short intervention of Senator Hayes, who is a well respected Member. The Senator appealed to the Minister to protect the principle of amateurism and asked him to consider the importance of cultivating and strengthening the capacity of amateur sports and the contribution they make to the community.
Senator Bonner also made a striking contribution and informed the House that he played for his county on a number of occasions.
Senator Bonner and I played on the same football team in college.
Senator Bonner travelled from Galway to Donegal to play national league matches on Sundays and all he could claim was the £5 travelling expense.
The Senator was noted for not taking prisoners.
Senator Bonner also pointed out that we live in changing times and the fact that GAA players put much more effort and time into training. Did the Senator not do likewise when he was playing?
Not at the same level.
The Senator then pointed out that, after playing matches, GAA players have to get up and go to work the next day. He made the case that some recognition should be given to GAA players and that is why I am proposing this recommendation. I know I have the support of some Members on the Government side.
As a former GAA player and administrator, I support this recommendation. Hurling is the greatest field game in the world. GAA footballers and hurlers are a wonderful group of athletes and they have brought much pleasure to many people for over 100 years.
I have watched the recent progress of Clarinbridge parish club in County Galway which took part in last Sunday's all-Ireland club final. This is a wonderful group of players from a small parish who trained diligently and effectively and won their first county title in 100 years. They trained through the winter and played in the rain last Sunday in Thurles. The same goes for Clarinbridge's opponents, Birr. These are wonderful athletes and great people, but they have families and jobs to go to. Given that there is so much money in the economy and things are going so well, some recognition should be given to GAA players. This recommendation is reasonable. It is a token and a gesture of appreciation for the wonderful entertainment these players provide.
One page of the recent Sunday Independent could have discussed the match between Clarinbridge and Birr while another page might have carried a headline to the effect that Roy Keane has negotiated a £78,000 per week contract. Professional golfers, soccer players and those in racing earn much money. I accept that they are professionals and I have an interest in all sports. However, the GAA is the poor relation. The Minister is a good GAA man and I appeal to him to examine the position of the GAA and recognise the magnificent work it has carried out. The association had a marvellous recent president in Joe McDonagh from Galway who introduced new ideas. The current president is also very good.
The time has come to recognise clubs and players such as those in Clarinbridge for the enormous contribution and the wonderful entertainment they provide. It is no longer sufficient to suggest that they can remain as amateurs. If they are left that way, many of them will fall away. That would be a great pity as the GAA is part of our heritage. It is important that the association is recognised and I appeal to the Minister to consider this recommendation which will be supported by many Members on the Government side. Deep in his heart I am sure the Minster will also see merit in the recommendation.
I wish to make my position clear. I am involved in the GAA. I was chairman of the Limerick county board for 12 years and I was in that role when the county last won the all-Ireland.
The Senator has a vested interest.
I gained the reputation of being a players' man as I was anxious to look after them. Players might be demanding and angry when one does not meet all their demands, but when I ended my year the players all recognised that I was with them. The Minister has met them and I am sure they would tell him the same.
I would support any recommendation or measure which helped GAA players, but the recommendation before the House is flawed. It proposes a tax credit of €2,000 per annum for individuals engaged in the sports of Gaelic hurling and football. However, is this open-ended? We are all engaged in the GAA. That is even the case with county and club officials who work with élite players when they start at under age level and when they cost money. Will such officials receive tax credits?
The recommendation also suggests that the relief should apply to those individuals whose names have been submitted to the Revenue Commissioners by the county board for each county. It is unfair to ask county boards to submit names as there are so many names they could submit. There is a large number of registered GAA players. Will all their names be submitted? The problem is that some players might not be as active as others. Will those who played in the club finals receive tax credits? I would support any practical recommendation which would benefit players, but this recommendation is not practical.
Senator McDonagh referred to the GAA as the poor relation, but that is not the case under this Government which has given more than any other Government to the organisation. That fact is appreciated by the GAA. The previous Government gave nothing to the GAA, but this Government has looked after the organisation. We must also consider the fact that the GAA is a 32 county association. I am in favour of looking after GAA players in a practical way and I will support any such recommendation. However, this recommendation is too flawed to be supported.
I am a little disappointed by Senator Rory Kiely who is noted as a GAA man.
In my Second Stage contribution to the Bill I went much deeper than the GAA. The Minister's proposal was introduced suddenly and the first I heard of it was from Des Cahill on "Morning Ireland". However, when I examined the proposal I came to the conclusion that it was introduced to help the small number of élite sportspeople. The idea was that they are big earners who reside in Ireland and pay a substantial amount in tax. As their sports careers only last a number of years the idea was to give them a savings through the tax system rather than saving money through their own system. I still believe that is the case as can be seen from the sports which are included. For example, the two best cyclists we produced could not have been resident in Ireland. Most of our top athletes would not have been resident in Ireland while earning their money. The new breed of rugby player might be resident here. Our golfers would qualify—
As far as I am aware only one of our top golfers is tax resident in Ireland.
That is correct. Quite a few jockeys are also resident. It is a good idea but it has hit a snag in relation to the GAA.
When I spoke on Second Stage I made the point that the top class footballers are not resident here while they are earning. My cousin, Packie Bonner, was not resident here. Although he is employed on a part-time basis by the FAI he will not gain any benefit from this because he has been resident in Britain for most of his career.
This might help some League of Ireland soccer players but I cannot see how it will help most of them because of the way they are paid and the amounts they receive. They are not élite sportspeople able to employ accountants. I doubt many of them would be in a position to produce documentation after ten years to claim tax relief. All League of Ireland clubs have had great difficulties with PAYE and PRSI. Senator Doyle's proposal of a tax free allowance or tax credit for soccer players might eliminate liabilities for the clubs.
Every county player when selected is as proud as we all were years ago when there was no money in the GAA. The times have changed, however, for élite GAA players. All county teams put in a great effort, particularly in the open championship and training, but only one team can win the All-Ireland Final and only a number of players in each team can reach superstar status. The only way GAA players get an income is through sponsorship, endorsements and advertising. If that were removed, however, the income of élite golfers and other such sportspeople would be increased. GAA players in full-time employment lead a hectic lifestyle and put in a great deal of effort through their jobs in the PAYE sector.
The recommendation fails in that it does not address the issue of policing. Who is engaged in the GAA? County panels are constantly changing. Will the lists be sent to the Revenue Commissioners every time there is a change? Also, many club players put in the same effort. Will they be cut off? Those players who played in Semple Stadium on St. Patrick's Day for their clubs put in as much effort as county players. Will they be eliminated?
I cannot vote for Senator Doyle's recommendation but the Minister should consult the GAA. I am not in favour of the GAA becoming a professional organisation with weekly wages for players. Some players are pushing for that but they would not do so if they did not make the county team. They are not pushing for it for the ordinary player. I have argued about this with members of the Donegal team which won the All-Ireland Final in 1992. One or two of them had a higher profile than others and their pals were left sitting in the background when trips to America and such like came up.
I argued with my own club man, Tony Boyle, about the idea of paying players. The GAA is a locally based, amateur organisation and I hope it never changes. I would like, however, to see a discussion with the hierarchy in the GAA and the League of Ireland. While players in the league are getting paid, there will be little in this for them. I hope the Minister will discuss the issue over the next year with the possibility of a change in the scheme in future that might assist League of Ireland and GAA players.
I have had no involvement at all with the GAA apart from stitching up the heads of those who play hurling and I am relieved to see more of them are wearing helmets. I echo Senator Bonner's sentiments that the Minister should consult the GAA to see what can be done. Senator Doyle's amendment deals with players engaged in the sport. They have made an enormous contribution to the cultural and sporting life of this country.
