I think Deputy Cullen is against this.
SECTION 54.
Question proposed: "That section 54 stand part of the Bill."
I am not against it, but would make the point the Minister made during his time in the Department of Enterprise and Employment in setting up the NESF. I am a member of NESF and the Minister has received its most recent report. There has been much discussion on corporation tax, particularly as it relates to the service sector. I am surprised by the route chosen in this Finance Bill and I disagree with it. I urge the Minister to look at the possibility of not moving to a 10 per cent rate. I am not convinced that everything has to drop to the lowest common denominator and that because it is 10 per cent in manufacturing it has to be 10 per cent in the services sector as well. A lower rate of corporation tax could apply to small or labour intensive enterprises. There is nothing to prevent the Minister introducing in next year's Finance Bill a scaled or tiered rate of corporation tax — I mention it now so he may consider it in advance. If there is a tiered rate of income tax there is no reason not to have a similar system of corporation tax.
The balance the Minister struck this year favours major corporations and companies such as banks with substantial turnovers in the £300 million bracket to whom 2 per cent is a significant figure. Small companies are now creating jobs; the larger companies have shed them over the last number of years. This country should try to keep up with the growth in the services sector throughout Europe and to maximise our potential in that area. This reduction in corporation tax does not maximise that potential as we could and should by targeting labour intensive service sector operations.
While this year we must accept the 2 per cent reduction, if the Minister took on board what the National Economic and Social Forum and many independent commentators have said and will continue to say, he would consider tiered rates. I do not accept that because the tax rate is 10 per cent for manufacturing industry it must automatically be the same for the services sector but there is a case for creating tiered rates. That would better achieve what can and should be done in the corporation tax area.
Chairman
We have 20 minutes left to deal with the ten sections remaining in this part of the Bill. The next number of amendments deal with corporation tax so there is plenty of scope to discuss any philosophical points about this tax.
Question put and agreed to.
NEW SECTION.
I move amendment No. 55:
In page 91, before section 55, to insert the following new section:
"55.—The Corporation Tax Act, 1976 is hereby amended by the insertion of the following new section after section 1:
‘1A.—(1) Where in any accounting period the profits of a company resident in the State do not exceed the lower relevant maximum amount, the company may claim that the corporation tax charged on its income for that period shall be calculated as if the rate of corporation tax for that part of the financial year beginning on 1 April, 1995 and each subsequent financial year were 25 per cent. (instead of being the rate fixed for companies generally).
(2) Where in any accounting period the profits of any such company exceed the lower relevant maximum amount but do not exceed the upper relevant maximum amount, the company may claim that the corporation tax charged on its income for that period shall be reduced by a sum equal to the following amount
(M-P) × I/P
where M is the upper relevant maximum amount, P is the amount of the profits and I is the amount of the income.
(3) The lower and upper relevant maximum amounts mentioned in the foregoing subsections shall be determined as follows
(a) where the company has no associated company in the accounting period those amounts are £80,000 and £100,000 respectively,
(b)where the company has one or more associated companies in the accounting period, the lower relevant maximum amount is £80,000 divided by one plus the number of those associated companies and the upper relevant maximum amount is £100,000 divided by one plus the number of those associated companies.
(4) In applying subsection (3) to any accounting period of a company, an associated company which has not carried on any trade or business at any time in that accounting period (or, if an associated company during part only of that accounting period, at any time in that part of that accounting period) shall be disregarded and for the purposes of this section a company is to be treated as an "associated company" of another at a given time if at that time one of the two has control of the other or both are under the control of the same person or persons. In this subsection "control" shall be construed in accordance with section 102.
(5) In determining how many associated companies a company has in an accounting period or whether a company has an associated company in an accounting period, an associated company shall be counted even if it was an associated company for part only of the accounting period, and two or more associated companies shall be counted even if they are associated companies for different parts of the accounting period.
(6) For an accounting period of less than twelve months the relevant maximum amounts determined in accordance with subsection (3) shall be proportionately reduced.
(7) For the purposes of the foregoing subsections the profits of a company for an accounting period shall be taken to be the amount of its profits for that period on which corporation tax falls finally to be borne, with the addition of franked investment income other than franked investment income which the company (if a member of the group) receives from companies within the group.
