When I spoke on Second Stage of the Finance Bill 2010 in Dáil Éireann, I outlined how the measures being introduced will ensure all sectors play their part in the critical task of stabilising the public finances. This has to be the starting point to any consideration of how we develop taxation provisions in the context in which we currently find ourselves.
The extraordinary budgetary adjustments the Government has introduced during this economic crisis have halted the deterioration in the budget balance and boosted international confidence in our ability to put our house in order. There are now tentative signs that the economy is beginning to stabilise on a number of fronts. Key macro-economic and fiscal data released in recent months are generally in line with expectations. There is an emerging consensus among economic commentators that growth is likely to return in the second half of the year and re-establish itself on a full-year basis in 2011. This perspective is broadly shared by my Department. This is why I announced in my budget speech last December that we are now turning the corner with a plan to take us on the path of sustainable economic growth.
While there have been many difficulties during these challenging times, there has also been a broad consensus nationally that decisive action was required to preserve our hard earned economic and social progress. By taking the necessary corrective measures to stabilise the public finances, we have generally seen a positive reaction from investors and an easing in our cost of borrowing. Across the wider economy we are seeing a number of necessary adjustments which will help restore our cost competitiveness. In particular, general price levels continue to fall and there is evidence that labour costs are improving. This will greatly assist our competitiveness. In overall terms, these developments will position us to take advantage of a strengthening international economy and we can expect to see domestic business and economic confidence returning with increased economic growth in our leading export markets. This will ultimately translate into increased economic activity and employment opportunities. Continuous investment over a number of decades in our greatest resource, our highly educated and skilled workforce, means our potential to grow is enhanced as future economic development will be focused on harnessing emerging opportunities in knowledge-intensive sectors.
The Finance Bill is key to our fiscal and economic strategy. The Bill targets support to enterprise and the Government remains committed to providing a pro-enterprise environment and maintaining our relatively low tax burden on business. This will assist us to maintain and enhance our competitiveness. For example, the Bill extends the existing scheme of tax exemptions on the income and gains of new start-up companies in the first three years of operation. It will now be available to companies which commence to trade this year. Measures have also been introduced to enhance the existing energy efficiency scheme and the regimes for intangible assets and research and development activity.
In a major move, the Bill contains measures to facilitate the development of Islamic finance in Ireland. Islamic finance is the fastest growing sector of the international financial services industry and it is important that we are in a position to attract this new type of investment. Under these provisions, the tax treatment applicable to conventional finance transactions will be extended to embrace Islamic finance.
The Bill enhances the capability of the Revenue Commissioners on a number of fronts. Possibly the most significant measure is the introduction of a mandatory disclosure regime for tax schemes that have characteristics that indicate they may be abusive. By obtaining information on aggressive tax avoidance schemes at an early stage, the Government can decide, if appropriate, to close them down.
The Bill also facilitates access by Revenue to information in the possession of NAMA on any offshore entities or vehicles. In addition, it allows for a substantial increase in the fines a court may impose on those convicted on indictment of certain offences under excise and custom law.
We are aware of the long-term challenge posed by climate change and it is the responsibility of governments everywhere to change behaviour to reduce greenhouse gas emissions. As a result, the Bill provides full details of the carbon tax which I announced on budget day. The tax has already been applied to petrol and auto diesel. It will apply from next May to kerosene, marked gas oil, liquid petroleum gas, fuel oil and natural gas and the application of the tax to coal and commercial peat will be subject to a commencement order.
As a result of the European Court of Justice ruling against Ireland of 16 July 2009, the value added tax legislation must be amended to allow public bodies, including local authorities, to be subject to VAT where they engage in activities that lead to a distortion of competition with private operators. The Bill contains the necessary provisions. Examples of services that will now be subject to VAT include waste collection, landfill, recycling, off-street parking, toll roads, rent from certain lettings of commercial property and the supply of staff and data. It should be noted that such services are already subject to VAT where provided by a private operator. The standard or the reduced VAT rates will apply, as appropriate. The changes will generally apply from 1 July this year, but the application of VAT to the supply of sports and community facilities by public bodies, including local authorities, is being made subject to a commencement order. Education, health, water and passenger transport services will not be subject to VAT arising from the judgment. Business customers that charge VAT will be in a position to claim a deduction for any VAT charged by a public body. The impact on private individuals, VAT exempt entities and other non-registered bodies will depend on whether the VAT is passed on by the public bodies, which should be limited somewhat since public bodies providing the affected services will have entitlement to deduct VAT on their inputs.
