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 confirming the budget day income tax package which concentrated available resources on those at the lower income levels and on elderly people. This Finance Bill will support the progress of our economy and prepare the ground for further improvement in living standards. It signals this Government's ongoing commitment to sound budgetary management and reflects its commitment to ensuring that the tax system plays a positive role in supporting the country's economic development.
This year the Bill runs to 150 sections and six Schedules, of which I will outline the main provisions, starting with the focal points. The Bill includes proposals designed to remove all those on the minimum wage from the tax net, thereby delivering on a key taxation commitment of the Government; confirm the cut in stamp duty for first-time buyers of second-hand residential property to help new buyers onto the property ladder; give effect to the other tax reliefs and tax reductions announced in the budget, give greater powers to the Revenue Commissioners in pursuing major tax evaders and those who facilitate tax evasion; update tax law to cater for new international accounting standards applicable to companies, thus keeping up our competitive edge; amend or extend several tax reliefs in some important areas, such as pensions, foster care, farming and international financial services; and upgrade tax administration to the benefit of taxpayers, especially in the PAYE area.
The Bill will close off several tax avoidance schemes some of which are quite aggressive in sheltering the income of certain high earners. This Bill also proceeds against the background of a major revision of tax reliefs under way on foot of the Minister for Finance's budget announcement. There is, therefore, likely to be significant new information available the next time we consider a Finance Bill, contributing to a major debate about the costs, benefits and equity issues arising in that context. There are many areas in which major changes this year would have been premature. This year's Bill is substantial.
Sections 2 to 5 of the Bill implement the various income tax reductions and reliefs announced in the budget. Section 2 increases the standard rate band by €1,400 per year for all earners. As a result, a single person on the average industrial wage will pay 14% less tax. There are also increases in the band for single and widowed parents. Altogether, some 52,000 taxpayers are taken off the higher rate of tax. Section 3 increases the entry point to taxation to just above the value of the minimum wage annualised. Thus, for a single PAYE person, the first €14,250 per annum, or €247 per week, of earnings is tax free.
Section 4 increases the age exemption limits by €1,000 for a single person and €2,000 for a married couple which stand at €16,500 and €33,000, respectively. Other income tax changes, combined with this, will remove more than 66,000 income earners from the tax net, including 4,700 elderly people.
These measures provide evidence of the Government's commitment to keep down taxes on wages and protect the real value of incomes for pensioners on low income. Over the past ten years the numbers of those in the tax system who pay no tax at all has increased significantly from approximately 331,800 to approximately 656,500 this year.
Recent data from the OECD show that for the average production worker, Ireland has the lowest tax wedge — that is, income tax plus employee and employer PRSI as a proportion of gross wages plus employers' PRSI — in the European Union and one of the lowest in the OECD.
Furthermore, for the single worker on the average production wage in Ireland, the average tax rate was the third lowest after Korea and Mexico, of the 30 countries studied. It was the lowest of the 19 EU member states surveyed. A married one-earner couple with two children on the average production wage in Ireland in 2004 received more money in cash transfers from the State than they paid out in income tax and social security contributions. Only Luxembourg is in the same league as Ireland in this respect and the OECD figures do not take account of the further improvements made in this year's budget. This is good news for the economy and for workers, who over recent years have seen average tax rates fall and have kept more of what they earned in their pockets.
Section 6 increases the relief for individuals, for 2005 and subsequent years, for rent paid for private rented accommodation that is their sole or main residence. Sections 7 to 10 are provisions for benefit in kind. Section 7 revises the method of valuing land for benefit in kind purposes where it is provided by employers to employees. Section 8 adds commuter ferries in the State to the list of passenger services for which employer-provided travel passes are exempt from taxation as a benefit in kind.
Section 9 confirms that the charge to tax in respect of the benefit in kind to an employee from an employer-provided preferential loan, applies for each year in which there is a balance outstanding on the loan. Section 10 provides an exemption from benefit in kind for security provided to a director or employee by the employer where there is a credible and serious threat to the personal security of the director or employee which arises wholly or mainly from his or her employment.
Section 11 exempts foster care payments from tax and, in line with international practice, section 12 provides for the exemption from tax of foreign service allowances paid to State employees. Sections 13 to 20 deal with various aspects of income tax — share options, employee share ownership trusts, tax paid by company directors, chargeable persons under self-assessment, professional services withholding tax, taxation of lump sums and the tax on certain deposit interest. Some of these tighten up requirements in certain areas and others reduce the tax imposition on the taxpayer in particular cases.