As have the officials.
Senator Bonner mentioned the fact that players work all day and then go out training. Looking at their fitness levels, it is amazing they have the time to hold down jobs unless their employers are extremely generous about allowing time off. I support Senator Bonner's suggestion that the Minister consult with the GAA to encourage players to stay in the sport.
I dealt with this amendment on Report Stage in the other House. It is not clear if the relief being proposed is intended as a tax credit of €2,000 per annum, as an annual allowance at the standard rate or as a sportsperson's marginal rate. While the relief is intended to be limited to Gaelic footballers and hurlers nominated by their county boards, it does not appear to be restricted to senior inter-county players and is open ended as regards the number of players from each county that can be nominated.
My unwillingness to give tax relief to amateur sportspeople has been portrayed in some quarters as a snub to the GAA, specifically its top hurlers and footballers. Tax relief for targeted sportspeople, which I introduced in section 12 of this year's Bill, is restricted to direct earnings from participation in sport. It is wrong to suggest that it can in some way simply be extended to cover amateur sportspeople. It does not, and cannot, apply where no earnings exist.
I am happy to stand over my record of support for the GAA. I came in for a fair amount of criticism when I granted the GAA €25 million in the 1998 budget to aid in the redevelopment of Croke Park. I am aware of the effort and commitment top players make in training and preparation and the pleasure they give to the sports-going public. These players have been referred to as élite athletes and I do not disagree with that description.
There are, however, sportsmen and women in other amateur codes whose dedication and commitment to their chosen sport is equally impressive and they were also excluded from availing from this relief. The question of whether these sportspeople should be paid or not is entirely a matter for their governing bodies, just as it is for the GAA with regard to its top players.
I am not prepared to agree with this recommendation. Even if I were, it could not be limited to GAA players. Once the link between tax relief and sports income is broken, it will become difficult, if not impossible, to stop its extension to people engaged in sport as a leisure activity rather than a competitive one. This would prove very costly to the Exchequer.
The GAA is already well treated in the tax code. The current tax exemption for the income of sports bodies was introduced in 1927 specifically for the games of Gaelic football, hurling and handball, and was extended to other sports in 1963. Where a sports organisation wishes to reimburse its members, be they players, coaches, selectors, referees or officials, for bona fide reasonable expenses they incur in attending training sessions and matches, those payments are not assessable for income tax. There is no set limit which can be reimbursed tax free in any year; it depends entirely on the facts of each case.
The tax code cannot be expected to contribute more than this to amateur sports. I do not intend to give further tax relief in these circumstances as a substitute for salary and for these reasons I cannot accept the amendment. The debate on this issue has been ongoing and I take on board what Members have said. The purpose of this section is to give a tax break to people who earn income from sport and who have short earning careers. It is not to compensate people who give of their free time to excel at any particular sport, be it tennis, handball or golf.
Many amateur sportspeople throughout the country spend hours each week in preparation for their sport. Their dedication makes them get up very early, take time off from work, attend special training courses and forego overtime and other earnings. Canoeists and many young swimmers in their teenage years get up at 5.30 a.m. to train to be good at their chosen sport.
The purpose of this tax break is not to reward people for volunteering in their chosen activity, it is to reward those who earned all or part of their living from sport and paid tax. At the end of their career they will be entitled to select ten of their tax earning years and have their tax liability recomputed. If they paid no tax in those years, they will not get any back tax. For example, if they had at their disposal the services of an excellent accountant like Senator Bonner, who organised their affairs in such a way that they did not have to pay tax, this tax break would be of no use. Many sportspeople, such as boxers, rugby players, soccer players and jockeys, who earn money from their sport have a very short earning career. In most instances advancing years means retirement from the sport and in many cases injury means premature retirement. The purpose of this provision is to allow for their tax liabilities to be recomputed at the end of their careers.
While other jurisdictions do not have tax reliefs such as this, they allow people to average their income over a number of years so as to ensure they do not have to meet all their tax liabilities in one year. I know many people who tried to make a living from their sport, but at the age of 23 or 24 years had to retire from it. They did not do their leaving certificate, nor did they pursue a profession. As a result they had no career to look forward to and ended up in menial jobs. They gave great enjoyment to us all for a short period of their lives during which time they also had to pay a lot of tax. This scheme attempts to give them a break. It is designed to be of benefit at the end of their careers, when it may be better appreciated.
The provision cannot be extended to amateur sportspeople, including those involved in the GAA, because they are not paid. If the GAA or any other organisation decides to pay its players, they will automatically qualify under the scheme. The provision refers to footballers, it does not specify that they should be soccer, rugby or gaelic players. However, if it was extended to amateur sportspeople, it would mean, for example, that someone like Senator Bonner, who was an excellent gaelic footballer, would, on retirement from his sport, be able to claim tax relief on the earnings from his chartered accountancy practice. I know of two eminent barristers who played gaelic football for their counties. Is it suggested that they should get tax relief on their earnings as barristers? Does anybody suggest that prominent amateur sportspeople who become Deputies should be able to claim tax relief on their Oireachtas salaries?
If a person is reimbursed reasonable expenses for travelling to matches and so on, the Revenue Commissioners do not pursue him or her. However, a tax liability will apply to the reimbursement of unreasonable expenses as that implies that a profit element has been incorporated. That applies across the income tax code.
Senator Bonner pointed out that the provision applies only to those who are tax resident in this country. One of my purposes in introducing it is to encourage sportspeople to reside in Ireland. Charles Haughey's introduction of a similar measure for artists in the 1960s encouraged artists to relocate in Ireland and has given the country a very good name. If sportspeople wish to reside in this country, they will be able to avail of this tax relief. They would also pay income tax at the rate of 42%. The provision may encourage Irish sportspeople to be tax resident here.
Senator Bonner mentioned rugby and soccer players. The provision will apply to soccer players because, owing to the diligence of the Revenue Commissioners, most soccer clubs make PAYE returns on players registered as employees. Others are on contract and would be paid on a self-employed basis.
Senator Rory Kiely and others referred to the position of the GAA. As Minister, I have been generous to the GAA. In 1998 I was heavily criticised from the expected quarters when I gave £20 million for the redevelopment of Croke Park. The allocation was spread over three years in payments of £7 million, £7 million and £6 million. However, I announced it as one sum because I knew I would be heavily criticised from the same quarters, regardless of whether I gave £1 or £20 million. When we do the same for other organisations the same rules do not apply, but official Ireland gets very exacerbated when the GAA receives anything. The best comment on the debate at the time appeared in a letter to one of the national newspapers. The correspondent pointed out that according to his calculations, in the three years from the awarding of the grant, approximately £50 billion would be given by the Government to public services. He went on to say he now understood that the GAA was responsible for homelessness, low social welfare payments, accident and emergency problems in the hospitals and hospital waiting lists because it had received £20 million, whereas the balance of £49,980 million was of no consequence.
I am well aware of the criticisms that can be made when anything is done for the GAA, but it is unreasonable to expect the tax code to reward people for giving up their free time. If the GAA or any other amateur organisation wants to reimburse its members, it is a matter for it. Senator Bonner referred to the leasing proposal made by Senator Doyle and his party. It is not practicable.
Some years ago I wondered if it was possible to introduce a tax regime to honour sportspeople. When I mentioned it in my Department it was pointed out that a predecessor had considered the idea but did not pursue it. I decided that this provision was the most appropriate way to proceed and hope it will be a success.