In respect of tax expenditures, the Bill abolishes six tax reliefs recommended by the Commission on Taxation. I had already announced in the budget that mortgage interest relief would also be abolished on a phased basis and a number of property based reliefs in the health sector were removed by the Finance Act 2009. Senators will be aware that I propose to ask each of my colleagues in the Government to assess the effectiveness of tax expenditures within their sectors with particular reference to those that the Commission on Taxation recommended should be removed from the tax code. This process will commence shortly and my Department will review the outcome of the sectoral analysis. It is my intention to report back to the Cabinet on progress by the end of June. This new approach will place the onus for objectively justifying retention of expenditure on the sector benefiting from the relief. My Department will then be in a position to present the Cabinet, in good time for the 2011 budget, with an analysis on which decisions about the future of tax expenditures can be made.
I will refer to the detail of measures in the Bill. The Finance Bill 2010 is one of the larger Finance Bills of recent years and since it runs to 165 sections, Senators will appreciate that it is not practical for me to go through it section by section. Instead, I will describe some of its main provisions in the time available to me.
Part 1 covers a cost benefit analysis of tax expenditures. Senators will be aware that on Report Stage in the Dail I agreed to accept an Opposition amendment which requires that a report be prepared for Dáil Éireann on the tax forgone and the benefits in terms of job creation or otherwise arising from the expenditures included in the Bill. This amendment now forms section 1. It should be noted that the Government will propose a recommendation on Committee Stage to change the time period for the preparation of this report from one month after the passing of the Bill to three months. It is my belief a one-month timescale would be impractical and would not allow the preparation of a report of suitable substance.
Part 2 covers the income levy, income tax, corporation tax and capital gains tax. The budget day announcement that an exemption from the income levy would be provided for certain capital expenditure incurred by farmers in meeting the requirements of the EU nitrates directive is covered in section 3. This section also makes a number of technical amendments to the income levy, including placing the levy on the same footing as income tax for double taxation agreements and cross-border worker relief purposes. Two tax reliefs recommended for abolition by the Commission on Taxation are dealt with in section 5. This ends the tax relief for long-term care policies and the benefit-in-kind relief relating to the loan of certain art objects.
Section 6 contains a number of changes which will simplify the approval of qualifying health expenses for tax relief purposes. The requirement for approving medical institutions is removed. Instead, maintenance or treatment costs will now qualify for relief where they are necessarily incurred in association with the services of a practitioner or diagnostic procedures carried out on the advice of a practitioner. Under the revised arrangements, nursing home fees will qualify for relief, provided the nursing home concerned provides qualified nursing care on-site on a 24-hour basis. I am also amending the legislation to clarify that tax relief continues to be available in respect of private contributions made towards the cost of the upkeep of an individual under the fair deal scheme.
Changes to the mortgage interest relief regime announced in the budget are provided for in section 7. To support those who bought their homes at the peak of the housing market, relief is being extended until 2017 for those who took out a qualifying loan for a home purchase in 2004 or afterwards. It provides encouragement for those who may wish to purchase in the next three years and relief will be available at current levels until 2017 for loans taken out between 1 January this year and 31 December next year. This is an extension of six months on the budget day announcement.
Section 10 enhances the current remittance regime. It provides an incentive for foreign employees to undertake an assignment in Ireland. The scheme is being extended to include EU and EEA nationals, while reducing the amount of time they have to spend in Ireland from three years to one.
Section 12 provides for the abolition of tax relief on service charges. This change is in line with the recommendations of the Commission on Taxation. Provision of such relief is inconsistent with the overall thrust of having people meet the economic costs of the services provided. Relief can be claimed this year for service charges paid in 2009 and can be claimed next year for charges paid in 2010. However, there will be no relief for charges arising in 2011 which would have been claimed in 2012. An anti-avoidance provision in section 13 tightens the rent-a-room scheme.
