Select Committee on Finance and General Affairs debate -
Wednesday, 10 May 1995

SECTION 55.

Mr. McCreevy

I move amendment No. 57:

In page 91, lines 18 to 24, to delete subsection (1) and substitute the following:

"(1) Section 162 (as amended by section 48 of the Finance Act, 1990) of the Corporation Tax Act, 1976, is hereby repealed.".

I want this particular subsection removed. I do not think there will be much fuss about it. This is the closed-company section to which the Minister signalled some change would be made in the Finance Act. The surcharge involved was originally introduced — in the 1970s when we were young and innocent — to deal with the situation where a great differential between personal tax rates and corporation tax rates occurred. There was good reason for its introduction. This type of closed-company operation was set up by people, usually professional unions of journalists and broadcasters, to stop them getting a major tax advantage over the ordinary person not working for their own incorporated organisation. I do not think there is a need for it now. I recommend that the Minister accepts the amendment and scraps the surcharge. I do not know what the cost will be but I can remember what the basis for it was, from my time as a young and innocent chartered accountant. The reasons for this surcharge no longer apply.

Mr. Quinn

There is considerable merit to the Deputy's proposal. It is a question of striking a balance. I will return to it on Report Stage. I am inclined to say yes.

Mr. McCreevy

What would the cost be?

Mr. Quinn

We do not know. We want to figure that out.

Mr. McCreevy

It is small.

Mr. Quinn

That is one of the factors. It is what the potential cost will be if it became an attraction. We have already moved in the direction the Deputy is requesting. It is a question of whether we go the whole way. We will calculate the cost and return to this at Report Stage.

Amendment, by leave, withdrawn.

Section 55 agreed to.

Section 56 agreed to.

NEW SECTION .

Mr. Quinn

I move amendment No. 58:

In page 92, before section 57, to insert the following new section:

57.—Section 141 of the Corporation Tax Act, 1976, is hereby amended

(a) in the proviso to subsection (1), by the substitution for ‘trade or profession' of 'trade, profession or business',

(b) by the insertion, after subsection (1), of the following subsections:

‘(1A) Subject to subsection (1B), every company which is incorporated in the State and is neither resident in the State nor carrying on a trade, profession or business therein shall, in every case within thirty days of

(a) the date on which it commences to carry on a trade, profession or business, wherever carried on, and

(b) any time at which there is a material change in information previously delivered by the company under this subsection, and

(c) the giving of a notice to the company by an inspector requiring a statement under this subsection,

deliver to the Revenue Commissioners a statement in writing containing particulars of

(i) the name of the company;

(ii) the address of its registered office in the State and the address of its principal place of business;

(iii) the nature of the trade, profession or business;

(iv) the name and address of the secretary of the company;

(v) (I) where the company is controlled by a company the shares in which are listed in the official list of a recognised stock exchange and have been the subject of dealings on the said exchange in the period of 12 months ending at the time at which the statement is delivered, the name of that company and the address of its registered office, and

(II) in any other case, the name and address of any individual or individuals who have control of the company;

(vi) the territory in which the central management and control of the company is normally carried out; and

(vii) such other information as the Revenue Commissioners consider necessary for the purposes of determining the territory in which the company is resident for the purposes of tax.

(1B) Subsection (1A) shall not apply to a company (hereafter in this subsection referred to as the "first-mentioned company") if at the time at which a statement under that subsection would, apart from this subsection, fall to be delivered, there is a company, which is a 90 per cent. subsidiary of the first-mentioned company, carrying on a trade or profession in the State.',

and

(c) by the addition, after subsection (2), of the following subsection:

‘(3) For the purposes of this section—

(a) sections 108 to 114 of the Corporation Tax Act, 1976, shall apply for the purposes of this paragraph as they would apply for the purposes of Part XI of that Act if subsection (7) of section 107 of the said Act were deleted, and

(b) control shall be construed in accordance with section 102 of the Corporation Tax Act, 1976.'.".

The aim of this amendment is to deter non-resident companies from using Ireland as a place of convenience in which to register and, in so doing, to preserve the reputation of the State as a location for legitimate business. Concerns have been expressed to me for some time about the use of such companies by the Central Bank, the IFFC committee and, more recently, by some of the main banking groups. The worry is that the active promotion of Ireland by the company formation agents as a location for registering non-resident companies, in conjunction with media publicity about shady business deals involving such companies, is having a detrimental effect on the integrity and reputation of our financial, legal and regulatory systems.