I am not in a position to advise the GAA on how it should deal with the remuneration issue. I am aware of the arguments made by Senator Bonner and others. Like him, I believe that people will want to wear their county jersey, irrespective of the cost. I know many people throughout the country who have sacrificed businesses, family and personal relationships to pursue their chosen career and never got any payment. People like Senator Rory Kiely have been involved in the GAA for a lifetime and given up many of their free hours for the love of the game. As far as I am concerned, that continues to be the situation.
I missed Senator Bonner's nice remarks yesterday. He and I were in school together and played sports alongside one another as well as against each other. We had such enthusiasm for sport that even if we had to pay to take part, we would have and I think that almost all people who play sports would share this attitude.
I am glad to see that Senator Bonner and I are on the same side at last.
I am disappointed with Senator Kiely's contribution. Of course this proposal is flawed; the Opposition's proposals are always flawed, because we do not have the backup services that are available to the Government. We have put forward this proposal on principle and I thought that people would support us on this. I know that Senator Bonner, in his heart, supports it. However, when I call the vote, his heart will go one way and his feet the other.
The GAA players could get some money if this proposal was a practical one, but it is not. This is a case of political expediency.
Not at all.
A general election will be held in the near future.
Will the Minister clarify the question of tax relief for sportspeople who have been resident here for tax purposes? Could there be gap years? For example, if somebody was a sportsperson for 15 years—
The Senator may raise this when we debate the section. We have to deal with the recommendation first.
Burke, Paddy.Caffrey, Ernie.Coghlan, Paul.Coogan, Fintan.Costello, Joe.
Doyle, Joe.Henry, Mary.McDonagh, Jarlath.Ross, Shane.
Bohan, Eddie.Bonner, Enda.Callanan, Peter.Cassidy, Donie.Chambers, Frank.Farrell, Willie.Finneran, Michael.Fitzgerald, Liam.
Gibbons, Jim.Glennon, Jim.Glynn, Camillus.Kiely, Rory.Leonard, Ann.Moylan, Pat.O'Brien, Francis.Ó Fearghail, Seán.
Tax relief was made available for the owners of heritage sites and buildings of architectural merit in order to help maintain them. Is the Minister improving that provision in this section?
Section 14 is essentially an anti-avoidance mechanism. It inserts a new section, 409C, into the Taxes Consolidation Act, 1997, for the purpose of restricting the use, by passive investors, of relief under section 482 of that Act. This relief is available in respect of expenditure on the repair, maintenance or restoration of certain buildings by the owner or occupier of such buildings. The buildings concerned are those which have been determined by the Minister for Arts, Heritage, Gaeltacht and the Islands to be of significant scientific, historical, architectural or aesthetic interest and determined by the Revenue Commissioners to have reasonable public access.
The way that relief is given is to treat the amount of such expenditure as an amount of loss in a trade which under the Tax Acts can be used to reduce a person's income liable to income tax. Subject to certain transitional arrangements an individual, who as a result of participating in a passive investment scheme claims relief under section 482 as owner of such a building, will be limited to €31,750 in the amount by which he or she can reduce his or her taxable income. Broadly, a passive investment scheme is defined as arrangements under which:
A person (who will make a claim under section 482 as owner) takes an interest in a building from its original owner;
At that time, or in the next five years, the building is determined to be an approved building for the purposes of section 482; and
The arrangements are such that the original owner has influence over how expenditure on the building is to be incurred; or, the original owner is entitled to participate in the tax benefits; or the original owner may reacquire the interest.
Recommendations Nos. 6 and 7 are related and are to be taken together by agreement. Is that agreed? Agreed.
I move recommendation No. 6:
In page 29, before section 16, but in Chapter 3, to insert the following new section:
"16.–Section 45(I)(iii) (Donations to approved bodies, etc) of the Finance Act, 2001, is hereby amended by the insertion of "or shares, property or other investments whose value is not less than €100" after "sums of money amounting to at least £200.".
This recommendation is due to a letter all Members received from the Irish Charities Tax Reform Group which asked that the Finance Act, 2001, be amended to reduce the minimum level for an individual donation to a charity from €250 to €100. The vast majority of donations received by the sector are in the €65 to €125 bracket which, as the law stands, are not tax effective, either for the donor or the institution concerned. The group also asked that the legislation be changed to extend the meaning of the relevant donation from cash only to cover gifts and donations of non-cash assets such as shares, securities, property and other investments.
The Minister said yesterday that a number of Members had raised the issue on Second Stage. I have tabled this recommendation as requested by the Irish Charities Tax Reform Group. If the Minister is not prepared to accept it, I ask him to look favourably on it in next year's Finance Bill.
This recommendation has been well explained by Senator Doyle. Despite the great increase in incomes in recent years, there has not been a great increase in the amounts people are giving to charity. This recommendation is to take account of the fact that donations are perhaps at a lower level for those charities which would benefit. The Minister should take account of the fact that most of what is allowed will not cover most of the donations made and reduce the level to €100.
I also spoke about this matter yesterday following receipt of the letter from the charities organisation. The lower one goes the more likely one is to get claims. Perhaps administratively that is the reason the level is in place. While I cannot support the recommendation, the Minister indicated yesterday that he would look at the matter again. I asked a question about subscriptions to the church – if subscriptions are over €250, they are eligible for tax relief and if the limit was €100, the church would be in a position to gain more. My local church in Dungloe is newly designed by modern architects, but the roof must be replaced after less than 30 years. People would gladly give additional money if there was tax relief. It would be a great way to encourage local people to contribute more money to reroofing the church. I agree with this, in principle, and hope the Minister will look at the matter again before next year.
The first recommendation proposes to allow income tax or corporation tax relief for donations of non-cash items to charities, while the second proposes reducing the minimum qualifying donation from the current level of €250 to €100. Regarding the donation of non-cash items, under existing law donations must be in the form of money in order to attract income tax or corporation tax relief. Capital gains tax relief does apply at present to a non-cash item donated to a charity. In such cases the donor is exempt from CGT on making the donation while the charity is also exempt from the tax in the event of the subsequent disposal of the item for cash and it uses the proceeds for charitable purposes. I am not prepared to go further than this at present.
There could be difficulties with income tax or corporation tax relief, for example, when the value of an unusual donation is open to question. No such difficulties arise when the donation is in the form of money. In addition, the means whereby the relief is given in the case of a PAYE donor presupposes the individual has paid income tax to the value of the relief being claimed. While there is some prospect that this is so when the donation is in the form of money, such relief may be broken where non-cash items are involved.
Regarding the second recommendation, I have given some thought to the idea of reducing the de minimis amount. I have also received representations from the Irish Charities Tax Reform Group on this point. However, I have decided against making any change for the time being for the following reasons. The relief is already very generous, being at the taxpayer's marginal rate of tax. For an individual donor this could be as high as 42%. A reduction in the minimum donation would have the effect of increasing the number of donations qualifying for relief and be costly to the Exchequer. Donations in any year may be on a cumulative basis. Therefore, a monthly donation of €20 would qualify for the relief.
This new scheme of tax relief for donations has only been operational for about one year. While I understand the desire of those concerned to have the lower limit reduced further, I am not aware that the €250 limit has had any negative impact on the level of donations to charities. The Irish Charities Tax Reform Group has informed my officials that charities have found the new relief very useful in obtaining donations.
I am also concerned that any reduction in the minimum donation could significantly increase the administrative burden on the Revenue Commissioners in dealing with a large number of small claims, particularly regarding donations made by the PAYE sector, which would have to be claimed by charities at year's end. The cost to the Exchequer of the donation scheme, as expanded last year, will not be known until after the end of the current year and any reduction in the minimum qualifying donation would increase the cost to the Exchequer.