Section 16 makes a number of amendments to certain pension-related tax provisions and introduces a requirement for the electronic delivery of certain information in respect of small self-administered pension schemes. Sections 17 to 19, inclusive, are designed to prevent abuse of certain share-based remuneration schemes for employees. As I announced in my Budget Statement, the Government seeks for high earners availing of tax incentive schemes to contribute more in the current difficult economic circumstances. Therefore, I am abolishing, with effect from 2010 tax year, the loss relief available to owners of significant buildings and gardens who are passive investors. Details of the changes are set out in section 21, with some transitional arrangements. The effective income tax rate paid by people subject to the restriction of reliefs or horizontal measure is increased from 20% to 30% in section 23. This change is an important move in ensuring all parts of society play their part in addressing the difficulties facing the public finances.
Section 24 brings Irish tax law into line with certain provisions of the EU treaties and will allow charities located in other member states access to the tax exemptions and reliefs already available to charities based in Ireland where all of the required conditions are met.
The windfall tax, a special 80% rate of tax on disposals of rezoned land which was introduced as part of the NAMA legislation, is amended by section 25. The provision will ensure material contraventions involving a rezoning are covered by the tax. The amendment also ensures the sale of one-off sites below an acre in size and €250,000 in value are not subject to the windfall tax.
Section 26 provides for the termination of the scheme of capital allowances in respect of child care facilities. The scheme, which was previously open-ended, now has a termination date of 30 September 2010, unless certain qualifying conditions are met. This measure is in line with the termination of other capital allowance schemes which were undertaken in the Finance Act 2009 and in line with a recommendation of the Commission on Taxation.
Section 27 amends section 372AW of the Taxes Consolidation Act 1997 which relates to the mid-Shannon corridor tourism infrastructure investment scheme. It extends by two years the period during which applications can be made and within which expenditure must be incurred for capital allowances purposes. Clearance will be required from the European Commission from a state aid perspective.
The tax relief that is currently allowed where donations of qualifying heritage properties are made to the Irish Heritage Trust is being extended in section 28 to similar donations to the Commissioners of Public Works. The overall financial limit on the value of such properties that can be donated in any tax year is, however, being retained.
Enhancing the attractiveness of Ireland as a location from which to conduct international business is an important theme in this Bill. The tax treatment applying to the new management company passport regime introduced by European legislation, the UCITS IV Directive, is clarified in section 31. The section also exempts investment undertakings from the requirement to obtain and maintain declarations of non-Irish tax resident unit holders where the investment fund in question is not marketed in Ireland to address the disproportionate administrative burden this places on industry. Section 33 removes the requirement for non-resident companies receiving dividends from Irish resident companies to provide a tax residence and-or auditor's certificate to obtain exemption from dividend withholding tax at source. Instead, a self-assessment system will apply.
The legislation on deposit interest retention tax is amended by section 37 in a number of respects. First, it removes personal retirement savings accounts from the scope of the DIRT regime. Second, it requires a relevant deposit taker to obtain the tax reference number of a person making a specified deposit. This will facilitate the introduction of the national solidarity bond announced in the budget speech. Third, financial institutions will make accelerated payments of DIRT tax to the Exchequer. Fourth, financial institutions must automatically issue statements setting out the amount of DIRT deducted rather than on request as at present.
I mentioned earlier that section 39 should enable us to tap into the growing market of Islamic finance, an industry that in 2007 was estimated to be worth approximately $700 billion and is estimated to be growing at roughly 10% per annum. Equally, it will ensure a level playing field is created for all commercial financial product providers so that the tax benefits that accrue to conventional financial products are also available to Islamic financial products.
Ireland's existing, but limited, arm's length pricing rules for manufacturing cease at the end of this year with the ending of manufacturing relief. The opportunity is now being taken in section 42 to introduce general transfer pricing legislation. The provisions will align Ireland's tax code in this area with international norms, namely the OECD transfer pricing guidelines.
