I welcome the Minister of State.
Finance Bill 2015 [Certified Money Bill]: Committee Stage
SECTION 1
Question proposed: "That section 1 stand part of the Bill."
Should the system under which all of a person's income is liable to USC when they pass the exemption limit be reconsidered?
The Senator should start again. We could not hear him because the microphone was not turned on.
I welcome the Minister of State. The system under which USC becomes payable on every cent earned once a person goes over the limit is quite unusual in the tax code. Usually an exemption is an exemption, as it is in the case of exemption from PAYE. When people go over the exemption limit, has consideration been given to just applying the tax to the amount by which they exceed the limit rather than to the very first cent of money that they earn?
The Senator highlights a real difficulty with USC. It is a very crude instrument of taxation, which is why we are committed to removing the burden of USC from hundreds of thousands of people and reducing all the rates of USC in this Finance Bill. Ultimately, we are also committed to the abolition of USC. The priority of the Government and Minister for Finance, Deputy Michael Noonan, is to abolish USC over time. His preference for the moment with the limited fiscal space available to him is to reduce the various rates. The Bill provides for an increase in the entry point to USC from €12,012 to €13,000 from 1 January 2016. It is estimated that over 700,000 income earners will not be liable for any USC at all in 2016. The entry point to USC was €4,004 when we entered government and this will be the third occasion on which the Minister will have increased the entry point.
The number of income earners exempt from USC is affected by the condition of the economy because as the economy continues to improve, more people will be earning more than the entry point to USC. The increase in the minimum wage from €8.65 to €9.15 per hour will increase the hourly income of minimum wage workers by over 5.7%. It is preferable for an individual to pay some USC and have a higher net income than to be exempt from USC and have a lower net income. The changes announced in the budget will mean that all income earners who pay USC will see a significant reduction in their USC bill from 2016 for the same level of income.
I take the broader point that the Senator is making, but it is the policy preference of the Minister to work towards the abolition of USC. He is targeting the fiscal space available to him with that very aim of taking more people out of the USC net and reducing the three rates in order that we can have a tax system post-USC within a matter of years.
I thank the Minister of State. In the literature that is called a poverty trap. If somebody has an income above that limit and all of the earlier income is taken into the tax net, it gives a very high marginal tax rate, which should be avoided. I agree with the Minister of State's emphasis.
Question put and agreed to.
Section 2 agreed to.
NEW SECTION
Recommendation No. 1 is in the names of Senators Kathryn Reilly, Trevor Ó Clochartaigh and David Cullinane.
I move recommendation No. 1:
In page 11, between lines 20 and 21, to insert the following:
“3. The Minister shall, within one month of the passing of this Act, prepare and lay before Dáil Éireann a report on options available for removing the USC liability for all workers earning less than €19,572 a year.”.
The Minister of State has mentioned that the Minister's commitment is to abolish USC over time. We can only make recommendations. The purpose of this recommendation is to reduce taxation on low income earners who earn less than €19,752 a year. We came to that figure by way of our own proposal to raise the minimum wage by €1.50. At that level, we believe it would be at the threshold of a normal week's work for a worker. The €13,000 figure that the Minister has selected falls too short. Those on minimum wage in the State are hit hardest with regard to the challenges of rent, education costs and the different expenditures people have in day to day living. We believe there is a necessity to move towards a living wage and seek to ensure there is space available for people to be able to live on that wage. Taking anyone earning less than €19,572 a year out of the USC net would allow for this.
I thank the Senator for her recommendation. It appears from the wording of the proposed recommendation that it is the Senator's intention that all those earning up to €376 per week, just over the earnings of a full-time worker on the new minimum wage of approximately €357 per week, should be exempt from the charge to USC entirely. It is unclear whether the Senator also intends that this recommendation would consider all income earners with income of less than €19,572, rather than just workers. I do not think that is what she is trying to do, but it is a little vague in that regard. Such a group would also include pensioners and people with income from their investments.
The Senator will be aware that the budget contained a number of measures specifically targeted at supporting those on lower incomes. With regard to USC, the changes proposed to the Finance Bill include the extension of an exemption threshold to €13,000 per annum. This measure alone removes an estimated 40,000 low-income earners from liability to the charge entirely. It is now estimated that over 700,000 individuals - 29% of all income earners - will not be liable to USC from 2016. In addition to this, as a result of a reduction of the two lower rates of USC and the extension of the ceiling for the second rate of USC from €17,576 to €18,668, all those earning the increased minimum wage with an average working week of 39 hours will remain liable to the two lower rates of USC, notwithstanding the increase in their gross income. Senators may also be aware of the new PRSI credit which was introduced in the budget in order to address the PRSI step effect, which otherwise would have negatively impacted on workers on the increased minimum wage. This is a further measure aimed at supporting those on lower incomes, by smoothing entry into the PRSI system.
With regard to the proposal from the Sinn Féin Senators who would like a report prepared on options to increase the USC exemption threshold to €19,572, it should be noted that this would increase the entry point above the current entry point to income tax, which stands at €16,500 per annum for a single employee. As a result, such an individual would pay no tax, no USC and would have a minimal liability to PRSI. Doing this would seriously undermine the original rationale for the introduction of USC; therefore, we need to look at it in the context of how one phases out USC in a fair manner. In addition, USC was intended to ensure that for as long as it lasts most individuals would make some contribution towards the provision of services and towards assisting in restoring the public finances. The removal of individuals earning up to €19,572 would obviously not achieve this.
When the Government considers options for a budgetary tax package, it must take account of all the parts of the package and, therefore, single measures could not be contemplated in isolation. Taking these factors into account, the Minister is not minded to expend resources of the Department on the production of the report requested by the Senator and cannot, therefore, accept the recommendation.