Section 21 brings our pension tax rules into line with EU law by removing any possible discrimination between pension providers in the State and pension institutions from another member state. Sections 22 to 26 deal with putting the PAYE system on-line to enhance the level of service for the taxpayers in question which is a major upgrade of the tax administration system. This will enable the PAYE sector to file returns and avail electronically of a range of self-service options for their tax affairs, including requests for reviews of tax paid. It will also allow for self-service options via an automated telephone system dealing with ordering forms and leaflets and claiming certain tax credits.
Chapter 4 of this part of the Bill deals with income tax, corporation tax and capital gains tax reliefs. Sections 27 and 36 deal with business expansion schemes and film relief respectively, and formally incorporate into statute law several changes required by the European Commission when granting State aid approval to these schemes last year.
Section 28 amends the tax relief terms for heritage buildings and gardens by strengthening the requirement for reasonable public access and the effective advertising of public opening hours.
Sections 29 to 32 extend the farm relief for pollution control, provide for time extensions to stock relief schemes and provide for income-averaging for tax purposes of certain Feoga scheme payments made in 2005.
Section 33 allows a number of outstanding applications for capital allowances in respect of third level education buildings received before 31 December 2004 to be examined for the purposes of this tax relief without any change to the overall termination date of 31 July 2006. Section 34 clarifies and extends the definition of hotel for the purpose of capital allowances.
Section 37 is an important anti-avoidance measure to ensure that foreign-based limited partnerships cannot be used by certain high earners to reduce significantly their income tax bills. Section 38 reduces the period from three years to two years for charities to become eligible for tax relief on donations. Section 39 is a measure to combat the re-packaging of distributions of income as capital gains so as to attract the lower CGT rate of 20%, instead of the top income tax rate of 42%.
Section 40 is a technical amendment dealing with funds administered by the Courts Service that are included in the "gross roll-up" taxation regime for investment undertakings, which was introduced in the Finance Act 2000.
Section 41 deals with an issue in regard to the unequal tax treatment that may arise for certain overseas life assurance companies doing business in Ireland, compared with Irish assurance companies doing business in the State. Section 42 is a provision to ensure that life assurance companies cannot avoid the exit tax on gains made by investors by simply rolling these over into further investment products. This section is subject to a commencement order to allow time for discussions to take place with the industry on the details of the implementation of the section in regard to the various life insurance policies involved.
Section 43 also closes a loophole on the use of losses on offshore funds. Section 45 ensures that the ring-fence on the use of losses for tax purposes in leasing contracts is not circumvented in certain cases. Section 44 provides for the tax treatment of a proposed new type of investment vehicle — a common contractual fund, CCF. This is a measure which will facilitate our funds industry. The tax treatment will be subject to certain conditions and safeguards.
Section 46 amends the rules on the application of encashment tax on certain foreign dividend and interest cheques cleared by retail banks in the State. Section 47 exempts certain non-taxable entities, such as personal retirement savings accounts and tax exempt unit trusts, from the application of dividend withholding tax. This will avoid the need for those bodies to reclaim tax from the Revenue Commissioners in respect of dividends paid by Irish companies, thereby eliminating an unnecessary circular flow of cash.
Section 48 makes some important changes in tax law to accommodate the move by companies in 2005 to the new international financial reporting standards. Company law requires that, from 1 January 2005, all companies listed on a stock exchange must prepare their consolidated or group financial statements in accordance international financial reporting standards, IFRS, instead of, as in our case, Irish generally accepted accounting practice, GAAP. The individual accounts of companies may also be prepared in accordance with IFRS. However, once a company moves to IFRS, it will be required to use it as the norm for the future. Under Irish tax law, the starting point for calculating the taxable trading income of a company is the profit of the company according to its accounts.
Section 48 provides that where a company prepares its individual company accounts on the basis of IFRS, such accounts will be used as the starting point for calculation of taxable trading profits. This section goes into some detail on the rules to be applied in respect of the specific tax treatment in a number of areas such as unrealised financial gains and losses, share-based payments, research and development, interest and labour costs included in capital assets and transitional rules for the switch from Irish GAAP to IFRS, including rules relating to bad debt provisions. The changes, while technical, are important in determining the tax liability of individuals and groups of companies.
Section 49 provides for a number of amendments to the charges provision such as deductibility for interest paid by a company on loans taken out with lenders in other EU member states. Sections 50 and 51 apply the benefit of certain EU directives on taxation of interest and royalty payments and the parent-subsidiary directive to Switzerland following an EU agreement last year.