A number of enhancements are being made to the scheme of tax relief introduced last year for the provision of intangible assets. The amendments in section 43 include additions to the list of specified intangible assets that can qualify under the scheme and a reduction in the period from 15 to ten years over which the assets must be held to avoid a clawback of the relief. The aim of these amendments is to increase the effectiveness of the scheme and to enhance its ability to attract international business to Ireland. The scheme is designed to facilitate Irish-based companies actively managing and exploiting intellectual property assets. It was never intended to cover expenditure on liquor licences, which expenditure is being specifically excluded from benefiting under the scheme.
Section 44 extends from seven to ten the categories of energy-efficient equipment eligible for the existing accelerated capital allowance scheme. The new categories included in this scheme are refrigeration and cooling systems, electromechanical systems, and catering and hospitality equipment.
The budget speech included an extension of the existing scheme where start-up companies have a three-year relief from corporation tax. Section 45 gives effect to this by covering companies commencing trade in 2010.
It is important the annual Finance Bill includes measures which ensure Ireland can continue to attract internationally traded services. Three consecutive sections, 46 to 48, inclusive, are aimed at this objective. These provisions provide for unilateral credit relief in respect of royalty flows from residents in non-treaty countries which is being extended to all trading companies, allowing unused credits in respect of foreign tax on branch profits to be carried forward and credited against corporation tax in succeeding accounting periods and to permit a company to carry forward excess losses of a foreign branch that were disregarded under section 847 of the Taxes Consolidation Act 1997. In a similar manner, changes are proposed in section 50 to the current tax treatment of dividends received by companies in this country that are aimed at improving the international business environment and help to encourage the creation of high quality employment in the economy.
Section 54 introduces a number of changes to the existing research and development tax credit scheme. The main change deals with a position where a company or company group is carrying out research and development activities in different facilities in separate geographical locations and the activities in one of those facilities is permanently discontinued.
Section 56 makes two amendments relating to the date of disposal and acquisition of an asset. The first amendment avoids a position where a person disposing of land under a compulsory purchase order could have been due to pay the liability before receiving compensation for the land. The second amendment ensures the proceeds from a CPO are liable to capital gains tax where the individual making the disposal dies before receiving the consideration.
Part 3 deals with Customs and Excise. The legislation for the introduction of a carbon tax and the consequential necessary legislative changes arising from this tax is set out in sections 64 to 87, inclusive. Section 88 confirms budget day announcements reducing the rates of alcohol products tax. Section 89 introduces amendments to the existing bio-fuel mineral oil tax relief scheme operated by the Department of Communications, Energy and Natural Resources. Sections 90 to 93, inclusive, provide for the updating of excise law provisions to reflect new European legislation introducing the new computerised excise movement control system.
Sections 94 to 101, inclusive, change the penalties applicable to certain offences under excise and custom law, increasing substantially the fines which a court may impose on persons convicted of such offences on indictment. Included here is section 97 which places on a clear legal footing the arrangements under which Customs and Excise can obtain information in respect of goods and passengers in advance of their arrival.
Vehicle registration tax issues are dealt with in sections 102 to 111, inclusive, including, in addition to the VRT items I already mentioned, the introduction from 1 January 2011 of a revised classification system for the registration of vehicles within the State to reflect the broader European classification system, and the introduction of a new requirement for vehicle insurers to inform Revenue where they issue a policy for a foreign registered vehicle for a period in excess of 42 days, which requirement will provide Revenue with a further tool to tackle VRT evasion by State residents who fail to re-register and pay the appropriate VRT on vehicles purchased outside the State. Included here are sections 107 and 108 which, respectively, confirm budget day announcements introducing a scrappage scheme and extending until 31 December 2012 the existing VRT exemption for electric vehicles and the existing VRT relief of up to €2,500 for plug-in hybrid electric vehicles.