On the issue of a living wage and how we ensure people earn a decent wage, there will obviously be different policy proposals from all parties. I fear that increasing the minimum wage by the rate that Sinn Féin proposes would have the unintended consequence of stalling job creation. We can debate that issue at another time.
I thank the Minister of State for his response. We will not get into the living wage argument here, but the Joint Committee on Jobs, Enterprise and Innovation just published a report on the issue with cross-party agreement. Perhaps the Minister of State might look at it.
I have it.
I thank the Minister of State for his response.
Recommendation put and declared lost.
Sections 3 to 14, inclusive, agreed to.
NEW SECTION
I move recommendation No. 2:
In page 16, between lines 32 and 33, to insert the following:
“15. The Minister shall, within one month of the passing of this Act, prepare and lay before Dáil Éireann a report on options on introducing a third rate of tax payable at 47 per cent on income over €100,000.”.
We are used to doing the dance on this recommendation. It has been made in this and the other House on numerous occasions and we are all very familiar with the arguments for and against it. The Minister of State knows what I will say and I know what he will say but God loves a trier. At the heart of the recommendation that a report be produced on options to introduce a third rate of tax, payable at 47% on income over €100,000, is the question of how to have an income tax rate that would allow people to work hard and take home more money that would allow them to live comfortably, while contributing more. It would put a brake on the growth of the income chasm between the rich and the poor that we discussed on Second Stage. We need to ask ourselves how this could be done in a way that would not penalise people on middle incomes who might be squeezed. On every €1 over €100,000 we suggest an extra 7 cent should go into the State's finances which would have the effect of creating a more equal society, putting a brake on the growing disparity in incomes and bringing hundreds of millions of euro into the State’s finances to address some of the problems being experienced by those in the lowest third of the population’s earners.
On Committee Stage in the Dáil my colleague, Deputy Peadar Tóibín, related this to the concept of price elasticity saying there was not necessarily a linear relationship between tax or price and behaviour. He said if people were asked if they would be happy to pay a little more tax in order to have a health service in which patients would not wait on trolleys, 90 year olds would not have to wait days and children would not be forced to take painkillers for tooth pain because they had been waiting months for dental surgery, most would say they would be willing to pay a little extra if necessary and if they could afford it. This recommendation proposes that those on high incomes could contribute 7 cent more.
As the Senator said, we have this exchange regularly in this House and the Dáil and know one another’s positions clearly. I do not buy into the logic that if taxation was increased on something, it would yield more. While accepting that everyone has to pay his or her fair share and that the system has to be progressive, there is significant evidence to suggest that if we want more of something, we should tax it less. If we want more jobs and productivity in the economy, we should not hike up taxes, particularly when living on an island with two jurisdictions. If the Senator is in favour of a united Ireland and having an all-Ireland economy, having two very different marginal tax rates, whereby somebody in Northern Ireland pays a much lower rate than somebody in the Republic, would not be good for investment in the Republic and would not make much sense in the promotion of an all-Ireland economy. It is important to note that the top 1% of income earners pay 22% of the total income tax and universal social charge take. That is up from 21% last year and 19% the year before that. I am absolutely in favour, as is everyone in this House, of progressivity and people paying their fair share, but we need to ensure there are no unintended consequences.
The basis for the recommendation is having a report laid before the Dáil on the options for introducing a third rate of income tax of 47% on individuals’ income in excess of €100,000. The Government’s commitment is not to increase top marginal tax rates. A third rate of tax of 47% would increase the top rate of tax by seven percentage points. It would also have the effect of increasing the top marginal tax rate to 59% for employees and 62% for the self-employed. The Minister for Finance, Deputy Michael Noonan, discussed this proposal at length with Deputy Peadar Tóibín on Committee Stage in the Dáil. He expressed his concerns, supported by research from the Organization for Economic Cooperation and Development, OECD, that tax rates at such levels would be anti-competitive and could drive skilled workers out of the country at a time when we needed to battle to attract skilled workers and talents into the country and to stay here. His view is that this recommendation would damage rather than support the economy. Marginal tax rates influence individuals’ decision to work more or work at all. Higher marginal tax rates for earners might also incentivise a greater level of tax evasion and contribute further to the development of a shadow economy. As the Minister stated in his Budget Statement, it is his desire to have every worker progressively moving to a point where the marginal tax rate will not be more than 50% for all workers. We think this would make Ireland more attractive for mobile foreign investment and skills, including for returning emigrants and attracting and keeping skills in the country.
Recommendation put and declared lost.
Sections 15 and 16 agreed to.
SECTION 17
Question proposed: "That section 17 stand part of the Bill."
I tried to research the estimate of €70 million per production and found completely contradictory estimates, some as low as €4.5 million and some much higher. It is a 40% increase, from €50 million to €70 million, when money is not exactly growing on trees. How did we get to the figure of €70 million and do we know whether we will get value for that money? Are we subsidising very expensive movies? Why has the figure gone up by 40% in a 12 month period?
Last year the Minister for Finance said he would keep the cap on eligible expenditure on the film tax credit under review, as well as considering other possible amendments to improve the operation of the scheme. In recognition of the importance of Ireland’s film industry to the cultural economy he announced an increase in the cap on eligible expenditure to €70 million in the budget. This arose from a proposal within the Government from the Minister for Arts, Heritage and the Gaeltacht. The Minister’s aim in doing this, based on his advice from that Department, is to try to attract higher budget films to Ireland. He does very much intend to monitor the measure closely to ensure it has the intended effect. The Minister for Arts, Heritage and the Gaeltacht had indicated that the current cap made the scheme less attractive to big budget films and that a sizeable increase was needed to encourage film studios to invest in increased studio capacity. I recently visited several film studios in my constituency and this issue came up - that they needed to attract more big budget films. We are trying this on the advice of the Department of Arts, Heritage and the Gaeltacht, but the Minister for Finance will monitor it to make sure it has the intended effect of attracting more film productions and an expansion of film studios.