In summary, as a scheme of tax relief for individual donations to charities was only brought forward last year, it seems much too early to make the kinds of changes being proposed. For these reasons I am not prepared to accept the recommendations at this time.
Am I right in saying this section increases the BES schemes?
The allowable limit is now €750,000.
I said on Second Stage that I read somewhere that there was greater interest in the BES schemes since the Minister announced these proposals. Am I correct in saying that?
I imagine there would be. Some years ago I reduced it to its present limit. It was £250,000 or €370,500 and I decided to increase it. It had been reduced some years ago because the recommendation was to target BES schemes at small businesses, which was what they were originally intended for. Before making the changes the BES scheme was being used very effectively, but for non-risk business activities other than small businesses. I believed reducing it to a lower level would target it where it was desired to impact in the first place. I have now decided, after the recommendations of others, that the limit is a bit low and have decided to increase it to €750,000. I suspect there will be a considerable level of increased interest since the level was reduced, but I do not want it to be too high as the reason I reduced it in the first place in my second Finance Act was to target those small businesses in need of BES-type schemes. I imagine there will be considerable interest again now that the limit has been upped.
This section restores interest relief in certain cases. This has been in and out in recent years like musical chairs. Where do we stand now regarding interest relief on property?
We are back more or less to where we started from.
That is the answer.
I have only introduced five budgets but seven Finance Bills. I introduced a second Finance Act in 1998 on foot of the Bacon recommendations and a second in the year 2000 on foot of the other Bacon recommendations. Most items in both Bacon reports related to increases in supply, but some fiscal changes were also recommended. The Government decided on further changes. This led to second Finance Acts. We changed stamp duty regulations, increased relief and so on. The whole purpose of Government policy in this area was to allow first-time buyers an opportunity to get a foothold in the market in which we deemed it correct at the time to interfere. I decided at the end of last year that the market had become very flat and that it was necessary to get the investor back in, so I have allowed interest relief again. I have, more or less, gone back to the position in all these areas which pertained when we started.
There are lots of lessons to be learnt in this area by everybody. The main lesson is that it is quite dangerous to interfere in the open market.
I thank the Minister for the changes he made to the town and urban renewal schemes in relation to rental rather than owner-occupied properties. In each of the Minister's Finance Bills, I have sought a rural renewal scheme for west Donegal. Five towns in west Donegal were selected under the town renewal scheme but, to be quite blunt, it has been a disaster in Donegal. Towns only 20 or 30 miles outside Dublin were entitled to the same reliefs as backward places in west Donegal where the population has declined over the years. To regenerate the west coast of Donegal, I am looking for the same rural renewal scheme as that brought in for the Upper Shannon basin. I know there will be difficulties until that scheme is finished.
Again I ask the Minister for such a scheme and I hope he will be here this time next year. Maybe at that stage he will be in a position to consider it. A rural renewal scheme incorporating tourism projects should be introduced. I know many other counties along the west coast will be pushing for such a scheme but I am using this opportunity to ensure this is kept at the top of the Minister's agenda.
Senator Bonner has raised the problem of west Donegal in each of my Finance Bills. As he rightly pointed out, he has pressed the case for extending the rural renewal scheme to west Donegal. The Upper Shannon rural renewal scheme was one of my initiatives and it has worked very effectively in the area encompassed by it. It is a pilot scheme which has been quite effective in some parts of the Upper Shannon area. Some areas have done better than others. I have extended the deadline to 2004 but it is the intention that it be reviewed long before that. We will then consider the possibility or the desirability of extending similar initiatives to other parts of the country. I would be loath to give a commitment at this stage that there will be a continuation of a similar type scheme in the future because that is a matter which will be the subject of consideration.
I have stuck with the area I defined on the first day and I have not extended it by a millimetre. We drew the line on the basis of electoral divisions which have been in place for 100 years or so and bear no relationship to towns and so on. Unfortunately, I divided Deputy Mattie Brennan's parish in half. Deputy Brennan is retiring at this election, not on account of what I did to his parish but because he has decided it is time to step down. I have not been able to accommodate Deputy Brennan who is a long-standing friend of mine.
Parts of Ireland need incentivisation. How we go about it in the future is open to consideration on foot of what we learn from this project. Places like west Donegal, parts of Mayo, parts of Cork and many other areas need something to encourage development. It is an open question, which has to be further debated, as to whether the tax system should always be the way to do something in this regard. I do not know the answer. Incentives brought in over the years, including the urban and rural renewal schemes and the various other things I have done, have certainly inspired people to do things they would not have done before. People seem to want to do anything rather than pay tax to the Collector General. They would prefer to invest in any type of scheme and get a tax break. Maybe that is not just an Irish phenomenon but it is certainly true in regard to the seaside resort renewal scheme, the urban renewal scheme, the town renewal scheme and the various other schemes.
The living over the shop scheme.
I brought that back again.
The Senator can be sure west Donegal will be considered in the future but I am not giving a commitment as to what a new scheme might entail. Many people will say the Upper Shannon scheme was a great success. Other schemes have been such a success that they have caused other problems but all that will have to be assessed.
I thank the Minister for repealing section 376 of the Taxes Consolidation Act. One of the biggest headaches I always had when completing tax computations for clients was caused by the famous section 22 add back. I am delighted to see it is gone. I read somewhere that the Minister said it had outlived its purpose.
I would like to raise the issue of capital allowances.
I have left that. I may consider it in the second coming as well.
I hope the Minister will do so.
If I recall, this was originally section 32 of the Finance Act, 1976. I always had the heading on the computation-add back section 32 of the Finance Act. I think that was the section. It caused more headaches for accountants and practitioners than any other section and has long outlived its usefulness. As much a streamlining measure as anything else, I decided to abolish it. I will consider the question of capital allowances in a future Finance Bill.
This is a very innovative measure to assist people who have gone beyond the stage of independent living and who are not yet in need of nursing home care. It is an intermediary step. I hope there will be a good take up of this measure because it is very welcome.
Does the Minister propose to give tax relief to people who give donations to capital sports projects? For instance, a gentleman we all know has made a donation of £50 million. I know it is outside the scope of this provision but it appears people who make a contribution of that kind will be able to get a tax break as a result. Is that the case?
The purpose of the scheme is exactly as the Senator has pointed out and it is modelled on the changes I made to charities tax relief last year. If one gives a donation to a sports body for a capital project, one will get a tax break but the project must be certified by the Department of Tourism, Sport and Recreation as a capital project – in other words, one cannot get a tax break for ordinary membership of a GAA, golf or tennis club; it must be for a capital project. The capital project must not be of a value greater than €40 million.
My only reason for doing that was to remove any controversy, that is, that we were bringing in some relief which would go to Campus Stadium Ireland. Whenever it goes ahead, it will cost in excess of €40 million. If a person made a contri bution to a capital project such as that and if it was less than €40 million, they would be entitled to a tax break if they were a tax resident. If one is not a tax resident, the tax break does not apply.
I hope this section is used by many sports bodies, and GAA clubs in particular, to raise money. There are many things in this Bill, including this, that merit more attention and publicity because they are innovative and will help sports organisations.
This section deals with shipping and there seems to be two methods that now apply regarding taxes.
In most other EU countries there are alternative methods of computing corporation tax for shipping companies. Companies can opt for the traditional profit and loss account or tonnage tax methods. The case for Ireland adopting the tonnage tax method has been put to me for a number of years. The European Commission proposed this and said it does not contravene state aid regulations. I did not introduce this in previous Finance Bills because the European Commission regards us as having an aggressive corporation tax regime. However, I decided to introduce it in this Bill. Under the tonnage tax method a company can compute its profits based on tonnage and then apply the rate of corporation tax to it.
