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

SECTION 69.

Mr. M. Ahern

I move amendment No. 65:

In page 105, subsection (2), line 7, to delete "6th day of April, 1995" and substitute "6th day of April, 1993".

Section 69 refers to the introduction of section 27 in the Finance Act, 1993, which was amended in section 65 of the Finance Act, 1994 . These provisions were introduced to encourage executives with stakes in established companies to realise their existing equity for reinvestment in alternative enterprises for the purpose of job creation. Naturally, conditions were attached to those sections. This year section 69 drops those requirements including the holding of 15 per cent of the voting rights. I do not know whether my amendment is feasible after what Deputy McCreevy said about retrospective legislation. I do not know how many people would be involved over the last two years but I know some people who have sold their shares. They did not have more than 15 per cent shares but were in controlling positions in those companies. They reinvested money into new companies and created quite a number of jobs. I do not know whether it is possible for the Minster to accept this amendment.

Mr. Quinn

A fundamental principle is at stake here. Many people have had my responsibilities prior to me and many will after my departure; I am honour bound to hold a line. People make decisions on the basis of the tax regime that prevails at the time. Within a tax year there is room for some modification but if we were to accept the principle that there are some deserving cases — and there will always be deserving cases, I suspect, with good legal advice, that we could open up a Pandora's box. If, for example, corporation tax is 38 per cent today somebody could plead that it should have been 38 per cent three years ago and look for repayment on that basis because the Oireachtas in its wisdom decided retrospectively and selectively and somewhat arbitrarily to do it. I am familiar with the representations made in regard to a particular case here and I have the greatest sympathy for the individual involved, but a cold calculated decision was taken and consequently a price was placed on the value of a particular shareholding having regard to the taxation regime that prevailed at the time. To interfere with that now would not only be a bad precedent but it is simply not warranted, no matter how sympathetic one can be to the individuals involved.

Amendment, by leave, withdrawn.

Question proposed: "That section 69 stand part of the Bill."

Mr. McCreevy

I understand the purpose of section 69, and perhaps the Minister could take a benign view of share dealing by replying to questions on section 68. I do not understand the point about a local authority and environmental unfriendly use by a person in the explanatory memorandum. If the Minister gave an example of what is envisaged, I could probably understand it. I am not sure what the Minister is attempting to achieve in section 68, particularly in terms of paragraph 1 of the explanatory memorandum.

Chairman

Do the Deputy's questions relate to section 68?

Mr. McCreevy

Perhaps the Minister could refer to these questions when he is replying to section 69.

Chairman

We have dealt with section 68. Perhaps the Minister could briefly reply.

Mr. Quinn

It essentially involves a situation where an activity in a particular area is deemed to be environmentally unfriendly and the company want to sell up and relocate the offensive activity elsewhere where it can get planning permission. It is a tax incentive for the company to relocate from one place to another.

Mr. M. McDowell

Would McGovern's in Ranelagh be included?

Mr. Quinn

If they were still there, but this applies to——

Chairman

That type of thing.

Mr. Quinn

Yes.

Mr. McCreevy

So that is the purpose of the provision. My second question relates to the point that it will be certified by the local authority. Will that be a management function of the local authority or a reserved function of the councillors?

Mr. Quinn

It will be a management function, involving the local planning department and the environmental section.

Mr. McCreevy

On foot of guidance. If a person gets this——

Mr. Quinn

It is not a reserved right of councillors.

Mr. M. McDowell

What is a reserved right these days? Section 4s?

Mr Quinn

That is a good question. I do not know.

Mr. McCreevy

I am not disputing what the Minister is attempting to do

Question put and agreed to.

NEW SECTION.