I thank the Minister of State. I thought €70 million was for the lot for the year. It is a gamble. We hope it will work, but it seems to be very generous.
Question put and agreed to.
Section 18 agreed to.
NEW SECTION
I move recommendation No. 3:
In page 26, between lines 1 and 2, to insert the following:
“19. The Minister shall, within 1 month of the passing of this Act, prepare and lay before the Oireachtas a report on the operation of the Employment and Investment Incentive in particular in how it relates to companies more than seven years old.”.
On Second Stage I gave the Minister of State a specific example to highlight my concern. Without the insertion of this recommendation, companies more than seven years old are disadvantaged under the provisions under which there is access to the employment and investment incentive, EII, scheme because of the amount of finance they must raise. Will the Minister of State’s officials look into this matter? It appears from research conducted by Fianna Fáil that this is the case. If that is the case, the purpose of inserting this recommendation would be that within one month of the passage of the Bill the Department would come back with a report on how the EII scheme was operating for companies seven years old or older.
We discussed this issue on Second Stage. I do not quite understand it because if the Government is aiming to encourage people to invest, it should also aim to maintain investments, but this does not apply to anything older than seven years.
I thank the Senators for raising this point on Second Stage. It is an important point and I asked officials in the Department to liaise further with them. They corresponded by e-mail with the Senators to explain the rationale behind this measure. It is not a case of the Government or Ireland deciding on a measure but of recognising the EU rules around it. It is not entirely clear from the wording proposed in the recommendation what the specifics are that the Senator wishes to be contained in the proposed report. We can engage on that matter and, I hope, provide him with whatever information he needs between now and Report Stage.
The EII scheme is targeted at job creation and retention and available to the majority of small and medium-sized trading companies. However, as it is a state aid scheme, the Irish authorities were required to make changes to the qualifying company criteria in order to comply with the new guidelines that came into effect recently.
The alternative could have resulted in the scheme being in breach of state aid rules. In such a scenario, the Commission could have requested the suspension of the scheme in its entirety and launched a full investigation regarding its compatibility with the internal market rules.
In allowing for state aid for risk finance investments the Commission has moved away from qualification criteria based on whether an enterprise is in seed, start-up or expansion phase and has now set new criteria on the type of companies that can qualify. These new European rules stipulate that a qualifying company must not have been operating in any market; have been operating in any market for less than seven years following their first commercial sale; or require an initial risk finance investment which, based on a business plan prepared in view of entering a new product or geographical market, is higher than 50 % of their average annual turnover in the preceding five years. That is how we arrived at that position.
In addition, regarding follow-on investments, the following three criteria must all be met: the lifetime limit of €15 million is not exceeded; the possibility of follow-on investments was foreseen in the original business plan; and the company has not become linked with another company such that it would no longer be an SME. The revised guidelines from the Commission take account of the fact that SMEs may face difficulties in gaining access to finance, particularly in the early stages of their development. The Commission notes that business finance markets may fail to provide the necessary equity or debt finance to newly created and potentially high growth SMEs resulting in a persistent capital market failure, which negatively affects SMEs growth prospects.
The Commission, therefore, made the changes to the qualifying company criteria in recognition that newer SMEs found it more difficult to raise funding via traditional routes. Such companies typically create more employment than companies that have been operating for longer periods and this furthermore justifies the targeting of the relief. Regardless of whether I agree with the recommendation, the hands of the Government are tied in this regard. We need to make sure an investment scheme put in place to support start-ups and SMEs is compliant with EU rules. If it is not compliant, we risk jeopardising the scheme. The Commission had been monitoring this and its view is clear to the Department.
We published the detail of the changes in the financial resolution on budget day. I am sorry I cannot accept the recommendation, but that is the rationale behind my decision.
I thank the Minister of State for his response. He stated the new EU rules or guidelines were recently introduced, but I wonder when that was. With regard to their transposition, were they rules or guidelines? The Minister of State mentioned both words. Were they transposed into Irish law by way of statutory instrument or was a report submitted? How was it assessed by the Minister? Were they referred, for example, to the Joint Committee on European Union Affairs, the Joint Committee on Jobs, Enterprise and Innovation or the Joint Committee on Finance, Public Expenditure and Reform? Has there been legislative scrutiny of these changes? Will the Minister of State provide the detail?
I will give the Senator all the details I have available and we can engage further between now and Report Stage. My understanding is that these guidelines are from 2014. The Commission has made it clear Ireland needs to make sure it is in compliance with them and we do not want to jeopardise the scheme. I also understand the action needed to be taken by the Minister requires reference in tax law to the existence of the guidelines and, therefore, the Minister did not need to sign a statutory instrument.
I am not aware of a discussion by an Oireachtas committee. I do not have that knowledge.
I appreciate that, but this highlights the issue of how we deal with EU guidelines. While I do not question the fact that the issue was raised by the Commission and it has sent guidelines to the Department, in legal effect guidelines are guidelines. They do not derive from an EU directive. Who made the decision in the Department? I acknowledge that this is a niche issue which will not affect a vast number of people overnight. It appears there has been no scrutiny of this and if had not been brought to my attention and that of Senator Feargal Quinn and a few others by an Irish company, we would not have known about it. Perhaps that is also down to us. More than 80% of our laws emanate from the European Union and the scrutiny of EU legislation and directives is a broader issue. What is the difference between a Commission guideline and a directive and what we must do in respect of each? Must the Government follow a guideline?