There is a particular concern that the international standing of the IFFC is being adversely affected. Members may know that an Irish registered non-resident company is, for the purpose of definition and description, a company which, although formed and registered in Ireland, is tax resident outside Ireland. In Ireland tax residency is determined on the basis of where the central management control is located. In the case of an Irish resident company corporation tax is charged on all its profits wherever they arise. However, a non-resident company is only liable to corporation tax if it carries on a trade in this State through a branch or agency. Hence, if no trade is carried on in the state no corporation tax liability arises. Apart from this tax advantage there are other reasons Ireland is viewed as a good location for such companies. Ireland is viewed, for example, as a respectable location in terms of its membership of the European Union. It is relatively inexpensive to incorporate and maintain a company here.

Recent increased attractiveness of Ireland as a location for non-resident companies stems from changes made in the UK tax law in 1988 to tackle the precise problem we are now experiencing. The UK changed its tax residents laws for companies to the effect that a company registered in the UK is now in general deemed to be resident there for tax purposes as well. These changes effectively terminated the use of the UK incorporated companies in such circumstances.

Mr. McCreevy

Is it just an information gathering exercise on foreign companies who set up here?

Mr. Quinn

No. We will make them tax liable: it will discourage shady people. The attractiveness of being non resident is that if one does not carry on trade here one can have a respectable address but a disreputable activity which is not taxable. It damages our perception generally. It is designed to discourage them.

Amendment agreed to.

NEW SECTION.

Mr. Quinn

I move amendment No. 58 (a):

In page 92, before section 57, to insert the following new section:

58.— (1) (a) In this section—

‘appropriate inspector' has the meaning assigned to it in section 9 of the Finance Act, 1988;

‘base period' means the period of 12 months ending immediately before the commencement of the first relevant period;

‘expenditure on research and development' means non-capital expenditure incurred by a company being—

(i) an amount equal to 115 per cent of the aggregate of the amounts of —

(I) such part of the emoluments paid by the company to employees of the company engaged in the carrying out of research and development activities related to the company's trade as is laid out for the purposes of the said activities, and

(II) expenditure incurred by the company on materials or goods used solely by the company in the carrying out of research and development activities related to the companies trade:

Provided that expenditure referred to in clauses (I) and (II) incurred by a company (hereafter in this definition referred to as ‘the first-mentioned company') which is a member of a group on behalf of another company which is a member of the group, the other company shall be treated for the purposes of the Corporation Tax Acts as having incurred the expenditure and the first-mentioned company shall be treated for those purposes as not having incurred the said expenditure,

and

(ii) a sum paid to another person, not being a person connected with the company, in order that such person may carry out research and development activities related to the company's trade;

‘group base expenditure on research and development' means the aggregate of the amounts of expenditure on research and development incurred in the base period by qualified companies which throughout that period are members of the group;

‘group expenditure on research and development', in relation to a relevant period, means the aggregate of the amounts of expenditure on research and development—

(i) incurred, or treated as incurred, in the relevant period by qualified companies which throughout the relevant period are members of the group, and

(ii) which is certified as having been incurred by the said companies in certificates given to the companies by persons who are auditors of the companies appointed under section 160 of the Companies Act, 1963, or under the law of any territory where any such company is duly incorporated and which corresponds to that section;

‘qualified company', in relation to a relevant period, means a company which—

(i) throughout the relevant period carries on a trade which consists wholly or mainly of the manufacture of goods in the State:

Provided that trading operations of a company shall not be treated for the purposes of this section as the manufacture of goods in the State by virtue of any section of the Tax Acts other than section 39 of the Finance Act, 1980,

(ii) holds a certificate, given to it by Forbairt, which certifies that, in the opinion of Forbairt, the research and development activities which are proposed to be carried on by or on behalf of the company have the potential to achieve the purposes set out in paragraph (iii) of the definition of research and development activities,

(iii) notifies the appropriate inspector, before the commencement of the research and development activities, of its intention to carry out such activities or to have such activities carried out on its behalf,

(iv) maintains a record of expenditure incurred in the carrying on by it or on its behalf of research and development activities in accordance with a system, approved by Forbairt, of recording such expenditure, and

(v) does not, at any time during the period commencing on the 10th day of May, 1995, and ending 3 years after the commencement of the first relevant period, raise any amount through the issue of eligible shares (within the meaning of section 12 of the Finance Act, 1984);