It sounds very complicated.
Alternatively, a company can opt for the traditional profit and loss method. This was introduced to try to ensure that Irish flag carriers are registered here. Other European countries found that their flag carriers were being registered in non-EU countries and they were losing their fleets. The same thing was going to happen in Ireland. Despite the complexity of the system, the shipping companies pressed for it for some time and welcomed its introduction.
I welcome the tonnage system option for the shipping industry. Tonnage also plays a very important part in the fishing industry. The Minister said this has been introduced to standardise our regulations with those across Europe. Perhaps the Department of Finance, or the Department of the Marine and Natural Resources, could examine how the fishing industry is being treated across Europe. Our fishing industry is being strangled by the tonnage and quota rules implemented by the European Commission. We note from afar how the Dutch and Spanish fishing industries are treated. We feel they are being treated separately and the rules are not fully implemented, unlike in Ireland.
The volatile level of the price of fish makes an argument both for and against the tonnage tax system. If income or corporation tax was based on the tonnage, one would know what one would have to pay on an annual basis. Tonnage is now the basis on which our fleets are allowed to catch fish. I would like the Minister to examine the extension of this option to fishing trawlers. Unfortunately, there are only one or two Members of the Oireachtas who fight the fishing industry's case.
The Minister introduced the seafarer's allowance some time ago. At the time I pushed for the extension of the £5,000 allowance to fishing boat crew members. Many of them are on fishing trawlers far from home for weeks on end and engaging in activity that is much more dangerous and intrusive on their lives than those involved in the shipping industry. The Minister could not extend that allowance at the time and I ask him to consider doing so now.
I note the Senator's comments and I am sure he has made them known to the Minister for the Marine and Natural Resources. I am afraid it is not possible to extend the tonnage tax to the fishing industry. It does not apply in any other EU country and I can envisage all kinds of state aid complications. We are in enough trouble with the EU in such matters without bringing more on our heads. The purpose of the tonnage tax is to keep EU shipping companies internationally competitive. We have not been the initiators in this but we have initiated many other corporation and capital gains tax schemes. I wanted to take my time in introducing this so that we would not look even more aggressive in this area.
I am sure there are many parts of the tax code that I have changed and many other things I have done that I should regret, but I do not. The introduction of the seafarers' allowance of £5,000 is one area that I am half sorry I ever touched. I have been inundated with requests from many groups seeking special allowances for their professions. Seafarer's allowance or similar schemes are available in other countries. The original purpose of our seafarer's allowance was to assist people working on ferries. It was not intended to involve fishermen. If I am pressed much further on this, I will abolish it.
I have no difficulty with the purpose of this section, particularly as it is being brought in on a phased basis. I always thought it was unfair to sole traders that they had to pay their taxes half way through the year whereas companies had an additional six months after the year end. I presume the filing date for companies remains nine months after the year end.
I raised the issue of file and pay returns for sole traders two years ago but the bullet is about to hit its target in the coming tax year. In principle I have no difficulty with it on an ongoing basis. It must be remembered that all accountancy practices are not Arthur Andersen or KPMG and that there are only a certain number of qualified staff who can complete certain aspects of tax returns. The difficulty I have is that smaller practices have a cross section of account types. There are company accounts, which have a filing date of nine months after the year end. They can arrive at any time during the tax year. In my accountancy practice I occasionally used different accounts dates for the benefit of the taxpayer. In general, the account date for all small sole traders is 31 March. This year we are changing our professionals to 31 December to ensure they get the best possible relief on their withholding tax or get credit on an actual basis.
We are still left with small clients and they make up the majority of customers in a small practice. I do not intend to change any of those to 31 December. Otherwise we would have no work for two or three months. I intend to leave them. That will not be a difficulty in the long term because the 31 March accounts will fall within the following tax year.
We will have a problem in October this year in that if I attempt to keep my company returns going in the same way and change my professional clients to December, I will not be able to cope at the same time with the smaller accounts. I realise that we have nine months from the 31 December filing date, but, in principle, they must all be filed by 31 March. We cannot physically do the accounts now due until March, which only gives us a few months to prepare the returns.
Also, returns this year have to be filed with the Revenue Commissioners, whereas before we dealt with the local tax district offices which always gave a certain leeway when there was a December filing date because of the unsocial aspect, but this year the tendency has been to enforce the law. Under the tax Act, one has up to 30 days to file a late return where before one has been up to date. The summer holidays are upon us and I have a Seanad election, as the Minister knows. Therefore, most small practitioners will be in a terrible heap. I ask him, therefore, that the filing of returns to 31 January be accepted just for this year. We do not seek to obstruct the system, but it is not possible for small practices to cope. There will not be a difficulty the following tax year as the accounts date will fall on 31 March. I hope the Minister will advise me that there will be leniency. Small taxpayers carry a 5% or 10% penalty, which is much more harsh on them than on larger taxpayers who can afford to pay.
This section is aimed at bringing forward the payment date for corporation tax and brings it into line with that in other EU and OECD countries. It has a cash flow benefit and will be introduced in stages over the next five years because of the considerable amount of money involved. I also introduced the provision that small companies can base their tax returns on the figure for the previous year or 90% of that for the current year. Most choose the previous year.
The Senator referred to the new pay and file dates for self-employed persons. I worked in a small practice and heard from my partner about the problems that will ensue because of this. As the Senator said, 31 October is a good date and, if administered properly, will stop people coping with different dates as they will have completed everything on the one date. It is the first year and I recognise that there will be problems for staff, but matters will improve with time. In ten years' time there will probably be an earlier pay and file date as in the United States it is 15 April.
There were discussions with the Tax Emolument Liaison Council about flexibility, but we have written the date into law. The Revenue Commissioners will exercise flexibility after 31 October, but it will not be a question of months. I know from my own experience as a practitioner and as Minister for Finance that if I gave any specific guideline beyond a certain date, that would become the new deadline. I remember the work that had to be done in 1988 when the McSharry interest amnesty carried a 30 September deadline which allowed all taxpayers to get their accounts up to date. That was also the first year that returns had to be filed by 31 December, which was extended to 31 January because accountants had worked from July to September to meet the first deadline and then for the following three months. I remember working to 2 a.m. or 3 a.m. and over Christmas to meet the deadlines. There will be flexibility for a short period. I do not have any good news for the Senator or my partner because I must start on some date. There will be problems the first year. The Revenue Commissioners have been given a lot of extra work to do in recent years, from tax credits to realigning the tax year with the calendar year, and they, too, will be in a heap.
I cannot recall the Senator's question about the date of 31 October.
It concerned the final date.
I am afraid that we must live with it. I also wish the Senator the best of luck in the forthcoming elections.
I plead again with the Minister, not because we want this every year, but only for the first.
I remember the Senator's last question now. It was about filing returns with the Office of the Collector General. The reason for this is that under the new pay and file date arrangements, more emphasis will be given to the cheque. A new form is being designed to accommodate those who want to pay earlier and have the cheque cashed or to pay by direct debit on that date. If it was done through the local tax offices, cheques would be issued everywhere. It was decided, therefore, to deal with all cheques in the one place. There is a production line set up in the Office of the Collector General where forms will be dealt with efficiently. If someone wants to make an early return, however, it can be sent to the local tax office by 31 July.
My own experience is that all small traders wait until the very end to get their accounts done and, even if they are done earlier, they will not sign them until the end of January. I hope to force practitioners' clients to choose the earlier date as a lot of difficulty was caused on 31 January, as it will on 31 October. People must get used to having accounts done and sent in on time, which will help practitioners. I predict that in five years' time it will operate smoothly. The statistics show that a colossal percentage of returns are filed in January every year. This must change. As I said, this will help practitioners and avoid the situation, which I know well, where completed accounts are left for months because the client will not sign them since he or she wants to wait until the last moment. The Revenue Commissioners will exercise discretion, but I am not inserting a date into law. This reflects my blunt and crude way of doing many things.