Mr. Quinn

I move amendment No. 66:

In page 105, before section 70, to insert the following new section:

70.—Section 66 of the Finance Act, 1994, is hereby amended—

(a) in paragraph (a) of subsection (7), by the substitution of 'subsections (8) and (8A)' for 'subsection (8)', and

(b) by the insertion of the following subsection after subsection (8):

‘(8A) In a case where paragraph (b) of subsection (7) applies and has effect, or would apply and have effect but for the fact that the new holding acquired by the individual does not constitute qualifying shares, and the following conditions are satisfied, that is to say:

(a) the date of the acquisition of the new holding by the individual was on or before the 5th day of April, 1994,

(b) the original shares had been held by the individual throughout the period of 5 years immediately preceding the date of the acquisition of the new holding,

(c) a disposal of the new holding, or a part of that holding, is made by the individual in the year of assessment 1995-96, and

(d) at the time of the disposal of the new holding, or, as the case may be, the part of that holding, the company in which the new holding subsists would not, other than by virtue of this subsection, be treated as a qualifying company in relation to that disposal,

then—

(i) if the disposal by the individual of the new holding or, as the case may be, the part of that holding is not a disposal of qualifying shares, that disposal shall, notwithstanding any other provision of this section, be treated as a disposal of qualifying shares in respect of which the individual's period of ownership is not less than 5 years,

(ii) subsection (2) shall apply—

(I) as if the reference in paragraph (a) of subsection (2) to "at the date of acquisition of those shares" were a reference to "at the date of acquisition of the original shares",

(II) where the company in which the new holding subsists is not the company in which the original shares subsisted, as if the reference in paragraph (a) of subsection (2) to "it is" were a reference to "the company in which the original shares subsisted is",

(III) as if the reference in paragraph (b) of subsection (2) to "throughout the specified period" were a reference to "throughout the period of 5 years immediately preceding the date of the acquisition of the new holding", and

(IV) where the company in which the new holding subsists is not the company in which the original shares subsisted, as if the reference in paragraph (b) of subsection (2) to "it is" were a reference to "the company in which the original shares subsisted is",

and

(iii) subsections (3) and (4) shall apply as if the references therein to "throughout the specified period" were references to "throughout the period of 5 years immediately preceding the date of the acquisition of the new holding".'.".

Mr. McCreevy

This amendment is over a page in length, but there is no explanatory memorandum. Will the Minister explain the purpose of the new section?

Mr. Quinn

It was brought to my attention that people were getting a relief if a sale was confined to Irish nationals. However, if they took shares in a foreign company as part of the sell out or transfer of ownership, for example, if the acquisition was part shares and part cash and the company which was buying the shares or buying out the company was foreign based, the Irish resident was penalised because the purchaser was a foreign company as distinct from a national company. The purpose of the amendment is to equalise the position between an Irish buyout of an Irish company as distinct from a foreign buyout of an Irish company.

Mr. McCreevy

The amendment proposes a new section of the Bill. Is it related to any other sections or is it a completely new section?

Mr. Quinn

It is completely new. The amendment extends the 27 per cent rate to disposal in the current tax year of non qualifying shares/securities which were acquired in exchange for qualifying shares prior to the introduction of the 27 per cent rate under a company reorganisation takeover. This will provide a once-off 27 per cent exit mechanism for entrepreneurs who invested in and built up a successful Irish business but who are now unable to qualify for the 27 per cent rate because their business was subject to a restructure or takeover, for example, by a foreign company, and their qualifying shares were exchanged for non qualifying shares or securities prior to the introduction of the 27 per cent rate.

To be eligible for this facility, the original shareholding which was exchanged must have been capable of meeting all of the conditions applying to the 27 per cent rate. In other words, they must have been ordinary shares held for at least five years in a qualifying trading or holding company. This is a once-off facility to cater for transitional cases and will not be extended beyond the current tax year. The 27 per cent rate is aimed at encouraging investment in Irish business and it would be undesirable to extend the rate in open ended business to non qualifying investments acquired in exchange or qualifying investments.

Mr. McCreevy

I am not much wiser, although that is not the Minister's fault. Perhaps the Minister could ask his officials to write to me and explain this section because I just do not understand it.

Mr. Quinn

The Deputy is not far behind myself. With the agreement of the Chair, I would invite one of my officials to offer a technical explanation.