(8) For the purposes of this section the income of a company for an accounting period shall be taken to be the amount of its profits for that period on which corporation tax falls finally to be borne exclusive of the part of the profits attributable to chargeable gains; and that part shall be taken to be the amount brought into the company's profits for that period for the purposes of corporation tax in respect of chargeable gains before any deduction for charges on income, expenses of management or other amounts which can be deducted from or set against or treated as reducing profits of more than one description.'.".
This proposed new section concerns corporation tax. The Minister's officials in the Revenue Commissioners will have recognised that this section is a direct copy of the old small companies tax relief provisions, except that I have changed and updated the figures. In case some people think I stayed up all night drafting this——
I was most impressed.
Deputy McCreevy is forgetting what he said this morning about obligations.
——it is taken directly from what was known as small companies corporation tax relief which was abolished about ten years ago. It concerns the point made by Deputy Cullen, which I also mentioned on budget day. I used to think that reducing the corporation tax rate to 25 per cent for certain service companies would have enormous tax implications for the State, until in the last eight months I discovered — using the Revenue figures — it would not be as expensive as once thought. One could confine the reduction to service or labour intensive companies because of the rise in corporation tax intake through the financial services centre.
I favour the reduction of corporation tax rates over a number of years and I have no quibble with the Minister reducing the rate from 40 to 38 per cent. However, as Deputy Cullen and others pointed out, in that case everyone benefits whereas in a previous existence the Minister would have said it was better to target a lower rate at specific companies. Knowing the Minister's views I was surprised he did not do that on this occasion. I do not criticise him for the reduction but I thought he would have taken the other approach as the Revenue Commissioners can demonstrate the cost is not as large as once thought.
My amendment proposes to bring back small companies tax relief but at different thresholds. The amendment, as proposed, would mean that the profits of a company of less than £80,000 would be taxed at 25 per cent, from £80,000 to £100,000 at a graded rate and profits greater than £100,000 at 38 per cent. That is what the effect would be, as the amendment is drafted, on that section. I know the Minister will not be in a position to accept it on Committee Stage because it would involve a cost on the Exchequer but the principle of going in that direction is correct. Dropping the rate from 40 per cent to 38 per cent means everyone is treated the same as the big banks and financial institutions who are making the big profits.
We have all now recognised, after a long hard struggle, that the growth in employment will come from small and medium enterprises. That is now recognised world-wide and in Europe. It probably took longer to accept it in Ireland than anywhere else. All the financial institutions are now targeting the small and medium size enterprises, because of competition as they fear others will come in and take their business. It is not done out of the goodness of their hearts but because that is where the profits will be. The small operator employing four or five people, who has all his assets tied up in his business, cannot hike off to some other part of the globe to set up a factory. He will stick it out in Ireland. That has finally been recognised. If we now have any criticism it is that we have myriad State support schemes, ranging from the IDA to the county enterprise partnership boards. There are so many of them that it has become quite confusing, apart from the private institutions that also exist. This amendment is trying to focus on the reality that it would be better to go in this general direction rather than by having a 2 per cent cut in the rate, from 40 per cent to 38 per cent.
Chairman
Amendment No. 56 is related and may be discussed with Amendment No. 55. Is that agreed? Agreed.
Any company that operates in these qualifying zones would be subject to tax on profits at a rate of 25 per cent. The Minister will be in a position to decide how long this rate of 25 per cent would operate. This is in line with the idea I had earlier about the enterprise areas: that the logic, by extension, was to insert a section that would apply a 25 per cent to those enterprise areas or zones. The Minister for Finance, in setting the conditions at the start, would include a time limit of, say, five years for which the 25 per cent rate would apply. Amendment No. 56 is a logical extension of the amendment I moved earlier in relation to enterprise areas.
With regard to corporation tax, Denis Cremins of Craig Gardener/ Price Waterhouse, in a study published some time ago, estimated that the average rate of corporation tax paid by companies in Ireland is about 17 per cent and that has never been contradicted.
The effective rate.
The effective rate is 17 per cent. Taking the 10 per cent and other rates into account, the average rate is 17 per cent, which emphasises the point I made earlier about the small cost there might be in going the route I suggested.
Chairman
Does Deputy McCreevy wish to discuss amendment No. 57 with amendments Nos. 55 and 56? Is it agreed that we will also discuss amendment No. 58 in the Minister's name?
Amendment No. 57 relates to clothes companies. I wish to discuss it separately.
