The Finance Bill implements the tax changes announced in the budget and provides for a range of other measures. In particular, the Bill includes measures that will continue to foster an environment which will allow Ireland's economy to take advantage of the international recovery as it develops and to sustain employment. The economy is in safe hands and will continue to be so under the Government. The Bill also provides for implementing measures for a number of EU directives.
This year's Bill runs to 94 sections and four Schedules and I propose to give an outline of the main provisions. Part 1, which runs from sections 1 to 42, deals with income tax, corporation tax and capital gains tax. In my period in office, the income tax burden has reduced significantly. Since 1997, average tax rates have fallen for all categories of taxpayer, including those on lower incomes. After budget 2004, for a person on the average industrial wage, the average tax rate will be 10 percentage points lower than in 1997. An increasing proportion of those on the income tax record — over 35% of all income earners — pay no tax. The number of such income earners increased by over 75% from 380,000 in 1997-98 to 669,000 after budget 2004. For 2004, the percentage of the income tax yield coming from those earning at or under the average industrial wage is estimated to be about 6% as compared to over 14% in 1997. The tax wedge for a typical married production worker is the lowest in the EU and, indeed, the lowest in the OECD. Contrary to what some try to present, the Government has helped those on both low and middle incomes enormously and we are proud of our record.
We are now consolidating the gains we have made. Available resources have been concentrated on continuing progress towards removing those on the minimum wage from the tax net. When the statutory minimum wage came into effect in April 2000, less than 64% of the minimum wage was exempt from tax. Section 3 increases the entry point to taxation of a PAYE worker by €240 per year to 90% of the increased new minimum wage annualised. Thus, for a single PAYE person, the first €12,800 per annum, or €246 per week, of earnings will be tax free. This compares to €98 per week in 1997 to 1998. All PAYE workers will benefit from this increase of €240 in the employee tax credit.
Section 2 increases further the exemption limits from income tax for persons aged 65 and over to €15,500 single and €31,000 married. Since I became Minister for Finance, the income tax exemption limits for the elderly have increased by more than 135%. In that period, more than 81,000 income earners aged 65 or over have been removed from the tax net.
Section 4 increases the standard-rated allowance for trade union subscriptions from €130 to €200. Section 6 puts beyond doubt that income arising from the investment of personal injury awards made by the Personal Injuries Assessment Board for permanently incapacitated persons will be exempt from income tax in the same way as if the awards had been made by a court. This applies where the income in question forms the sole or main income of the individual.
Section 7 exempts from income tax compensatory awards where an individual's rights under employment-related legislation have been infringed, for example, in the case of discrimination, harassment or victimisation. Up to now, the position has been that such awards have been subject to income tax. Provision is also made to exempt out-of-court settlements in such cases subject to certain restrictions.
In the Finance Act 2003, I provided for the direct application of PAYE to taxable benefits-in-kind. Taken together with the changes in the Social Welfare Act 2003, this has ensured the application of PAYE and PRSI, including the training and health contribution levies, to these benefits from January this year. Some further legislative provisions are required to bed down the new regime, and these are provided for in sections 8 and 9. They include an exemption for mobile phones as well as for computers and high-speed Internet connections provided by an employer to an employee in his or her home for business use. An exemption in respect of certain company vans parked at home by employees is also provided for. This takes account of representations made to me by both employers and employees to which I was happy to respond favourably.
Section 9 also extends the existing benefits-in-kind tax exemption for employer-provided travel passes to include Luas services, which are due to commence this year, while section 10 confirms the budget day announcement that the specified rate used to calculate the benefit-in-kind charge on certain preferential rate mortgage loans will be reduced from 4.5% to 3.5%.
Section 11 extends the existing standard-rated tax relief in respect of health insurance policies which cover non-routine dental treatment to policies issued by insurers providing dental insurance only. The budget announcement of an income tax exemption for income received by Gaeltacht households under the summer college student scheme is provided for in section 12.
Section 13 provides for an updating of the qualification requirements in respect of the 100% stock relief for young trained farmers to reflect changes in the underlying academic courses. It also provides that, in general, it is the achievement of certain standards that is mandatory rather than just attendance at courses. Similar provisions are included in sections 69 and 70 on stamp duty relief for young trained farmers.