The Senator has made a fair point. While a directive is something Ireland, with every other member state, commits to transpose and implement in various ways through national parliaments, we do not have to implement a guideline, but if we want Commission officials to approve our scheme from a state aid point of view, we have to be in compliance with the rules. This did not need to be transposed into domestic law in the sense that it did not require a statutory instrument, legislative change or even pre-legislative scrutiny. This is the Commission stating it is the policeman on state aid and if we want to have our scheme approved, we need to be in compliance with state aid rules. It is the approving body and these are its guidelines. That is the difference.
The Commission has raised the importance of being in compliance a number of times and the Minister and the Department have left it as late as possible to bring in these further restrictions to ensure we are in compliance, but we have to do it now or we run the risk of jeopardising the entire scheme.
Before Report Stage, will the Minister of State furnish Senator Feargal Quinn and me with the relevant correspondence between the Commission and the Department? If that is fair enough, I would like to read it. At least I have clarity now on where this has come from. If we had no choice but to do this, I understand it. The Minister does not want to jeopardise the scheme on the basis of not following a guideline, but again there is the distinction between a guideline and a directive. I will withdraw the recommendation and table it again on Report Stage.
In an effort to be helpful, I will ask my officials to engage with Senators Darragh O'Brien and Feargal Quinn on making available any information available that it is appropriate to make available.
I thank the Minister of State for the explanation. I agree entirely with Senator Darragh O'Brien. We do not want to jeopardise the scheme because it is worthwhile, but we would like to investigate the history behind this and I appreciate the offer he has made.
Recommendation, by leave, withdrawn.
Sections 19 to 31, inclusive, agreed to.
Question, "That section 32 stand part of the Bill," put and declared carried.
SECTION 33
I move recommendation No. 4:
In page 71, between lines 11 and 12, to insert the following:
"(2) The Revenue Commissioners shall then make this country-by-country report available to the public on their website.".
We welcome the move towards country by country reporting, as it will lead to increased transparency. However, this also misses out on public transparency. It is interesting that the public is not allowed to know what is happening. In England, for example, when it was discovered that large multinationals operating there were paying low corporation tax rates, the public became annoyed and political pressure on these companies began to increase.
These organisations then began to consider the necessity of maintaining good public relations with customers and, therefore, stepping up to the plate in respect of having a better corporation tax regime.
All Members are aware that society is a powerful leverage with regard to tax justice. If the information is not made public, consumers are not making full decisions on the justice behind the behaviour of those companies and it is not good for the public not to have such power and knowledge. Although we live in an information society, the information is largely withheld and that neutralises citizens' ability to effect change on these companies. As such public transparency is important, I ask the Minister of State his opinion as to whether he considers it right there should be transparent public knowledge on country by country reporting. Does he think it is important that people are not kept in the dark with regard to their expenditure and the tax justice behind it?
I share the Senator's desire for as much transparency as is possible, which is a desire shared by all Members. However, I also greatly respect taxpayer confidentiality. Where should one draw the line? Do people want to see the Senator's tax affairs or mine? While it is important that the Revenue authorities should see them, they are confidential and the Revenue Commissioners are independent and held in high regard by the public.
While understanding the rationale behind the Senator's recommendation, the main reason I am not in a position to accept it is the Organisation for Economic Co-operation and Development, OECD, base erosion and profit shifting, BEPS, process is a highly positive step forward in that our tax authority and every other tax authority signed up to the OECD BEPS process will be able to receive this country by country reporting. That means tjat not only will the Revenue Commissioners in Ireland know about the level of tax paid by certain companies here, they will also know about the level of tax paid in other OECD countries. This can only be good in tackling aggressive tax planning, tax evasion and various other concerns that are shared by Senators on all sides of the House.
I acknowledge this is an issue Senator Sean D. Barrett raised in the Chamber yesterday. However, were we to do anything that went further than the OECD BEPS process, we would be giving a reason, an excuse or a way out to other countries not to share that information with our tax authority. In other words, the agreement on the BEPS process is that there will be country by country reporting and tax authorities will share the information. The agreement is, however, that such information remains confidential to tax authorities. What I do not wish to do - I respectfully suggest the Senator does not want me to do it either - is to undertake to do anything that would jeopardise receiving additional information which the Revenue Commissioners do not possess today but will have as a result of the OECD BEPS process.
That said and in fairness to the Senator, it is a matter the European Commission is examining separately. The Commission is examining the issue of public country by country reporting. This would require companies to make publicly available information on their operations, activities and profits in each country in which they operate. As I am sure the Senator is aware, the Commission recently held a public consultation on the issue and has now commissioned an impact assessment. The Government awaits the outcome of its impact assessment, which I consider to be the prudent thing to do.
One must ascertain the impact of any of these measures on jobs and investment, but the Government will continue to engage actively in the debate on this issue at a European Union level while proceeding, through this Bill, with the introduction of country by country reporting to tax authorities, as agreed at the OECD as part of the BEPS process. In general, on this issue and all international tax issues, it is important to have a kind of global consistent approach. That is what has been agreed to in respect of country by country reporting. It is a significant step forward and will provide a lot more information for our tax authority and many others. However, the Government cannot take the next step the Senator proposes it should take for the reasons I have outlined.
Briefly, does the Minister of State have an idea as to when the European Commission's impact assessment will be published? Is there a timeline for its publication?
I do not have a precise timeline. I know that the Commission has taken the decision to commission the impact assessment which has started and is under way. Our guesstimate is that it will take a number of months but it is under way.
Recommendation, by leave, withdrawn.
Section 33 agreed to.
Section 34 agreed to.