Section 52 amends the current provision that certain payments between companies that are members of a group may be made without deduction of tax provided that certain conditions are met. The amendment relaxes the condition, in certain circumstances, that both the paying company and the receiving company must be resident in the State.
Section 53 amends the existing provision dealing with the calculation of manufacturing relief. The amendment will ensure that the correct amount of relief is given to companies in all cases, as problems had arisen with the calculation of the relief following the introduction in 2001 of the new regime for ring-fenced charges and losses.
Section 54 amends the taxation regime introduced last year for headquarters and holding companies in Ireland in regard to the valuation of certain shareholdings in such companies. This will satisfy the requirements of the European Commission's clearance of the scheme as not being a state aid.
Section 55 deletes section 686 of the Taxes Consolidation Act 1997, which was introduced to provide an effective reduction in corporation tax to 25% in respect of certain petroleum income. That provision was introduced in 1992, when the standard rate of corporation tax was higher than 25%. Since 1 January 2000, a flat rate of corporation tax of 25% applies to all income from petroleum activities and section 686 has become redundant.
Section 56 relates to capital gains tax and deals with the 15% CGT withholding tax by the purchaser of certain assets valued over €500,000. Section 58 provides for an exemption from CGT for trustees of tax exempt pension schemes. These are the main direct tax changes in the Bill.
I will now deal with excise and VAT, where, as the House knows, the only change made by Government to the rates on budget night was the increase in the farmers flat rate addition. Consequently, the provisions in the Bill deal more generally with excise and VAT law and with measures to counter evasion and avoidance in these areas.
Sections 59 to 63 deal with alcohol products tax, APT, and the investigation and pursuit of offences. Most notably, section 62 allows a court to temporarily close a premises or club involved in selling illicit alcohol. The previous penalty of full closure was not being applied as courts appear to feel it too draconian. Section 63 provides for the 50% APT reduction on microbreweries announced in the budget, which has been widely welcomed.
Sections 64 to 70 relate to petrol, diesel, LPG, fuel oil and coal. Section 64 provides for minimal increases in mineral oil tax on LPG and fuel oil arising from the EU energy tax directive. It also provides for new differentiated rates for sulphur-free petrol and diesel. It provides for an EU energy tax on coal but as most types of coal usage, including domestic use, are exempted, the effect of this change will be minimal. The small excise increases will come into effect on 1 April, while the provisions applying to coal and sulphur-free fuels will come into effect by commencement order, most likely in July.
Sections 71 to 86 consolidate and modernise the excise law on tobacco products, which is contained mainly in a 1977 Act. The provisions do not introduce any new duties or any other significant changes into the operation of tobacco tax law.
Sections 87 to 97 relate to other aspects of the excise system. The provisions are mainly of a technical nature. Section 97 extends the 50% VRT rate reduction on hybrid vehicles to 31 December 2006. This relief was due to end on 31 December 2004 but there are particular environmental reasons, connected with lowering emissions, that we should continue to encourage the wider use of hybrid petrol-electric engines in more vehicles.
Sections 98 to 113 contain a number of important revisions to the VAT tax code. These deal with several anti-avoidance measures relating, inter alia, to VAT on leases and the sale of property in section 100. As we have become more vigilant in closing off loopholes in direct tax areas, attention has switched to finding ways of saving tax through creative interpretations of VAT law. VAT now brings in £11 billion, or30%, of tax revenue each year. Consequently, the gains and losses from tax planning can be significant. VAT law is often complex and is open to interpretation. The European Court of Justice sometimes rules in an unexpected way. There are legitimate issues of difference in how Revenue and tax advisers feel that some of the law applies. That is fair enough in so far as it goes but it is also important for the State to protect the revenue base. For that reason, the VAT changes here focus on clarifying the law, sometimes in favour of the State and other times in favour of the taxpayer, as in the case of the exemption from VAT of student accommodation.
Sections 114 to 129 refer to stamp duty. Section 115 deals with particulars which must be notified to Revenue concerning the liability of an instrument to stamp duty and the penalties for failure to notify.
Section 116 is an anti-avoidance amendment which redefines the current provision for the calculation of ad valorem stamp duty so that it is payable in respect of the value of the property conveyed. The amendment applies to instruments executed on or after 2 March 2005. Section 117 combats the avoidance of duty by splitting transfers of property into more than one conveyance.