I am fully behind what the Minister has done, but I am concerned about the position in the first year.
Not all accountants will be running in the Seanad elections.
In all seriousness, I speak for all accountants. We all had accounts that were held to be sent in at the end of January, but which will now be sent in in the last days of October. I refer to small clients, fee payers, on whom we have built our businesses, but who do not have their accounts done. Whatever the Minister may say, my staff and that of every other accountant have a huge workload. Like the Minister, I have been at this game for 30 years and in that time the accountants always got the brunt of the workload in terms of implementing these changes. All I am asking is that this year we are given a little leeway.
On the issue of the file and pay forms going to the Collector General, that is the same as the bogus tax account returns made in November. I was able to leave in some forms to that office the day before the final date simply because I was due to come to the Seanad, but I had to send one client of mine in a taxi to Dublin that evening to ensure she had her forms in the office in O'Connell Street by 12 o'clock. Practices in the west face many more difficulties because we have to make arrangements. We are given until 12 o'clock on 31 October to file with the Collector General and if someone is living in Limerick, like Senator Kiely, they can walk into the office but one has to drive from Donegal to Limerick. People will probably be given one or two days' leeway with the postal system but the local tax office was much handier for practising accountants.
This section reduces the off-course betting tax from 5% to 2%. Will that be resolved by the bookmakers and not passed on to the customers? Is there a regulation for that?
This section allows that to be done in that the bookmaker can pay it. Under the existing law it has to be collected from the customer but one of the sections allows it to be absorbed and not charged to the customer. Some years ago it had to be charged to the customer – I was not the Minister at the time – because the big firms were trying to force out the smaller operators by getting them to absorb it, but this allows the charge to be absorbed by the—
So it is up to the bookmakers to do that?
Yes, they can charge it or absorb it themselves.
I move recommendation No. 8:
In page 150, before section 123, but in Chapter 6, to insert the following new section:
"The Minister shall prepare and lay before both Houses of the Oireachtas a report on the Government's policy to a merger of Allied Irish Banks and the Bank of Ireland.".
The reason for this recommendation, as I am sure the Minister is aware, is that the issue of whether the Bank of Ireland and AIB should merge has suddenly come into the public arena and there has been fairly widespread public debate about it. This is as a result of the chief executive of the Bank of Ireland raising the issue and proposing a merger between Bank of Ireland and Allied Irish Banks in recent weeks. He did this in several interviews and also during a dinner with journalists recently. It is a seed which he has planted and which he hopes will become acceptable in the Irish financial and banking landscape.
I would like the Minister to make a statement on this proposal or to report back to the House on it with a statement of Government policy about such a massive merger. A merger of this sort would be monstrous in financial terms and also in Irish terms. The Tánaiste, as the Minister will know, has already given the thumbs down to this particular merger but it is much more important that we hear the views of the Minister for Finance and the Government speaking with one voice and letting us know that this merger is a political non-runner and the Government will frown upon it.
The reasons are apparent. There are two protections in-built in the system against such a merger, but they are not absolute unless we have Government disapproval. If the Government was to give its blessing to such a monstrous merger, I suggest there might be a possibility of it getting through. The two safeguards we have are the Competition Authority, and we recently had a much strengthened Competition Bill, and the European Commission. The reason the Competition Authority will show an immediate interest in this – the Director of the Competition Authority recently spoke about this very issue in theoretical terms, which obviously could be translated into practical terms – is because if such a merger was allowed, approved or encouraged by the Government, the Bank of Ireland and AIB would have 80% of the crucial and sensitive markets which would affect virtually every consumer in this country.
I refer, first, to the very lucrative credit card market and, second, to the transaction markets, cheques and current accounts. Everybody knows that credit cards are highly lucrative for the bank and extremely penal to the consumer. If the duopoly that exists in the credit card market, which charges absurd rates above 18%, is allowed to become a monopoly, there will be no competition and these guys will run riot. I say that in a measured fashion because we know the way the banks have already behaved in this and other markets. They behaved disgracefully towards the consumer and the same week this suggestion was made the European Commission found that they were running a cartel. If a cartel becomes a monopoly, the situation will become worse. We would have a monster, with no competition, ruling the Irish retail banking market and it is important that the Government, and not just the Tánaiste, gives a thumbs down to a proposal of this sort.
As evidence of the European Commission's office interest in such an area, I cite the case of two Swedish banks which wished to merge last year. They were the second and the fifth largest Swedish banks, but they were stymied by the European Commission. They had just under 50% of these markets to which I referred but, nevertheless, it was considered they would have an unacceptable domination in those markets and the merger was stopped. It is important, therefore, that the two biggest banks in Ireland should not be allowed to take 80% of the market.
The arguments for the merger, as put forward by the only person who proposed it but who, because he is in such a powerful position in the Bank of Ireland, must be taken seriously, are that one large bank worth approximately €25 billion, as opposed to two banks worth approximately €12 billion each, would be able to protect itself more easily against predators from overseas because it would have more muscle, be more expensive to buy and be in a better position because of its diversification geographically.
That does not make sense to me because that is the old fashioned idea that for some reason it is better for the banking system to have, as its principal player, one big Irish bank rather than two foreign banks. If we know anything about the behaviour of Irish banks, it is that they would behave far worse than two foreign banks if they were to come in and offer competition. I would prefer if the Bank of Ireland and AIB were taken over and run by, say, the Royal Bank of Scotland or some other bank than for them to merge and take advantage of their utterly dominant position whereby there would be no competition in the market. That is a menacing prospect.
It would not only affect the retail area. We talked already about stockbroking. Bank of Ireland and AIB own the two biggest stockbrokers in Ireland. Imagine what would happen if Davy's and Goodbody's were merged. That would mean that one company would take the lion's share of the corporate stockbroking business. The launches to which Senator Doyle referred would almost inevitably go to that one company. There would be no competition. There would be very little competition in the insurance market because of the dominance such a merged company would have there. There would be very little competition in the investment management market because Bank of Ireland Asset Management, which was very successful recently, and AIBIM, which is not so successful, would be forced to merge. One conglomerate would rule nearly all the financial markets as well. That is a dangerous prospect. It is not only dangerous for customers but in stockbroking there would be a danger regarding the charges and commissions to customers in that there would be no competition in the area of commissions.
Such a prospect would not only be dangerous for customers, it would have a political dimension which no government can ignore. A merger of this sort would involve massive branch closures, what is called rationalisation. There would be no sense in it. In every town where there is one Bank of Ireland branch and one AIB branch, one of those branches would be closed. That is what is called achieving synergies. If that were to happen, it would mean more unemployment. A large number of people would be unnecessarily laid off. Loss of competition means less work in the long term and certainly in this situation.
I should remind the Minister that the green card played as the support for this floated idea is the worse card in light of the fact that the only banks that have introduced competition in the market recently are foreign ones. The most obvious example is the Bank of Scotland, not the Royal Bank of Scotland. When the Bank of Scotland came into the mortgage market here, it caused a furore because the old cartel had to get up off its backside and cut its mortgages and it did so. The first threat was posed to it when the Bank of Scotland came into the market. That was welcome and everybody was delighted when a foreign bank forced the banks here to do something to help the retail client, the poor mortgage payer who had been screwed by the banks for so long. If we were to permit a merger of this sort, there would be no way that a small foreign bank could enter the market here in a small way and do that.