Under section 14, the income tax exemption to encourage farm leasing is being improved by increasing the annual amount of leasing income exempted from tax and reducing the age limit for qualifying lessors. These improvements in the relief will encourage the higher utilisation of our agricultural land, which will become all the more important in view of the changes to the EU Common Agricultural Policy.
Section 16 facilitates occupational pension schemes in their investment activities by providing that any such schemes which borrow for investment reasons can be approved pension schemes for tax purposes. This section effectively levels the playing field between pension schemes which wish to borrow directly for investment purposes and those which invest in products where borrowing takes place, for example, an insurance company product such as a unit-linked property fund.
Section 17 gives a capital gains tax exemption to certain individuals on the disposal of assets. The individuals concerned are those who already have an income tax exemption on the income derived from those assets, for example, persons in receipt of court compensation arising from incapacity. Where the gains and income of a year from those assets are the principal source of income and gains in that year of such individuals, then both the income and gains will be exempted from tax. This will facilitate the use of a wider range of investments by these individuals.
Given the sometimes contradictory debate on tax reliefs and expenditures, it is important to remember that such reliefs are normally introduced to achieve desirable public policy objectives. It must be recognised that it is in their nature that such schemes will be used by high earners to reduce their tax liabilities. The value of such schemes must be balanced against the important objective of ensuring a wide tax base if we are to maintain low rates. Accordingly, we must keep such schemes under review.
The business expansion scheme and seed capital scheme reliefs are good schemes as long as they remain focused and targeted. Having reviewed the schemes in the lead-up to the budget, I am satisfied they continue to serve their purpose as now focused, and section 18 provides for an extension of these schemes for a further three years until 31 December 2006. It also provides an increase in the maximum amount a company can raise under both schemes from €750,000 to €1 million as announced.
The increase in the limit and extension in time from 5 February 2004 to 31 December 2006 and certain other changes to the schemes will be subject to a commencement order to allow for clarification of potential EU state aid issues raised by the European Commission. Other changes include an increase in the non-PAYE income limit for investor eligibility for the seed capital scheme and the phasing out by the end of 2004 of the application of the seed capital scheme to trading activities in an exchange facility established in the Custom House Docks area in Dublin. Separate to the commencement order, an initial extension of the scheme to 4 February 2004 is provided for and sections 18 and 19 provide for transitional measures, including for arrangements and investments made before 4 February 2004.
I have stated before that it is essential that tax avoidance schemes and loopholes are tackled vigorously. In a press release last March, I made clear my intention to close a loophole which had come to my attention. It related to the relief available to individuals in respect of interest paid on money borrowed for the purposes of acquiring an equity stake in, or lending money to, a company where the moneys are used to acquire certain premises. This is provided for in section 22.
Section 23 amends the scheme of capital allowances for qualifying residential units associated with registered nursing homes. These are units which allow older people to continue to live independently but to have access to nursing home facilities. The minimum number of qualifying residential units is being reduced from 20 to ten to allow for smaller developments. The condition for buildings to be two-storey at maximum is being amended to allow that the units may be in a building of any number of floors where a fire safety certificate is issued.
Section 24 is a technical change and redrafts one of the eligibility conditions for investors in private hospitals to bring it into line with other reliefs by removing an unintended effect of disqualifying all investors in a project where one is ineligible.
Sections 25, 26 and 27 provide for an extension of various tax reliefs and set out transitional provisions where appropriate, as well as clarifying the conditions associated with the reliefs, for example, where planning issues arise. Many places in Ireland have enjoyed a regeneration directly due to area-based tax reliefs. While these reliefs are now being phased out, arising from concerns expressed by various individuals and groups, including various local authorities, I felt, on balance, there was a rationale for allowing a longer wind-down period for the various tax reliefs referred to in these sections. This will allow for a more orderly completion of projects where delays had arisen for various reasons.
Section 28 confirms my budget announcement that the termination date for film relief is being extended from 31 December 2004 to 31 December 2008 and the cap on the amount that can be raised under the section in respect of any one film is increased from €10.5 million to €15 million per film. Changes to address instances of abuse are provided for in the section and these include the revision of the certification procedures, provisions to deal with overcomplicated financial structures and enhanced record-keeping requirements for film production companies. European Commission approval will be needed for the continuation of the scheme and the increase in the overall investment.