NEW SECTION
I move recommendation No. 5:
In page 71, after line 36, to insert the following:
“35. The Minister shall, within nine months from the passing of this Act, prepare and lay before Dáil Éireann a report on the effective rates of corporation tax paid by companies in the State.”.
This obviously relates again to the discussion on country by country reporting. The basis for many of the changes is that Ireland has been regarded as an outlier in respect of corporation tax, which some people state has cost us dearly in respect of the amount of tax we should have been receiving for many years. While the changes that have been made are welcome, as is country by country reporting, when people such as the Trinity College academic Professor Jim Stewart, using information from the US Bureau of Economic Analysis, estimates the effective corporate tax rate paid by foreign firms is 2.2%, the damage caused by this shocks to the bone and affects people's human experiences.
I acknowledge that the Minister of State has observed that a change from the agreed negotiated position would reduce the ability of that to function properly. While there is logic to that position, it would be important in this regard that public information be given and for this report on the effective rates of corporation tax to be provided. Some people would contest the figures that have been put forward. I believe the Minister previously has used a figure of 10.7% as being the effective rate, but Members of the other House have contested some of the figures. The introduction to some of the papers set out a broad spectrum of different effective rates, depending on how someone chooses to calculate it. However, it is important to have a report on the effective rates of corporation tax, which would go a long way towards dealing with the issue of transparency. It is a highly topical issue that has been raised in recent months, in particular.
I have certain reservations about the recommendation tabled on the effective rates. There are many valid reasons the rate might be lower than the standard rate. This probably will be my only opportunity to make this point but in respect of the €2.47 billion in additional tax revenues up to the end of October, I note that more than 80% of it was made up of corporation tax receipts. While this is certainly welcome, I read further in details published in The Sunday Times last Sunday that ten of Ireland's largest foreign direct investment companies were responsible for approximately 80% of corporation tax revenue.
I need not tell the Minister of State that previously, there was an over-reliance on one-off taxes. While these are not one-off taxes, the Department of Finance must pay close attention to over-reliance on certain multinational companies that are located in Ireland. These companies are transient and if someone else offers them something better, they will consider it and will move. I believe what is being done disproportionately, in this year in particular by way of the budget, the Finance Bill and the way in which money is being spent pre-election, is the use of a sizeable chunk of corporation tax receipts, which depend mainly on ten large companies.
We must be extremely careful in this regard, which is why there must be careful consideration of reporting, not necessarily on the effective rates of corporation tax, but the quarterly reports that will come from Revenue and the Department. I will conclude on this point, but I simply ask the Department to give careful consideration to the top ten corporation taxpayers in this country, to how secure they are within the country and, therefore, how secure is that tax revenue into the future. When the State is dependent on such a small number of companies for such a disproportionately large amount of its corporation tax receipts, it is at risk to the possibility of any of them moving, which then would change everything.
As the Minister noted on the last day, section 35 replaces the existing capital gains relief applying to disposals of qualifying business assets by individual entrepreneurs and business people with a simplified relief that will apply from 1 January 2016 and the new rate is 20% rather than 33%. The concern I expressed on the last day in respect of section 35 is that it is a subsidy to ex-entrepreneurs. Should there be some constraints that the money is reinvested in qualifying assets, not in property or other uses? Otherwise, it is a subsidy to people to get out of what all Members seek to promote, namely, entrepreneurship, new products and additional employment. Should constraints be placed on people qualifying for the 20% rate as to how the funds are used? While the aspiration was that one would sell one's first business to reinvest in subsequent businesses, as that is how entrepreneurs are formed and they get better each time, supposing they simply buy property?
Let me interrupt the Senator. Would we not be better off disposing of recommendation No. 5 before speaking to the section?
Should I speak later?
We will dispose of the recommendation and then the Senator can speak to the section. I apologise, Members are confusing me today.
While I am all in favour of efficiency, I had better make a few points. First, I always get nervous, I am sure it is not intended, when recommendations or amendments are tabled that appear to suggest the reason every multinational company is locating in Ireland has to do with corporation tax.
That does this country a disservice. I am not suggesting Senator Kathryn Reilly is, but there are many reasons companies make a decision to locate in Ireland and, of course, taxation is one of them. The personal tax levels are also a reason and something we will debate in the coming months. Corporation tax is definitely one. We define the reasons as the three Rs - rate, reputation and regime. The rate matters. I am not referring to a party political regime the Senator will be glad to know-----
I am.
----- but the regime we have in this country is around our business responsiveness. Let us also remember the reputation we have in the delivery of excellence across a range of companies. We have talent, a track record and tax - three Ts. Companies decide to locate here for lots of reasons and while tax is an important one, it is only one.
There are many figures bandied about regarding the effective rate of corporation tax. Senator Kathryn Reilly made reference to the United States BEA data, but we do not accept this as valid in the Irish context because the basic issue is that US data on the profits of subsidiaries of US companies were generally reported by reference to the place of incorporation of those subsidiaries, not by the place of tax residence of those subsidiaries. For that reason, the US data often overstate the profit made in Ireland by subsidiaries of US companies because significant profits arise to Irish registered companies which are tax resident elsewhere. Therefore, I do not accept it is as clear-cut as that.
There has been reporting on this issue. The Oireachtas finance sub-committee undertook quite a significant body of work on this topic. In April 2014 the Department of Finance published a technical paper on the effective rates of corporation tax in Ireland. The paper was jointly written by the Department of Finance and the well regarded economist, Professor Seamus Coffey of University College Cork, to ensure the work was as objective as possible. It was published in line with the budget around that time and contained a comprehensive analysis of the effective rates of corporation tax. It was prepared to provide clarity about the seemingly conflicting figures that were frequently quoted. It is fair to say it is an objective and excellent resource for those who seek to understand this complex and technical issue.