I also remind the Minister that he wisely sold ACC and ICC to overseas banks. He wisely said, "Let them come in and if anybody will introduce competition, they will do so." I presume he sold the banks to the highest bidder, which was the right thing to do. On that occasion there was no reluctance to sell two Irish State banks to overseas outsiders. I hope in this instance there would be no reluctance on the part of the Government to sell to anyone overseas who would act in the interests of the consumer.
Having said that, I do not think that will happen. The chief executive of the Bank of Ireland should have thought a little more carefully before he floated this idea because the obstacles are probably greater than he thought. Having come from Australia and having been there a long time, he may not have been aware of the strength of the teeth of the European Commission and the Competition Authority. It is important that a clear statement should be made by the Government that we are open to competition from abroad, that we are not fearful of foreign banks coming in and that we have no particular fear of the fact that AIB or Bank of Ireland may be taken over. That is the modern world in which we live. We cannot any longer say the green card will work and we want to be in control of our own banks. Our banks have behaved disgracefully. In the modern world there are takeovers every day of one bank by another.
I ask the Minister to make a statement to the House on this matter or to promise to report back on this issue because it is so important in light of what is happening in the banking world and in light of the fact that the Irish consumer has been crucified for so long.
It is wonderful to listen to Senator Ross speak in such a moderate tone rather than his usual ranting and raving to which we have to listen, especially regarding the Eircom shares.
It is obvious the Senator will not be standing for the Seanad again.
Yes, that is true. I accept what the Senator said, that the merger of two major banks would not be in the interests of a number of people he mentioned, insurance companies, stockbrokers, and particularly the customer. The Senator referred to possible bank branch closures. The banks have a bad record of closing branches throughout the country. The issue of the Bank of Ireland and AIB closing branches in towns and cities was debated in the House. If the two banks were to merge, there would a great number of branch closures. For that reason, such a merger would not in the interests of the consumer or the taxpayer.
I also take this opportunity to agree wholeheartedly with everything Senator Ross said. We have debated this matter on many occasions, particularly during Private Members' time. I have not yet heard Senator Ross rant or rave when it comes to debates on financial matters. I must agree that I am of one mind with him on most occasions on such matters, but there may be other matters on which he rants and raves.
Before he made the point, I was thinking that I would prefer the Royal Bank of Scotland to take over the AIB, rather than the Bank of Ireland and AIB to merge. Bad and all as is the service customers currently get from their banks, if those two banks were to merge the ordinary punter using the local branch would not get a service – the service would be given to the big customers. I support fully what Senator Ross said.
While there had been some discussion in the middle 1980s to the effect that AIB and Bank of Ireland should merge, no concrete serious proposal for such a merger has been put on the table. In the circumstances the matter has not been put to the Government for consideration and the Government has not adopted a policy stance as to what its response to such a proposal would be. Given the range of permutations for possible combinations among financial entities, it would hardly be productive for Government to spend its time drawing up contingency positions for situations that might never occur.
In any event, the issue might not be one solely for the Irish authorities, Government or otherwise, to adjudicate upon. Any proposed merger by large financial institutions would almost certainly have to be considered by the EU Commission, to assess its impact on competition in a European perspective.
I am aware that the Tánaiste and Minister for Enterprise, Trade and Employment, Deputy Harney, has said she would oppose such a merger on competition grounds. National authorities have a clear interest in ensuring a small number of financial institutions do not achieve an overly dominant position in the local banking market. The Government also has to have regard to the possible adverse employment implications.
The legislative position that would arise in the case of the merger referred to by the Senators is not clearcut. As I mentioned, European law also comes into the equation and various domestic legislative provisions would come into play. Holders of banking licences are exempt from competition legislation at present, but this does not mean that their non-banking business is exempt. It is possible that the Competition Authority would become involved in the implications for the insurance business of banks of any proposed takeover or merger. As the Competition Bill, 2001, removes the exemption, a banking merger will not be different from any other when it becomes law.
The takeover or partial acquisition of a bank is addressed in Chapter 6 of the Central Bank Act, 1989, which deals with acquiring transactions. The approval of the Central Bank is required for the acquisition of any holding of more than 10% of a bank. The approval of the Minister for Finance is required if the assets of a licence holder who controls more than 20% of the assets of all licence holders in the State are being acquired. The Minister can consent if he or she is satisfied that the Central Bank's decision to approve or refuse is in the interests of the orderly and proper regulation of banking and that the proposed acquisition will come within the provision of legislation dealing with mergers and takeovers. The Minister should consult the Minister for Enterprise, Trade and Employment and other Ministers, as considered appropriate. The Minister can refuse consent if he or she considers that the exigencies of the common good so warrant.
Would a merger between the two national banks be in the national interest? The national champion argument is based on the premise that it is of strategic importance to Ireland to have a strong Irish owned bank, capable of competing in a pan-European market. A similar issue was dealt with by the Commission in a recent case involving the proposed merger of two Swedish banks. In its initial statement of objection, the Commission analysed the impact of the merger purely in terms of the national market, not based on the pan-European market. I understand the Swedish merger will not proceed.
Should we strive to prevent foreign ownership of Irish banks? It is sometimes argued that a merger between the Bank of Ireland and Allied Irish Bank would pre-empt a foreign takeover of one of the banks. As the Minister for Enterprise, Trade and Employment has pointed out, however, more than half of the shares in AIB are owned outside the State. One could claim that on this basis it is difficult to sustain the argument that foreign ownership, in itself, is harmful to Irish interests. As the two banks have their headquarters here, their outlook and orientation could be expected to be more in tune with the needs of the domestic economy and enterprise. A balance needs to be struck between this obvious advantage and the other benefits of a competitive banking market.
The merger referred to in this recommendation raises many issues, some of which would also arise if a large foreign based bank was to make a bid for one of the banks involved. As I have indicated, the legislative position is quite complicated and will evolve as the Competition Bill is enacted. I put it to the House that the Government will address this issue if and when it arises in a thorough and comprehensive manner, with full regard to all relevant factors. I welcome a debate on the possibility of a merger, as someone who knows that an argument other than that made by the Minister for Enterprise, Trade and Employment and Senators Ross, Joe Doyle and Bonner courts the possibility of utter public odium. As I spent 25 years courting such odium, I am not likely to be influenced by it now.
The Government has not taken a position on a merger between the Bank of Ireland and Allied Irish Bank and will not do as it would be ridiculous, given the many possible permutations and combinations. I do not breach Cabinet confidentiality by saying it has not been discussed by the Government in my time in office, to the best of my recollection. I am certain that a debate on the matter has not been initiated during this Administration. I can safely say, however, that the feelings of my Government colleagues would be the same as those expressed by Senator Ross and others this afternoon. I am confident that a poll of Members of the Oireachtas would reveal that they are all in the same camp.
I welcome this debate as a means of raising other important issues. I attempted to raise these issues some years ago when I established a strategic review of banking in my Department. Its report touched on the issue of a merger of Ireland's two largest banks. As part of the build-up to the debate, I established an internal working group comprising officials from the Central Bank and my Department. The group's report was not too favourably disposed to the merger. I was disappointed that the strategic review did not lead to a wider debate on many banking issues at the time as I had hoped.
It is desirable that the possibility of a merger be debated as an important issue, if not the most important, but it is perhaps unfortunate that the group chief executive of the Bank of Ireland, Mr. Soden, proposed it at this time. I cannot criticise him, however, as throughout my political career I have raised certain matters despite being told not to do so. Senator Bonner was not in the House during my years of political wilderness in Fianna Fáil, when I was told, "You should not bring up this issue, it is the wrong time, it will cause consternation and the party will be brought to its knees." I have been told all my life that it is the wrong time to make certain political decisions, including by the various éminences grises in the Department of Finance. I have never been deterred by those who have said that it is the wrong time to bring forward a proposal.