Sections 119 and 120 deal with stamp duty exemption on land acquired by young trained farmers and requires that if any of the land is disposed of within five years, a proportionate clawback of the relief will apply where the proceeds are not fully reinvested. Section 121 sets out the provisions that will apply to the measure announced in the budget whereby stamp duty on an exchange of farm land between two farmers for the purpose of consolidating each farmer's holding will only be charged on the difference in the values of the lands concerned.
Sections 122 and 123 extend the stamp duty relief on certain stock borrowing and on sale and repurchase transactions to assist liquidity on stock exchanges. Section 124 is an amendment to give a stamp duty exemption to conveyances or transfers of units in a common contractual fund and to replace certain references to collective investment undertakings to reflect more up to date definitions in the Taxes Consolidation Act 1997.
Section 125 effects a technical change to replace certain references to collective investment undertakings in the Stamp Duty Consolidation Act to reflect more up to date definitions in the Taxes Consolidation Act 1997. Section 126 confirms the stamp duty reduction for first-time purchasers of second-hand residential property. This measure, which came into effect on budget day, will continue to free up the market to the benefit of first-time purchasers, which was the intention.
Section 127 reduces companies capital duty on the issuing of share capital from 1% to 0.5% for transactions after budget day, 2 December last. This will help maintain our position as an attractive location for companies.
Section 128 exempts financial cards, such as credit cards and ATM cards, from double stamp duty where these cards are being switched from one provider to another. This change will help competition in the market.
Section 129 corrects a drafting error in the Stamp Duties Consolidation Act 1999 with regard to the definition of "neglect" for the purposes of inquiries or raising of assessments by Revenue.
Section 131 amends the information to be included in the affidavit required for Revenue purposes in respect of the estate of a deceased person. The amendment reflects the changes made in the Finance Act 2000 in regard to residence as the basis for capital acquisitions tax on foreign property instead of domicile as it was up to then. At present, a person can provide for inheritance tax liabilities by insuring against them and the proceeds of such policies, called section 60 policies, are themselves free of inheritance tax where they used to pay the CAT liability.
Section 133 extends this relief to situations where such a policy is taken out to meet the tax liability that may arise on the inheritance of an approved retirement fund by a child aged 21 years or over.
Section 134 amends the CAT provision which grants an exemption to units of certain collective funds comprised in a gift or inheritance. This amendment extends the exemption to units of a new investment vehicle known as a common contractual fund.
Sections 135 and 136 deal with the clawback of gift or inheritance tax relief on agricultural and business assets where the farm or business is sold within the time limits set out in the legislation. The sections clarify that any relief granted will be clawed back to the extent that the proceeds of a sale of the land or business are not fully reinvested in farm or business property. The purpose of these reliefs was to encourage the retention of family farms and businesses and the changes proposed are in line with that rationale.
Section 137 under CAT grants a credit for foreign tax similar to estate duty, gift or inheritance tax against Irish gift or inheritance tax where a double taxation treaty does not exist between us and the country concerned.
The final part of any Finance Bill is often the one that attracts most attention as it deals with the actual collection of tax and the powers of the Revenue to enforce the State's valid claim on the taxpayer. It seems this is also the case this year. Sections 138 and 139, however, limit Revenue's powers with regard to PAYE and relevant contracts tax on payments to subcontractors by requiring that Revenue cannot enter a private dwelling to inspect books and records in connection with these taxes unless it has either the consent of the occupier or a court warrant. This is the position already under the law on other taxes and the Revenue powers group last year recommended this safeguard be extended to PAYE and relevant contracts tax, RCT. I am happy to propose to do so to the House.
Section 140 is new and empowers the Revenue Commissioners to sample the information, other than medical records, held by a life assurance company in respect of a class or classes of policies and their policyholders. This new power, which is modelled, in part, on powers given to the Revenue Commissioners regarding DIRT in the Finance Act 1999, will enable Revenue to investigate whether certain life assurance products are or have been used to shelter untaxed income.
Section 141 reduces the maximum penalty in the case of fraud from 200% of the tax undercharge to 100% which is the normal limit used by Revenue in such cases. This reduction, which was recommended by the Revenue powers group, affects undercharges of tax after the passing of the Bill. Historical cases are not affected.