In the past few years there has been a great deal of discussion about the effective rate of corporation tax. Much of this discussion has been confusing and unclear because, as Senator Darragh O'Brien said, there are many reasons for different rates. It is important to note that there is no single measure of effective corporate tax rates which can claim to be the best or the most accurate - different measures are relevant depending on the task at hand. The paper examined three methodologies used in the calculation of effective rates of corporation tax generally. The paper also analysed eight figures which were quoted in great detail regarding Ireland. Two of the rates often quoted are the EUROSTAT implicit tax rate of approximately 6% and the US Bureau of Economic Analysis, BEA, data of 2.2%. However, this paper by Mr. Coffey and the Department of Finance concluded that neither of these rates were adjudged to be the most appropriate rate of effective corporation tax. The EUROSTAT rate is based on national accounts which do not correspond to the actual or legal tax base in computing tax liabilities. This methodology can therefore skew the effective rate and I have already outlined the difficulties with using the BEA rate.
In attempting to assess the effective corporate tax rate applying to the total profits earned by companies in Ireland, the paper concluded that the approach based on the national aggregate statistics from the Revenue Commissioners and the Central Statistics Office was the most suitable. The paper found that the effective rates of corporation tax as measured according to statistics from these two sources were reasonably close to the headline rate of 12.5% and that the difference was mainly accounted for by double taxation relief and a small number of other reliefs, including the research and development tax credit.
The paper was based on the analysis of effective rates across a ten-year period and, therefore, I do not believe there is a need for it to be re-examined on an annual basis. It was only published in 2014. On the basis of this extensive analysis, we are comfortable that companies in Ireland are paying the appropriate rate of corporate tax on profits generated by those companies in Ireland. Given that a detailed report has previously been prepared by my Department and discussed at length by the Oireachtas finance committee, I do not believe there is a need to allocate scarce resources to conduct another report at this time.
With regard to the important issue of corporation tax raised by Senator Darragh O'Brien, he is correct that it needs to be monitored closely. After all the State has been through it is important that we continue to very carefully monitor very the Exchequer figures, where tax is rising and where revenues are ahead of profile. The performance of corporation tax receipts has been unexpectedly strong in 2015. At the end of November, corporation tax receipts were €2.3 billion, or just under 60% higher than expected, at €6.4 billion, and up €2.2 billion, or 52% in year-on-year terms.
As the House may be aware, corporation tax is highly concentrated in Ireland, with approximately 80% of receipts received from the multinational sector. In addition, the top ten tax paying groups accounted for over one third of total corporation tax receipts. Revenue has advised that approximately 60% of the surplus against profile is from a small number of large multinational companies, hence the importance of continuing to attract multinationals and, importantly, it is primarily attributable to improving trading conditions. For example, at the end of October 2015 there was an increase of over 20% in the number of companies paying between €100,000 and €5 million compared with the same period last year. This was reflected in the receipts which are also up by over 20% for this cohort of companies.
Based on the information collected by the Revenue Commissioners, it appears the vast proportion, with the exception of around €300 million, of the increase in corporation tax payments is not one-off - they are not windfall taxes. They will enter the Revenue tax base for 2016 and beyond. Importantly, the chairman of the Revenue Commissioners wrote this letter on 20 November to the Minister of Finance which the Minister published on the Department of Finance website outlining that about €300 million might be exceptional payments but the remainder is expected to be part of our tax base for 2016 and beyond.
While corporation tax receipts are running significantly ahead of profile, it is also important to note that VAT receipts are ahead of profile, with almost €1 billion extra collected this year than last year which can only be due to people spending more money in the real economy. Income tax receipts are ahead of profile also. There are a number of areas in which receipts are ahead of profile. That is the rationale behind the corporation tax rate.
Recommendation put and declared lost.
SECTION 35
Question proposed: "That section 35 stand part of the Bill."
I apologise to Senator Kathryn Reilly and the Minister of State for speaking prematurely during the previous debate.
Section 35 replaces existing capital gains tax relief applying to the disposal of qualifying assets by individual entrepreneurs and business people with a simplified relief of 20% rather than 33%. In the section the qualifying business refers to activities such as development land and the letting of land and so on. However, are there sufficient protections as to where the money goes after the business is sold? Does it go back into a productive activity? That is my concern.
Of course, we want entrepreneurship, products, employment and all of those, but are there protections that this money will not be spent on property? This was a concern of the Minister's when we discussed the Strategic Banking Corporation of Ireland - that it would not lend money for property purchase. That is what got the State into trouble before and is not something we want at this stage. Is there protection if the money was to be spent on something which was less dangerous to the economy; if someone was to take up gambling or bought a deck chair and pipe and slippers and exhibited no further entrepreneurship ever, why would we give someone an incentive to do this?
I thank the Senator for his colourful suggestions and he makes a valid point. The relief will not apply to disposals of chargeable business assets by companies or to disposals of development land which I know is an issue raised by Senators in this House, or to a business dealing in or developing land, or to a business consisting of letting land or building or holding investments.
Where a qualifying business is carried on by a private company, individuals seeking to qualify for the relief must own not less than 5% of the shares in the company or at least 5% of the shares in a holding company the business of which consists wholly, or mainly, of holding shares in its 51% of subsidiaries and those subsidiaries are wholly, or mainly, carrying out the qualifying business.
The shareholder must also have been a working director or an employee of a qualifying business company or group of companies for a continuous period of three years within the five-year period immediately prior to the disposal of the chargeable business assets. This entrepreneurship provision in the Bill is obviously replacing an earlier provision which only allowed relief on a second disposal. It was also subject to considerable restrictions and, it is fair to say from our engagement with entrepreneurs and the business community, was seen to be ineffective. The new provision allows relief in order that entrepreneurs can invest in a new venture. While there may be some who do not reinvest their gains, this in our view is not considered to be a significant issue for people who are clearly serial entrepreneurs.