Sections 112 to 133, inclusive, set out a range of changes to VAT. These changes include the reduction in the standard VAT rate by 0.5% to 21% with effect from 1 January 2010, the application of VAT to services provided by public bodies, including local authorities, the introduction of a margin scheme for second-hand means of transport and agricultural machinery, changes to the VAT treatment of telephone cards and prepaid top-ups for mobile phones, and the application of the reverse-charge mechanism to the supply of greenhouse gas emission allowances. In addition, sections 130 to 132, inclusive, make amendments to the VAT Acts to facilitate the introduction of a VAT consolidation Bill later this year.
Part 5 deals with stamp duty. Section 135 allows for the exchange of data between the Revenue and the Property Registration Authority in the context of the new e-stamping regime which was introduced in last year's Finance Act. A relief from stamp duty is being provided under section 138 to facilitate fund mergers enabling the reorganisation of funds into structures now permitted under recent European UCITS IV legislation. The levy on certain life assurance premiums is being amended by section 139 to exclude pensions and reinsurance business. The payment date for the levy is also being brought forward.
Provisions relating to a wide-ranging package modernising capital acquisitions tax are covered in section 147, the details of which are outlined in full in the explanatory memorandum. Delivered on an Exchequer-neutral basis, the changes will deliver significant benefits to customers and their agents, including the elimination of up to 75% of the current quantum of capital acquisitions tax documentation combined with the use of faster, simpler and more straightforward processes.
Part 7 covers miscellaneous provisions. Section 149 introduces a new mandatory disclosure regime for tax schemes that have characteristics which indicate they may be abusive. The measure will require promoters to give details of such schemes to the Revenue Commissioners, shortly after they are first marketed or made available for use. In certain limited circumstances, the obligation to disclose will fall on the users of such schemes. By obtaining information on aggressive tax avoidance schemes at an early stage before a loss of taxation becomes apparent, the Government can decide, if appropriate, to close them down before they can do significant damage to tax revenues.
The domicile levy is included in section 150. The levy will ensure wealthy citizens make a contribution to the national finances at this time of difficulty. It applies for the 2010 tax year and subsequent years.
In the Budget Statement, I highlighted the importance of improving the effectiveness of the Revenue Commissioners in addressing the challenges facing the collection of taxes, including dealing with tax avoidance. Sections 153 to 156, inclusive, contain several related measures which aim to achieve this objective.
Section 158 is the final step in the ratification process for new double taxation treaties with Bahrain, Belarus, Bosnia-Herzegovina, Moldova, Georgia and Serbia. It also provides for the ratification of eight tax information exchange agreements with Gibraltar, Guernsey, Jersey, Turks and Caicos Islands, Anguilla, Bermuda, Cayman Islands and Liechtenstein.
Section 161 provides for the introduction of a statutory scheme providing for voluntary deductions from members of the Judiciary to cover pension-related deductions.
Section 163 amends the Bretton Woods Agreements Act 1957 to provide that the Minister for Finance may guarantee the provision of a bilateral loan facility by the Central Bank, acting as agent of the Minister, to the International Monetary Fund, IMF.
I hope the Seanad has found useful this explanation of the Bill's measures. It is a comprehensive Bill that will enable us to take further steps on the path we have already established to fiscal and economic recovery.
The provisions are extensive and run to a large number of sections. However, it is worth bearing in mind that no substantive changes were made to income tax. The earlier emergency supplementary budget 2009 had already increased dramatically the imposition of income tax on taxpayers at every level. It had done so in a progressive and equitable way which ensured those who earned most, paid most.
As a result, however, of the various changes to income tax and levies introduced in the Finance (No. 2) Act 2009, it was clear a substantial number of taxpayers were paying more than 50% at the marginal rate on their income. The scope, therefore, for further increases in income tax was limited. Other branches of taxation have been examined and improved.
It is important, irrespective of which party is in government, that a strong signal is sent out through our taxation measures that Ireland is open and available for investment. In recent weeks, clear signals have emerged that international investors see Ireland as a desirable location for investment. That is a result of the budgetary decisions taken by the Government in the teeth of vigorous opposition. Those decisions have ensured that a measure of international confidence has returned to the country. They key task facing all of us is to translate that into confidence at home so we believe in ourselves as a people and in our capacity to tackle our economic problems. We must go ahead to lay the foundations for economic recovery.