‘qualifying expenditure on research and development attributable to a qualified company', in relation to a relevant period, means so much of the amount of qualifying group expenditure on research and development in the relevant period as bears to that amount the same proportion as the amount of expenditure on research and development incurred by the company in the relevant period bears to the group expenditure on research and development in the relevant period;

‘qualifying group expenditure on research and development', in relation to a relevant period (hereafter in this definition referred to as the ‘said relevant period'), means an amount determined by the formula

E (D + £25,000)

where

E is the amount of group expenditure on research and development in the relevant period, and

D is the greater of—

(i) the amount of group base expenditure on research and development, and

(ii) the amount of group expenditure on research and development in any relevant period preceding the said relevant period:

Provided that—

(I) the qualifying group expenditure on research and development in relation to a relevant period 'shall not in any case exceed £150,000, and

(II) the aggregate of the amounts of qualifying group expenditure on research and development in all relevant periods shall not exceed the aggregate of the amounts specified in certificates given by Forbairt to companies which are members of the group;

‘relevant period' means—

(i) in the case of a company which is a member of a group the end of the accounting periods of the members of which coincide, the period of 12 months throughout which one or more members of the group carried on a trade and ending at the end of the first accounting period of the company which commences on or after the 1st day of June, 1995,

(ii) in the case of a company which is a member of a group the end of the accounting periods of which do not coincide, the period specified in a notice in writing made jointly by companies which are members of the group and given to the appropriate inspector within a period of 9 months after the end of the period so specified, being a period of 12 months throughout which one or more members of the group carries on a trade and ending at the end of the first accounting period of a company which is a member of the group which accounting period commences on or after the 1st day of June, 1995, and

(iii) in any other case, the period of 12 months commencing on the 1st day of June, 1995,

and each subsequent period of 12 months, commencing immediately after the end of the preceding relevant period, which falls wholly into the period of 3 years commencing at the beginning of the first relevant period;

‘research and development activities' means systematic, investigative or experimental activities which—

(i) are carried on wholly or mainly in the State,

(ii) involve innovation or technical risk, and

(iii) are carried on for the purpose of—

(I) acquiring new knowledge with a view to that knowledge having a specific commercial application, or

(II) creating new or improved materials, products, devices, processes or services,

and other activities carried on wholly or mainly in the State for a purpose directly related to the carrying on of activities of the kind referred to in paragraph (iii):

Provided that activities that are carried on by way of—

(A) market research, market testing, market development, sales promotion or consumer surveys,

(B) quality control,

(C) the making of cosmetic modifications or stylistic changes to products, processes or production methods,

(D) management studies or efficiency surveys, or

(E) research in social sciences, arts or humanities,

shall not be research and development activities.

(b) For the purposes of this section—

(i) two companies shall be deemed to be members of a group if one is an associated company (within the meaning of section 102 of the Corporation Tax Act, 1976) of the other,

(ii) a company and all its associated companies form a group:

Provided that a company which is not a member of a group shall be treated as if it were a member of a group which consists of that company and, accordingly, references to group expenditure on research and development, group base expenditure, and qualifying group expenditure on research and development shall be construed as if they were, respectively, references to expenditure on research and development, base expenditure and qualifying expenditure on research and development, and

(iii) systematic, investigative or experimental activities, or other activities, shall be regarded as carried on wholly or mainly in the State if, and only if, not less than 75 per cent. of the total amount expended in the course of such activities is expended in the State,

(iv) expenditure on research and development shall not be regarded as having been incurred by a company which is a member of a group if any expenditure on research and development incurred in a relevant period or in the base period by a company which is a member of the group has been or is to be met directly or indirectly by the State or any person other than a company which is a member of the group.

(2) (a) On making a claim in that behalf, a qualified company shall be entitled, in computing the trading income for an accounting period of a trade carried on by it, to deduct an amount equal to treble the qualifying expenditure on research and development attributable to the qualified company as is referable to the accounting period and the company shall be entitled to such a deduction in addition to any deduction to which the qualified company may be otherwise entitled in respect of expenditure incurred on research and development:

Provided that where the amount referred to in paragraph (a) exceeds an amount which would, apart from this subsection, be the income from the sale of goods of the trade so referred to, for the said accounting period, then the excess

(i) shall not be deductible by virtue of the foregoing provisions of this subsection, and

(ii) shall be treated as a loss incurred in that trade, which is a loss from the sale of goods, for the purposes of relief under -

(I) section 16A or section 116A of the Corporation Tax Act, 1976, or

(II) to the extent that such relief does not exceed the income from the sale of goods in the course of that trade in the accounting period for which that relief is given, section 16 (1) of the Corporation Tax Act, 1976.