It is important to ensure that Ireland remains competitive as a location for attracting and retaining foreign investment. The Bill provides measures that enhance the prospect of attracting further high quality investment projects in Ireland leading to additional future employment opportunities. Sections 31, 34 and 42 are designed to encourage multinational corporations to locate their regional headquarters and holding companies in Ireland. The Bill provides for an exemption from tax on gains for holding companies on the disposal of a shareholding in a subsidiary, whether Irish or foreign, and makes a number of related changes to the scope of our provisions for relief against foreign tax in respect of dividend income paid to parent companies. Specifically, sections 31 and 34 amend the provisions on relief for foreign taxation in the case of dividends paid by a subsidiary to a parent company. To qualify for relief for foreign taxation in the case of dividend income under a unilateral credit relief provision where no double taxation treaty applies, the shareholding involved must up to now have been at least 25% of the subsidiary company. This is being reduced to 5%. Relief is also being made available for foreign tax imposed on company tiers lower than the immediate subsidiary. The provisions in sections 31 and 42 will come into effect by way of a commencement order following clearance by the EU Commission from a state aid perspective. Section 34 will implement Ireland's obligations under the EU Parent and Subsidiary Directive.
Section 31 will also allow companies to average the credit tax for foreign tax across dividend streams on shareholdings of 5% or more for the purpose of calculating the relief. The section also extends the credit mechanism to certain sub-national taxes imposed in tax treaty countries where those taxes are not covered by the relevant tax treaty. This issue arises in particular in the cases of the US and Canada where non-federal taxes are not covered by the relevant tax treaty.
The CGT exemption provided in section 42 will apply where the shareholding held by the holding company is a minimum of 10% of the subsidiary concerned and at least €15 million in value, or where the shareholding held is a minimum of 5% of the subsidiary concerned and at least €50 million in value. It is also a requirement that the subsidiary is primarily a trading company or, taken together, the holding company and its subsidiaries are primarily a trading group. The minimum shareholding must be held for a continuous period of 12 months in the three years prior to the disposal.
These measures will encourage foreign direct investment by facilitating multinational companies with operations in a number of different countries to set up holding companies in Ireland. The objective is to bring regional headquarters companies to Ireland, which would include corporate functions such as control of regional operations, group treasury and centralised administration. These initiatives have been welcomed by IDA Ireland and by key industry players.
The programme for Government includes commitments to build the capability of firms to carry out and manage research and development in Ireland and work to ensure that Ireland develops a world-class research capacity. Following on from my announcement in the budget, section 33 provides for a 20% tax credit for companies for qualifying incremental expenditure on research and development.
The Irish economy needs to make a decisive transition from high-volume, lower value enterprise to high-value, high-innovation, knowledge-intensive enterprise, and research and development activities can encourage such enterprise. In addition, increased research and development activities can help embed an existing firm's activities in Ireland as well as developing additional high quality employment. Senators might be interested to note that tax incentives are widely used to stimulate research and development in other advanced economies. Their effectiveness has been established by a series of empirical studies, particularly among large firms in high-tech sectors, and this is where the need in Ireland for greater research intensity is most pronounced. As with all tax reliefs it is important that the measure be focused. Accordingly, the measure is targeted at encouraging additional research and development by basing the scheme on incremental expenditure rather than permanent additional tax deductions for all research and development activities.
Full details of the scheme, including a core definition of research and development activities, are set out in section 33 and detailed guidelines will be issued by my colleague, the Tánaiste and Minister for Enterprise, Trade and Employment, on what activities will constitute research and development activities for the purposes of the credit. Companies will be able to deduct 20% of the incremental spend on research and development from their corporation tax bill in addition to its normal deduction as an expense.
Incremental spend will be calculated by reference to a base year. For expenditure in 2004, 2005 and 2006, incremental spend will be calculated by reference to expenditure in 2003. In 2007 the base year will be 2004, 2005 will be the base year for 2008 and so on. In order not to distort the year-on-year calculation of incremental expenditure, capital investment on construction and refurbishment of building will be treated separately with a 20% credit made available to companies to invest, irrespective of its incremental nature.