Chairman

I have no objection. Is that agreed? Agreed. This is my precedent but we have been creating precedents here all day.

Mr. Philip Brennan

I am from Revenue. Deputies may or may not be aware that there is an existing relief in the capital gains tax code specifically designed to cater for a reorganisation of a company's share capital whether by company amalgamation or a company takeover. To take a simple example, if I have shares in company A, and company B wants to take me over, what usually happens is a paper for paper exchange. I get shares in the new company in exchange for my passing over the shares. From a capital gains tax point of view that is treated as neutral. In other words, I do not have to pay capital gains tax on the deemed disposal of my shares. It would be unfair because all I am getting are new shares.

Mr. M. McDowell

These are new shares and you are not deemed to be selling on the shares in your possession?

Mr. Brennan

That is correct. Last year the Finance Act contained a provision for a reduced rate of capital gains tax on the disposal of certain types of shares. This year, the Minister is trying to deal with is a situation where a reorganisation took place and at a time that your shares would have been qualifying shares but now, because they are either in a foreign company or you took non-qualifying shares, you find yourself in a position where you cannot qualify for the 27 per cent rate. This new provision allows you, subject to certain conditions, to qualify for the reduced rate when you come to dispose of the new holding.

The conditions are, first, that the reorganisation must have taken place before 6 April 1994. The reason for that condition is because after that date people would have been aware of the legislation. So, if you decided to be taken over by a foreign company it was in the full knowledge that the new holding would not qualify.

You must also have held the original shares for five years before the reconstruction, and the company in which the original shares were held must have been a qualifying trading company. Finally, you must dispose of the new holding this year. It is a once off measure to facilitate people who, probably through no fault of their own, would feel hard done by because the new holding is actually not in an Irish company and not in a qualifying company. I hope that explains the position adequately.

Mr. M. McDowell

How many people are likely to avail of this?

Mr. Brennan

There could be quite a lot. I have not got the exact figures but there are quite a lot of company reorganisations and reconstructions going on all the time. It is not necessarily confined to foreign companies.

Mr. M. McDowell

Do I understand that this won't ever happen after the end of this tax year?

Mr. Quinn

Yes.

Mr. M. McDowell

If anybody is foolish enough to swop shares in a new company in future, at least they are now aware of it.

Mr. Brennan

They are aware of the conditions that now apply.

Mr. M. McDowell

So, you are giving them mercy.

Mr. Quinn

It is a transitional thing.

Mr. M. McDowell

A retrospective transitional thing.

Chairman

Thank you very much Mr. Brennan.

Amendment agreed to.

Mr. Quinn

I move amendment No. 67:

In page 105, paragraph (a), line 16, after "shares" to insert ", other than shares quoted on a stock exchange,".

Amendment agreed to.

Mr. Quinn

I move amendment No. 68:

In page 105, paragraph (c), line 30, after "applies" to insert "and paragraph 18 does not apply".

It is a technical drafting amendment.

Amendment agreed to.

Question proposed: "That section 70, as amended, stand part of the Bill."

Mr. McCreevy

Can the Minister give a brief summary of section 70? If he has a long explanation we will not bother with it but, perhaps, we can have a reasonable synopsis of what the change is about.

Mr. Quinn

Its origins are in the Glacken report and the question of the back to back financing that was done in terms of transactions to avoid tax. You will recall the various transactions that were done, without going into the technical detail which we can make available for you. If you recall, by selling to an intermediary company in a particular manner, tax that would otherwise normally have been due was legally avoided. It is to close that off. Mr. Glacken brought this to our attention in the course of his report.

Mr. McCreevy

It is tax avoidance in this case?

Mr. Quinn

Yes. It is, in effect, closing a loophole that was brought to our attention arising from that inquiry.

Question put and agreed to.

Chairman

We move on to Part 2, Chapter 1, Customs and Excise.

Sections 71 to 78, inclusive, agreed to.