I wish to speak on amendments Nos. 55 and 56. The Minister's amendment deals with fresh territory.
Chairman
I am in the hands of the committee but I am conscious of the fact that we have only 15 minutes to go. I am anxious that we at least look at the other amendments before us.
Mr. McDowell
What has been said on the section and Deputy McCreevy's amendment has been interesting. I favour the reduction in the top rate of tax from 40 to 38 per cent. I also favour some provision for small companies of the type Deputy McCreevy outlined. I do not believe in choosing one rather than the other and there is a difference of emphasis between Deputy McCreevy and me on this point. In effect, his two amendments deal, first, with a low rate of 25 per cent related to the size of the company and, second, a separate low regime of 25 per cent related to the location of the company.
There is something wrong with tax engineering whereby we can play God by saying companies of a certain size and in certain places deserve to be favoured. What is wrong with ordinary, run of the mill companies that happen to be in run of the mill locations trying to make a profit? We should continue to reduce the top rate. Relieving companies by giving them a tax credit against corporation tax at the bottom, or against the top rate of corporation tax so that the 10 per cent people do not apply, is the way I would do it.
On the general attitude to our philosophical position in respect of corporation tax, we were under pressure to extend the 10 per cent rate. There were fears that the European Commission would raise a red flag. I had two choices: to reduce the overall rate, which is the choice I finally exercised, or to adopt a two-tier approach to it in respect of small companies and place the threshold at the levels Deputy McCreevy has used. I came down in favour of the position in the Bill because the 40 per cent corporation tax for non-manufacturing and service companies is too high.
One of our great strengths has been a degree of certainty in corporation tax within different administrations. It has provided the security and certainty that helps to underpin business confidence. Therefore, I would be slow to trick around with corporation tax. That is why I indicated it was my intention to reduce it gradually, subject to resources permitting, to the figure of 34, or indeed 32, per cent.
Our main competitor in real terms for domestic indigenous companies tends to be the United Kingdom. It is the nearest market against which people measure themselves. They have a general tax regime of 33 per cent and I know they also have a small companies provision.
I met both ISME and the SFA recently. I agreed that the designation of small company qua small company is too indiscriminate. There are small companies that are 25 years old and small companies that are five years old. If I were to target relief to small companies to enable them to grow because that is where the thrust of the intervention should be, it would be into small new companies otherwise there would be an enormous gain for many Irish companies who are simply mature, going nowhere and have no great significant investment plans. Approximately 19,800 companies will benefit from the provisions of Deputy McCreevy’s amendment. The estimated cost of Deputy McCreevy’s proposals is zero in 1995 effectively, because of starting up costs of £1 million. The real cost in 1996 would be £23 million and the full year cost would be £31 million. That amount of tax foregone would have too much of a scatter-gun effect for small business. I invite the committee to consider, as I have indicated to the SFA and ISME, coming back to us with a proposal that would enable companies in that critical two to five year period to get over the hump where they start to make small profits and have to pay some type of tax. I want to intervene at that point of the cycle.
Chairman
Clearly we should invite the views of the Joint Committee on Small Business and Services on this subject.
Amendment put.
Chairman
A division has been challenged and it will be postponed until 6 p.m.
NEW SECTION.
I move amendment No. 56:
In page 91, before section 55, to insert the following new section:
55.—The Corporation Tax Act, 1976 is hereby amended by the insertion of the following new section after section 1:
‘1B—(1) In this section—
"enterprise area" means any area designated as such by the Minister for Finance after consultation with the Minister for Enterprise and Employment and the Minister for the Environment;
"the Minister" means the Minister for Finance;
"qualifying company" means a company to which the Minister has granted a certificate under subsection (2);
"qualifying trading activities" means trading activities specified in a certificate granted by the Minister under subsection (2).
(2) The Minister may grant a certificate certifying that such trading activities of a company as are carried out in an enterprise area and as are specified in the certificate shall be qualifying trading activities.
(3) Where a qualifying company has a certificate under subsection (2), the rate of corporation tax on the qualifying trading activities shall be calculated by reference to section 1A (except for subsections (2) to (6) inclusive) as if the reference to the lower relevant maximum amount was a reference to the profits from the qualifying trading activities.
(4) A certificate may be subject to such conditions, including a date of revocation, as the Minister considers proper and specifies therein.'.".
Amendment put and declared lost.