Section 35 is aimed at assisting the leasing sector of our financial industry and it provides that lessors engaged in finance leasing may elect to pay tax on income from the finance leasing of short-life assets on the basis of accounting income rather than income based on current tax rules. The option will be subject to a number of conditions detailed in the Bill. The section allows lessors of such assets to account for them for tax purposes in accordance with accounting rules. This will result in the "interest element" of lease payments being taxed but no capital allowances being available. It will not change the amount of tax paid but will involve a more even spread of the tax over the lease period. As I said in the other House, this provision is being introduced to address specific issues which arise with the phasing out of the IFSC regime, but the new provision will apply across the board to all lessors of short-life assets. This change will help to keep Ireland competitive in this important sector.
Section 39 extends the qualifying period for the scheme of tax relief for corporate investment in certain renewable energy projects from 31 December 2004 to 31 December 2006. An EU directive dealing with the taxation of interest and royalties was agreed in 2003, the purpose of which is to eliminate withholding taxes on cross-border interest and royalty payments between associated companies and branches in different member states. The directive was transposed by way of statutory instrument in late 2003 and its provisions are being repeated in section 41 and Schedule I to the Finance Bill, with a number of minor technical additions.
Part 2 deals with excise duties. Sections 45 and 48 confirm respectively the budget increases of 25 cent, including VAT, in the excise duty on a packet of 20 cigarettes and of 5 cent per litre, including VAT, for petrol and diesel. As indicated in the budget, changes to indirect taxes were limited this year in the light of our goal of reducing inflation. Section 46 enables certain quantitative restrictions on cigarettes and tobacco to be retained in respect of travellers from the new EU member states after 1 May next. In effect, the regime applying to travellers from other existing member states will not be applied to cigarettes or tobacco acquired by travellers from the new member states in question during the transitional arrangements for accession states.
Sections 49 and 50 provide for a qualified exemption from the excise duty on biofuels for use in certain approved pilot projects including projects undertaken to test the technical viability of using biofuel as a motor fuel.
Part 3 of the Bill deals with VAT. Sections 55, 56 and 58 provide for the EU directive on the VAT treatment of cross-border supplies of gas and electricity to be transposed into Irish law. Increased liberalisation of the electricity and gas markets and increased cross-border trade between member states required a change in the rules to clarify that supplies of gas and electricity were taxable in the member state of final consumption, avoiding the need for a supplier to register in every member state which he or she supplies.
Section 57 confirms that where a house and site are sold together, the VAT treatment is that both the house and the site are subject to VAT. An interpretation of the VAT Act 1972 has been used to attempt to exempt the sale of developed sites where a site and new house or apartment are being sold together. The Bill provides that where a developed site is sold in such circumstances it is subject to VAT.
Sections 59 and 61 confirm the budget night financial resolution to increase the farmers' flat rate addition for VAT purposes from 4.3% to 4.4% with effect from 1 January 2004. There is a corresponding increase to 4.4% for the sale of livestock by VAT registered farmers.
Section 63 clarifies that where a trader in Ireland supplies goods or services to a trader abroad, in a situation where the recipient in the other member state is liable for VAT on a reverse charge basis, then the Irish trader must issue a VAT invoice. This will not impose any extra burden on traders and reflects existing commercial practice. Sections 64 and 65 contain a number of technical amendments to clarify the VAT treatment of fund management and administration services provided to Irish and foreign investment funds. The stamp duty provisions are contained in Part 4 of the Bill. Section 68 closes off a loophole whereby an exemption from stamp duty, in the case of certain company reconstructions and amalgamations, was being used to seek to avoid stamp duty on transfers of real property. The stamp duty exemption for owner-occupiers of new houses and apartments has up to now been dependent on a floor area certificate from the Department of the Environment, Heritage and Local Government, indicating that the building is not greater than 425 sq. metres. However, this particular certification process is linked with the now abolished new house grants and will cease on 2 April 2004. Consequently, section 72 provides for a new floor area compliance certificate for such houses and apartments, which will also certify that the property conforms to approved building standards. The certificate will be issued by the Department of the Environment, Heritage and Local Government for the purpose of the stamp duty exemption.
Section 74 replaces the current section of the Stamp Duties Consolidation Act 1999, which provided for a stamp duty exemption for certain international trademarks. This new section provides for an exemption from stamp duty on the sale, transfer or other disposition of intellectual property as announced in the budget. Intellectual property includes any patent, trademark, copyright, registered design, design right, invention, domain name, supplementary protection certificate or plant breeders' rights. This measure is aimed at making Ireland a more attractive place for the location of such intellectual property.