I thank the Minister.
Question put and agreed to.
Sections 36 to 53, inclusive, agreed to.
SECTION 54
Question proposed: "That section 54 stand part of the Bill."
I draw the Minister of State's attention to a situation that has come to light in regard to VAT exempt education activities. I will probably table a recommendation on Report Stage to try to address this issue. A number of education facilities, particularly conference and retreat centres that provide accommodation on a bed and breakfast basis have been recently informed by Revenue that should revenues from their bed and breakfast activity exceed €37,000 per annum all other revenue above that threshold, in respect of other activities at the centres, will be subject to VAT. I thought that advice to be very strange. I am speaking in this regard of retreat centres that hold weekend activities, in respect of which they provide accommodation on a bed and breakfast basis, the income of which on that basis would exceed €37,000 per annum. I would have thought that once the threshold of €37,000 was exceeded only the bed and breakfast activity would become subject to VAT. According to the tax advice they have received, which could be wrong, once the €37,000 per annum threshold is exceeded all of the activities, including conference and education fees, are subject to VAT. I accept the Minister of State may not be in a position to respond to my query today.
My officials will communicate with the Senator in advance of Report Stage to see if we can provide clarity on the matter.
I thank the Minister of State.
Question put and agreed to.
Sections 55 to 66, inclusive, agreed to.
SECTION 67
I move recommendation No. 6:
In page 95, line 33, to delete " "€280,000" " and substitute " "€300,000" ".
This amendment relates to the capital acquisitions tax inheritance threshold which the Government has set at €280,000. Most of us would be of the view that this is still too low. I am not presuming that the threshold can be raised overnight to an appropriate level, but the Minister of State will be aware that in the context of the sale of a standard family home and the dispersal of a will, the sale price would be well in excess of the set amount. We believe that it is unfair on families to have to pay further tax, particularly when account is taken of the fact that payments on the house will in all cases have been made from net income. I am proposing in this recommendation that the Government go a little further and, in this regard, substitute "€280,000" with "€300,000". I do not think I need to say any more than that on the issue.
While I do not disagree in principle with the Senator that there is a need to go further in this regard, the Minister adjudicated on how far he could go this year in the fiscal space available to him.
As we all know, the capital acquisitions tax threshold has been reduced a number of times in the past couple of years, while the rate has also been increased. These changes were necessary to maintain the yield from capital taxes in a period of falling asset prices in order that such taxes would continue to make a contribution to our efforts to consolidate the public finances. As part of budget 2016, the Group A threshold applying to gifts and inheritance from parents to their children was raised from €225,000 to €280,000. This represents an increase of approximately 25%. This was done in recognition of the improving state of the national finances and in the light of concerns expressed to the Minister by people making and receiving gifts and inheritance, particularly in the context of a rising property price market.
In allocating limited resources for the budget choices had to be made. If the Minister went further in this regard, he would have had to do something less elsewhere. As the economic recovery continues to take hold, available resources have been focused on reducing the burden of taxation on earned income and take-home pay, where high taxes impact on our competitiveness and economic growth and job creation. This was also the main focus of the last budget. The Minister has indicated that the change to the Group A tax-free threshold in the budget is only the start of a process. Subject to the outcome of the forthcoming general election and the consultation one must have with the people in that regard, this is an issue on which the Minister, if he is in a position to deliver another budget which I hope will be the case is willing to go further. The Minister will continue to examine the scope for further improvements in line with that suggested by the Senator as our economic recovery continues. There is a recognition among all of us that this is an area in which more needs to be done. That process was commenced this year. The Minister went as far as he could. Therefore, I cannot accept the recommendation.
I appreciate the Minister of State's response, but I propose to press the recommendation.
Recommendation put:
The Committee divided: Tá, 15; Níl, 28.
Tá
- Barrett, Sean D.
- Craughwell, Gerard P.
- Daly, Mark.
- Leyden, Terry.
- MacSharry, Marc.
- Mooney, Paschal.
- Mullen, Rónán.
- Norris, David.
- O'Brien, Darragh.
- Power, Averil.
- Quinn, Feargal.
- Walsh, Jim.
- White, Mary M.
- Wilson, Diarmuid.
- Zappone, Katherine.
Níl
- Bacik, Ivana.
- Burke, Colm.
- Cahill, Máiría.
- Coghlan, Eamonn.
- Coghlan, Paul.
- Comiskey, Michael.
- Conway, Martin.
- Cullinane, David.
- Cummins, Maurice.
- D'Arcy, Jim.
- D'Arcy, Michael.
- Gilroy, John.
- Hayden, Aideen.
- Higgins, Lorraine.
- Keane, Cáit.
- Kelly, John.
- Moloney, Marie.
- Moran, Mary.
- Mulcahy, Tony.
- Mullins, Michael.
- Naughton, Hildegarde.
- Noone, Catherine.
- O'Donnell, Marie-Louise.
- O'Keeffe, Susan.
- O'Neill, Pat.
- Reilly, Kathryn.
- van Turnhout, Jillian.
- Whelan, John.
Tellers: Tá, Senators Paschal Mooney and Diarmuid Wilson; Níl, Senators Paul Coghlan and Aideen Hayden.
Recommendation declared lost.
Section 67 agreed to.
Section 68 agreed to.
NEW SECTIONS
I move recommendation No. 7:
In page 96, between lines 4 and 5, to insert the following:
“69. The Minister shall, within 3 months of the passing of this Act, prepare and lay before Dáil Éireann an analysis of the tax changes in this Act, and the total of tax changes and spending adjustments of Budget 2016, setting out the continuing impact on people based on their gender, income, age, marital and disability status.”.