Section 142 contains new aiding and abetting provisions which will add to the armoury of the Revenue Commissioners in dealing with tax evasion and its facilitators. The main reason I have brought forward these provisions is that the existing provisions do not deal comprehensively with the actions of a person who facilitates another person to evade tax. Under the current provision it is an offence to "knowingly aid and abet another person to knowingly or wilfully make an incorrect tax return". To be guilty of such an offence a person would have to be shown to have assisted a taxpayer in filling in a false tax return. I am seeking to address the narrowness of this "aiding and abetting" offence and also to ensure that there is a comprehensive specification of the offence of tax evasion in the law.
Section 142, therefore, creates new offences of being knowingly concerned in the fraudulent evasion of tax or being knowingly concerned in, or being reckless as to whether or not one is concerned in, facilitating the fraudulent evasion of tax by another. This section defines the key concepts of "fraudulent evasion of tax", "facilitating" such evasion and being "reckless" as to whether or not one is facilitating such evasion. This section also provides that where an offence is committed by a body corporate, any director, officer or manager who consented, connived or approved of the commission of the offence or was reckless as to whether an offence was being committed, is also deemed to be guilty of the offence concerned. These new provisions will considerably strengthen the hand of the Revenue Commissioners in dealing with tax evasion.
Section 143 proposes to increase the threshold for publication of certain settlements in the list of tax defaulters from €12,700, the euro equivalent of £10,000, set in 1983, to €30,000 and to provide for the indexation of this amount every five years by reference to the consumer price index. Both the Revenue powers group and the Law Reform Commission recommended an increase in the current €12,700 threshold for the publication of the list of tax defaulters. The current threshold was set in 1983 at £10,000 and has not changed since. The Revenue powers group recommended a threshold of €50,000 and the Law Reform Commission suggested €25,000, both indexable for the future. The Government has decided to accept the case for an increase and €30,000 seems a reasonable level. This new threshold will apply only to tax liabilities incurred on or after 1 January 2005. It will not apply to any tax due before 2005 even if the settlement or adjudication is made on or after 1 January 2005.
Section 144 makes a number of changes to the legislation that was introduced last year to implement the EU savings directive. It is amended to take account of the decision by ECOFIN to change the date of application of the directive from 1 January 2005 to 1 July 2005.
Section 145 proposes to reduce the rate of interest on certain overdue tax from 1 April 2005 from approximately 11.75% per annum to just under 10% per annum. The reduction in the interest rate will not apply to PAYE, RCT, professional services withholding tax, DIRT, other withholding or exit taxes or to VAT or excise. The reduction will apply to one's own overdue tax for which one is personally liable and not to the paying over of fiduciary taxes collected from others on the State's behalf.
Section 146 is an amendment of a technical nature which will improve the continuation of court proceedings where there is a new Collector General by allowing that proceedings may be continued by the new Collector General in the name of the former Collector General. Persons against whom proceedings are pending will be informed that the proceedings are being continued on this basis.
The remaining sections in the Bill, sections 147 to 150, are standard provisions or minor and technical amendments.
This Finance Bill, in conjunction with changes announced in the budget, demonstrates the continued commitment of this Government to use the tax system to expand our economy, reward work and alleviate the burden on taxpayers, especially those on lower pay.
Since coming to office, the Government has striven to ensure that Ireland has a tax system that is fair and equitable as well as one that meets the challenges of the competitive global economy in which we find ourselves. Our approach to tax policy has been to reward work, encourage enterprise and underpin the competitiveness that has been a keystone of our remarkable economic performance in recent years. Independent commentators recognise our success in this regard.
In its latest annual report on taxation and wages, the OECD points out that the tax burden on Irish workers has fallen faster here than anywhere else in the developed world. For example, it states that the tax and PRSI bill on an average industrial worker has almost halved since 1996. The success of the economic policies pursued by the Government is evident across a number of economic indicators. From 1997 to 2004, Irish GDP has grown at an average rate of over 7.5%, compared to an average of just over 2% in the EU. The fruits of this economic success have been put to good use and have benefited people the length and breadth of the country. Since 1997, more than 400,000 new jobs have been created and unemployment has been reduced from over 10% to historically low levels. The prospects for continued economic growth in 2005 are good, with the Central Bank, in its latest quarterly bulletin, forecasting a growth figure of 5.25% for 2005, in line with the assessment made by my Department in the budget.
The European Commission also notes our strong growth and sound public finances in its commentary on Ireland's Stability and Growth Pact 2005 to 2007 and commends our solid progress in adhering to spending targets, advancing structural reform and the relatively favourable position with regard to the long-term sustainability of our public finances.
I hope Senators have benefited from this elaboration of the measures in the Bill. I look forward to the debate and I commend the Bill to the Seanad.