Mr. Soden might be blamed for bringing up this matter at an inopportune time. The only time I met him was on the morning he was appointed to his position, when Mr. Crowley, the Governor of the Bank of Ireland, brought him to see me as a courtesy call. Mr. Soden seemed to be a pleasant individual, but we did not discuss mergers or anything else. His background is in the southern hemisphere and I suspect he has been influenced by his experiences there. This leads me to believe that events in the southern hemisphere in recent years have been particularly influential and Mr. Soden may have admitted as much in a recent interview. If he had continued to work in Ireland rather than going to Australia 20 years ago, he may not have come forward with the idea of a merger. When I established the strategic banking review I was influenced by what I had read about developments in the southern hemisphere.
Most thinking in relation to this matter seems to align with that of Senator Ross who is supported by competition law. There is little chance that Mr. Soden's idea will be seen in a favourable light under EU law. It is worthy of debate, nevertheless, and the points he has made should be considered. It would be easy for me to say that I am on the side of the angels, as politicians are supposed to be in an election year, but I am too old to change the habits of a lifetime. It is important that other views are considered. I accept the points made by Senator Bonner and others. Senator Ross, who has expressed his thoughts today, and other journalists have written erudite articles on this subject in recent weeks. It is important that people are aware of all considerations and take them into account.
The argument that neither the Bank of Ireland nor Allied Irish Bank is a genuinely Irish institution can legitimately be made. A proper analysis of their shareholdings would demonstrate that most shares are held by institutions outside the State. Therefore, they are not, in effect, Irish owned, although they are Irish managed. As I said in interviews at the time of the strategic review which did not attract much comment, people in southern hemisphere countries woke up one morning to discover that their banks are not managed at home. I said at the time that we will wake up some morning in 2005 or 2006 to find that Allied Irish Bank and Bank of Ireland, or whatever they are called then, are not managed in Ireland. People will ask how it happened that they came to be controlled in Germany or the United States.
It might be argued whether we should have allowed it to happen rather than sleep walking into it. I set up the banking review group in 1999 so we would at least think about the issue. The group reported, but, unfortunately, there was not much debate. The report is on file and people can examine it if they wish. This is one of the issues raised.
Now that we have joined the EU and are members of the euro we no longer have control over interest rates or the value of our currency as we no longer have a currency. I have often expressed the view that in a small, open economy those tools were more valuable in theory than in practice, but at least we had them. Senator Ross has a view on the euro. We have control over budgetary policies despite efforts by our European partners to centralise such matters. However, who knows what will happen regarding such policies in ten or 20 years.
If I designated County Donegal as a tax haven for building, most people would start their operations in Letterkenny because that is where activity is based. Therefore, if all of Europe is the same, one would be mad not to set up one's business near Berlin or Paris or in the UK. There are about 50 million people in the UK and almost 80 million people in Germany. Why would one bother coming to Ireland which has 3.8 million people? That is what we must guard against in terms of our European policy. To attract business, a small country like Ireland must be nimbler, more flexible, be able to do things better, have a better education system, better people, better taxation and lighter, non-repressive regulation.
I used an analogy which Senator Bonner will recognise. It is hard to believe that the Senator and I played centrefield together. We were quite fast. The Senator was a better athlete than me and, if I remember correctly, he won Leinster championships at 800 metres. We played on the same team and then played against each other years later in college football. I always found that a 14 stone fit guy would run over a 10 stone fit guy. The same will be true in the European economy if everywhere is the same. We will lose out in time unless the Irish economy is more competitive, can do things differently, is nimbler, craftier, better educated or whatever. We must guard against oppressive regulation. We should have good regulation which is nimbler, better and more effective.
The same principle will apply regarding banks. AIB and Bank of Ireland are big banks in Irish terms, but many of their operations are outside the country. AIB's shares have risen in value recently, but the combined capital value of the two banks would not be more than about €25 billion. I think their capitalised values are about €11 billion and €14 billion. In European banking terms, €11 billion is very small and €25 billion is fairly reasonable. There is a difficulty in the Irish economy regarding technology. We wish to increase the size of the technology sector and Irish-managed banks will take that issue into account.
Senator Ross is correct to point out that profit is the bottom line. I am an innate capitalist like the Senator because it is the system which works best and creates more wealth. There are problems with capitalism. Excessive capitalism brings its own problems, but no one has found a better system. Capitalism is the best system because it responds better to the aspirations of people. Not everyone wishes to be a multimillionaire, but they might want an extra holiday, an extra day in the pub or to sit at home. The free market allows people such choices. It also creates extra wealth which can be used to help those who cannot help themselves. I am a total believer in this system.
Banks operate to the bottom line which is the return to their shareholders. That is their job with which I have no difficulty. However, there is a major difference between excessive profitability and a bank which is managed somewhere else. A Government can have some influence with AIB or Bank of Ireland in particular markets or if the economy is going in a particular direction by way of a telephone call or a chat because it is in the banks' vested interests as they are based here.
Senator Bonner and I have been complimentary about foreign direct investment in Ireland over the years. We are both chartered accountants and would always have felt a little aggrieved if we got nowhere having made a presentation to the IDA or Enterprise Ireland. However, if someone from the US came along with a large brochure they were welcomed with open arms and looked after. I do not know whether, like me, Senator Bonner felt that people were not treated equally. That was the case with good ideas which came before Enterprise Ireland or the county enterprise boards.
And the banks.
The banks also deal with customers in this way. I was in Hong Kong in 1992 or 1993 as Minister with responsibility for trade and 41,000 of the 42,000 businesses there employed less than 20 people. Big is not always beautiful and one has to have a way of running a business in a manner which suits one's needs.
The Irish economy has 3.8 million people and is situated in the middle of a big ocean. This is a small market with relatively small banks which have a dominant position. If banks are regulated or managed in Ireland, people working for them have a vested interest in making sure that everything goes well. It is the same as the analogy regarding the small business person and the foreign multinational. If a small business person employs 10 or 15 people, his or her house and business is mortgaged to the bank. If he or she goes down, his or her family will go down too. There is a difference in a bank which is managed in Ireland as it has a vested interest in keeping particular sectors of the Irish economy afloat. However, the same may not be the case if a small operation is owned by a US or European bank, the latter of which is more likely. In such cases, when something goes wrong in the Irish economy and we do not have control over interest rates or other tools, we do not have a banking system which is managed here either. This issue needs to be considered.
I would safely suggest that I am in a 0.01% minority in holding that view, but we should consider this issue. If this happens in seven, eight or ten years someone might suggest that it was not a good idea and highlight the fact that no one raised these questions. I thank Mr. Soden for starting the debate. I think the idea will be knocked over, but we have not had such a debate. It is a worthwhile debate, but the argument is on the side of Senator Ross and others. However, that is not to say that debating this matter was not a legitimate exercise. There are other issues which should be considered.
A recent editorial in Business and Finance raised some of these arguments. It suggested that the obvious thing to do is to say “no”, but that we should also think of the other issues. That has been a good exercise. I am a great believer in the free market and in freedom of expression. I welcome this debate. I am aware of the dangers of speaking about this as I know how politics operates. It will be suggested that this is how I think. However, the worst oppression is the tyranny or fear of expressing one's opinion because it can be interpreted in a particular way. It is not political to carry on like that, but after all the difficulties I have faced, I still believe it is the proper way to be.