I acknowledge that on budget day the Department publishes budget booklets with tables showing how different families are affected by the budget measures. These measures focus on taxation, but there is no holistic measure of the impact of the budget on different family types or people in different circumstances, be that in the context of gender, income, age, marital or disability status.
The ESRI publishes a report on the distributional impact of tax, welfare and public service pay policy, but there has been an issue in that regard. To put it to bed, it is important that a comprehensive analysis of the impact of the budget be made after it is announced. This would go some way towards showing the full distributional impact. If the Department does not want to accept the ESRI's analysis, it would at least then have the responsibility of publishing its own, one it could stand over.
Equality budgeting is an internationally accepted method of dealing with inequality and poverty that is used in a number of countries. We are not asking the Minister of State to introduce a new dawn. There is this process which is used in other countries. Therefore, we are not asking the Department to do anything other than to use a process that has been tried and tested. One of the biggest benefits of adopting it would be that the Minister of State would not have to listen to me or my party colleagues bellyaching in the wake of a budget because he would be able to point out that equality budgeting objectives had been met. This should allay fears of having to listen to me or Deputies Pearse Doherty and Peadar Tóibín. Perhaps, therefore, the Minister of State might look at this recommendation.
Tacaíonn mise agus mo pháirtí leis an mholadh seo freisin. I agree with Senator Kathryn Reilly on this recommendation. Fianna Fáil submitted an identical recommendation which is included in this proposal which makes sense. Not to repeat what Senator Kathryn Reilly said, promises were made previously about providing for transparency in the tax system. The Fine Gael Deputy, Deputy Eoghan Murphy, championed it for a number of years, as did many other colleagues. There is nothing to fear from it. I believe it would make the tax system more palatable if people could see the effects of changes on different groups, as outlined in the recommendation. Therefore, my party and I support it.
I would not want to do anything that would short circuit our exchanges on Committee Stage of the Finance Bill as it is an enjoyable experience. The Senators will be aware that a similar amendment was proposed in the Dáil and that it was the subject of significant debate on Committee and Report Stages. During those debates both the Minister for Finance, Deputy Michael Noonan, and I highlighted that a substantial amount of the analysis sought by the recommendation had already been published. I brought a copy with me. On 4 November the Department of Social Protection published a social impact assessment of the welfare and income tax measures included in budget 2016. The social impact assessment was completed in consultation with the Department of Finance of the income tax elements of the budget and consistent with the Department's analysis of the impact of the budget package.
Using the ESRI's tax welfare simulation model, SWITCH, the social impact assessment includes a breakdown of the impact of tax and welfare measures, respectively, as well as presenting the overall distributional impact of budget 2016 by income group and family type. It also examines the impact of the budget on the at risk of poverty rate and work incentives, as well as the impact of the change in the minimum wage. Expansion of the SWITCH model has also enabled the incorporation this year of investment in the early childhood care and education scheme into the social impact assessment. The inclusion of the distributional impact by family type in the SWITCH model facilitates comparisons of the distributional impact of the budget on families with and without children, by employment or retirement status and for lone parents. All of these comparisons are presented in the social impact assessment.
At this time it is not possible to use the SWITCH model to assess the impact of budgets on groups of people based on their disability status, but that is something on which we should be working together. As I have pointed out previously, there are significant efforts under way to further expand the capacity of this model. This is evidenced by the work done in the modelling of medical cards and the early childhood care and education scheme. For further information, the budget book also includes a range of material on distributional impact issues explaining the impact of the budget. It includes a series of tables showing the impact of budgetary measures at a range of income levels for different income earners, a variety of illustrative cases providing examples of change in net income, for example, household types, the extent to which income is redistributed through the tax and welfare systems and the progressivity of the income tax system.
That said, we have a SWITCH model which is delivering a social impact assessment. It was published on 4 November. We should be working to increase its capacity. A number of new measures have been added to it this year, including the early childhood and education scheme. This is the model we should continue to follow. Therefore, I am not in a position to accept the recommendation.
Recommendation put:
The Committee divided: Tá, 18; Níl, 27.
Tá
- Barrett, Sean D.
- Craughwell, Gerard P.
- Cullinane, David.
- Daly, Mark.
- Heffernan, James.
- Leyden, Terry.
- MacSharry, Marc.
- Mooney, Paschal.
- Mullen, Rónán.
- Norris, David.
- Ó Clochartaigh, Trevor.
- Ó Murchú, Labhrás.
- O'Brien, Darragh.
- Power, Averil.
- Quinn, Feargal.
- Reilly, Kathryn.
- White, Mary M.
- Wilson, Diarmuid.
Níl
- Bacik, Ivana.
- Brennan, Terry.
- Burke, Colm.
- Cahill, Máiría.
- Coghlan, Eamonn.
- Coghlan, Paul.
- Comiskey, Michael.
- Conway, Martin.
- Cummins, Maurice.
- D'Arcy, Jim.
- D'Arcy, Michael.
- Gilroy, John.
- Hayden, Aideen.
- Higgins, Lorraine.
- Keane, Cáit.
- Kelly, John.
- Moloney, Marie.
- Moran, Mary.
- Mulcahy, Tony.
- Mullins, Michael.
- Naughton, Hildegarde.
- Noone, Catherine.
- O'Donnell, Marie-Louise.
- O'Keeffe, Susan.
- O'Neill, Pat.
- van Turnhout, Jillian.
- Zappone, Katherine.
Tellers: Tá, Senators Kathryn Reilly and Diarmuid Wilson; Níl, Senators Paul Coghlan and Aideen Hayden.
Recommendation declared lost.
Progress reported; Committee to sit again.