Section 75 provides that the 2% duty on non-life insurance policies will not apply to dental insurance as is the case with medical insurance policies generally.
Section 78 amends the definition of a holding company for the purposes of the CAT business relief to take account of situations involving family companies where there may be more than one holding company and where there are intermediate companies between the holding companies and the underlying trading companies.
Sections 79 and 82 provide for an extension of the legislative framework that underpins tax information exchange agreements with certain jurisdictions in order to include gift and inheritance tax. An amendment is also being made to the relevant legislation to apply the existing Revenue powers to encompass the foreign equivalent of estate, inheritance and gift tax.
Section 85 amends the scheme of tax relief for donations of heritage items to cultural institutions of the State. The minimum value of an item or collection which can qualify is being increased from €100,000 to €150,000 with the additional requirement that, in the case of a collection, at least one item in the collection must have a minimum value of €50,000. In addition, there are detailed changes in the rules governing the selection of heritage items. These changes are designed to facilitate the work of the selection committee, which is made up of representatives of the cultural institutions and bodies concerned.
I referred earlier to the need to keep tax reliefs and expenditures under review. To facilitate this, it is important to improve the information available regarding the cost of such reliefs. Changes are being made to various tax forms to capture more information.
Section 86 provides for a number of statutory changes to the annual tax return forms for the 2004 tax year, and thereafter, to underpin this work. Essentially, persons wishing to claim certain reliefs will be required to provide additional information by completing an additional part of the form. Persons not complying will be liable for the standard surcharge and penalties for incorrect returns, where the error is not remedied without unreasonable delay. Section 86 also amends the end-of-year P35 employer return to require employers to show the overall amount of employer and employee pension contributions together with the number of employees contributing and the number of employees in respect of which the employer is contributing. These changes will take effect for the February 2005 P35 returns. In time these changes will yield accurate information on the cost of tax reliefs, such as the property-based tax relief schemes and on the cost of pension tax relief.
Subject to certain conditions, Revenue already has the power to apply to the High Court for an order requiring a financial institution to make records available for inspection or to furnish information relevant to the tax liability of a taxpayer, including a group or class of person whose individual identities are not known to Revenue.
Section 87 extends this power so it can apply in respect of information and records held by certain foreign financial entities, which are under the control of a domestic financial institution. This is a recommendation made in the Revenue powers group report, which is being proceeded with now because of the current Revenue initiative on offshore accounts. I published the report of the Revenue powers group on 4 February 2004 with a view to allowing time for all interested parties to discuss and debate the issues raised by the group. I will consider the various recommendations made in the report in the context of next year's Finance Bill.
Section 90 and Schedule 4 confirm the transposition into Irish law of the EU directive on the taxation of savings income in the form of interest payments. The aim of the directive is to enable savings income in the form of interest payments made in one EU member state to individuals resident for tax purposes in another EU member state to be taxed in accordance with the laws of the latter member state.
Section 91 provides for the carryover from one year to another of unspent Exchequer capital allocations up to a limit of 10% of each year's total capital allocation under the rolling five-year multi-annual envelopes for Departments announced in the budget. The Government is committed to keeping capital investment at 5% of GNP over the period 2004-08. Under the capital envelopes, a total of €33.6 billion will be available for capital investment to support the economy's future growth potential. The ability to carry forward from one year to another unspent Exchequer capital is an important element of multi-annual budgeting for capital purposes and for the management of capital programmes.
In successive budgets and Finance Bills I have managed to create a low tax rate environment. This policy has boosted investment and created jobs. Shrewd observers will be aware that governments and administrations throughout the world are pursuing this approach because they have witnessed its success. The rules are relatively simple: create the conditions in which enterprise and employment are rewarded through a low tax burden and people will respond accordingly.
Probably the most telling statistic in recent years is that over the past six years the numbers at work have increased by over 300,000. Unemployment today remains at historically low levels. Much has been achieved in this respect but we cannot take future prosperity for granted. This Bill includes significant measures that ensure further investment for Ireland and jobs for its people.
I hope Senators have benefited from this outline of the provisions in the Bill. I look forward to the debate on the legislation and I commend the Bill to the Seanad.