(b) In this subsection 'income from the sale of goods' and 'a loss from the sale of goods' have the same meaning respectively as they have in section 116A of the Corporation Tax Act, 1976.

(3) For the purposes of subsection (2)—

(a) where a relevant period coincides with an accounting period of a qualified company, the amount of qualifying expenditure on research and development attributable to the qualified company which relates to the accounting period of the company shall be the amount of the said qualifying expenditure attributable to the qualified company, and

(b) where the relevant period does not coincide with an accounting period of the company-

(i) the qualifying expenditure on research and development attributable to the qualified company shall be apportioned to the accounting periods which fall wholly or partly into the relevant period, and

(ii) the amount so apportioned to an accounting period shall be treated as the amount of qualifying expenditure on research and development attributable to the qualified company which relates to that accounting period of the company.

(4) Where a company makes a claim under this section the company shall be treated for the purpose of Chapter III of Part I of the Finance Act, 1984, as not being a qualifying company in respect of any amount raised, at any time during the period commencing on the day of May, 1995, and ending 3 years after the commencement of the first relevant period, by the issue of eligible shares (within the meaning of section 12 of the said Act of 1984).

(5) Section 157 of the Corporation Tax Act, 1976, shall apply for the purposes of this section.".

This relates to research and development. An information note has been circulated.

Amendment agreed to.

Section 57 agreed to.

NEW SECTION.

Mr. McCreevy

I move amendment No. 59:

In page 93, before section 58, to insert the following new section:

"58. — Section 39 (1A) of the Finance Act, 1980 is hereby amended-

(a) by the insertion of the following:

‘(c) artificial insemination (AI) production,', and

(b) by the insertion of the following:

‘(iii) in relation to artificial insemination as including references to artificial insemination production,'.".

Some of the major co-operatives supply artificial insemination services and due to a peculiarity in tax laws corporation tax must be paid at the full rate and not the 10 per cent rate for which most of the co-operatives activities apply. The purpose of the amendment is to make these services taxable at the 10 per cent rate.

Mr. Quinn

Has this been cleared by former Senator Des Hanafin?

Mr. McCreevy

We have to be very careful in these politically correct times. There were times when the Minister, Deputy Quinn, Deputy McGahon, and I could make jokes in the regard but they are long since gone.

Perhaps the Minister could come back to it on Report Stage if he has a difficulty with it now.

Mr. Quinn

Yes.

Amendment, by leave, withdrawn.

Section 58 agreed to.

NEW SECTION.

Mr. McCreevy

I move amendment No. 60:

In page 93, before section 59, to insert the following new section:

59.—Section 39 of the Finance Act, 1980 is hereby amended by the insertion of the following:

‘In this subsection "wood pulp substitute" means wood pulp substitute which is produced in the State—

(i) on a commercial basis with a view to the realisation of profit, and

(ii) wholly or principally from a process of decontamination and compaction of recyclable waste.

The following provisions shall apply for the purposes of relief under this Chapter in relation to a company carrying on a trade which consists of or includes the production of wood pulp substitute—

(i) the production of the wood pulp substitute by the company claiming the said relief shall be regarded as the manufacture within the State of goods,

(ii) any amount receivable for the said production shall be regarded as the amount receivable from the sale of goods, and

(iii) subsection (1) (d) shall have effect as respects the company in relation to a claim by it for relief from tax by virtue of this subsection as it has effect as respects a company in relation to a claim by it for relief from tax by virtue of subsection 1 (b) or subsection (1) (c).'.".

Mr. M. McDowell

I agree with the amendment.

Mr. McGahon

I urge my esteemed relative the Minister to accept this——

Mr. Quinn

The esteem is on one side.

Mr. McGahon

I have already apologised to the nation for the Minister being a socialist. If the Minister accepts this amendment it will allow a successful young company formed out of the Dundalk Employment Partnership to achieve manufacturing status. In recent times there have not been many successes in Dundalk apart from me and I urge the Minister to accept this amendment.

In one year this company has gone from employing three to 33 people, 31 of whom were long term unemployed with no prospect of employment. It has been a remarkable success. It has recently bought a premises in East Wall in Dublin and has plans to expand into Belfast and Cork. This year to date they have exported more than 20,000 tonnes of recycled packaged waste which is a wood pulp substitute. If the Minister could accommodate this company which will ultimately employ more than 100 people, it would be a tremendous boost as it has received little State aid. I urge the Minister to accept this amendment and make available some of the mandarins in his Department to talk to the company on an ongoing basis.

Mr. Penrose

Deputy McDowell will recall a number of cases in the late 1980s relating to bananas, coal and so on where interpretation in this area created tremendous problems. However, this amendment is tightly drafted and refers specifically to the wood pulp industry. This company is producing 350 tonnes per week and has been in operation a little over two and a half years. It is operating in line with Government policy on recycling strategy in Ireland. The 10 per cent rate of corporation tax would be very attractive and, as Deputy McGahon said, it is a manufacturing process. The company is thriving and will provide extra employment. This is where the potential is and I ask the Minister to consider it if at all possible.

Mr. McCormack

I add my support for the theory of the amendment. It is not only useful in terms of employment but is also environmentally friendly. The production of 350 tonnes of waste paper pulp a week saves 17 trees because it is a substitute for wood pulp.

Mr. Connaughton

I also lend my weight to the amendment. I spoke to the proprietors of this project in the last couple of days. I assume there will possibly be problems with similar industries if the amendment is accepted. I am around long enough to know that such things have a knock on effect. However, the finished product in this case is environmentally friendly and the company is doing something unique with waste paper. I ask the Minister to look extremely closely at it in that sense. I have no doubt that others will try to get on the bandwagon but the product being manufactured is badly needed. I hope both the officials and the Minister look carefully at this matter.

Chairman

Time is running out. It is clear that there is strong all party support in this area. I ask the Minister to respond briefly.

Mr. Quinn

I am very sympathetic to this particular company. I met them last night in the company of my esteemed cousin, Deputy McGahon.

Chairman

So, it is reciprocal.

Mr. Quinn

Yes.

Mr. McGahon

I will leave a large brandy for the Minister.

Mr. Quinn

The existing regime is under considerable threat from competitors in the rest of the European Union who see it as tantamount to State aid. We therefore have to look over our shoulder in respect of anything we might do here. Colleagues from the Border areas will be aware of the difficulties we had about the 10 per cent rate for mushrooms and the action taken by the UK authorities. We need to be extremely cautious and careful in our movements. What I said to the people last night was, if their activity requires a series of stages of handling, intervention and manipulation and is manufacturing under the legal definition of the word, it could be argued that they qualify under existing law. They said that they have not had extensive or comprehensive discussions with the Revenue Commissioners. Deputy McGahon will confirm what I indicated. Let us exhaust that route first rather than changing the law which may create unnecessary difficulties.

I am not prepared to accept the amendment at this stage because I do not believe that the interpretative process has been fully exhausted. If the interpretation can be sympathetically entered into and if they are intervening and transforming this material, then a case should stand up which would enable them to qualify. Since we have not had a chance at senior level to exhaust that route with the Revenue Commissioners, I suggest that we go down that road. If it does not take us to our destination, we can look at it again next year. The alternatives are not acceptable.

Mr. Nealon

I remember a discussion in the Dáil on whether changing ageing bananas from green to yellow was a manufacturing process. The Dáil broke up on that occasion on ideological grounds. I strongly support this idea. I have studied the process and I am delighted to see that much of the paper before us is recycled. We are moving into a new area and there is no doubt that a concession would pay handsome dividends in many respects.

Mr. D. Ahern

I lend my voice to those raised by other speakers, particularly my constituency colleague, Deputy McGahon. I worked closely with the company which seeks this amendment. As Deputy McGahon said, it was born out of the Dundalk Employment Partnership which is a State sponsored body for areas of unemployment, which Dundalk is. It was a successes and the State should help it to develop. I strongly urge the Minister to look at this again.

Chairman

It is clear that the committee is unanimous in its support of this project. I suggest that we leave this issue with the Minister to see if he can come back on Report Stage rather than leave it until next year's Finance Bill. The Minister referred to discussions with the Revenue Commissioners, which should be pursued immediately.

Mr. McGahon

I accept the Minister's reply. I believe he is sympathetic to this firm and to creating an avenue for it. I ask him to initiate a meeting——

Mr. Quinn

I will do so before the end of this week.

Amendment, by leave, withdrawn.

Section 59 agreed to.