Amendment No. 23 in the name of Deputy McCreevy is out of order because it involves a charge on the Revenue.
SECTION 24.
Chairman
This matter was discussed in relation to an earlier amendment. This amendment cannot involve a charge on the Revenue because it reduces the tax charge to the State.
Amendment No. 23 not moved.
Question proposed: "That section 24 stand part of the Bill."
The purpose of amendment No. 23 would have been to relieve a tax loss to the Exchequer. I do not know how this can be deemed to be a charge on the people of the State. I stated earlier that these interpretations are Jesuit-like in nature and I do not envy the people who must deal with them. The person who made the interpretation in this instance is wrong.
Section 24 relates to the annual industrial buildings capital allowance. I have no problem with this allowance but an anti-avoidance measure is being used at present. Why did the Revenue Commissioners not avail of the opportunity to close in the Finance Bill? Industrial buildings allowance is spread over a number of years and its purpose is to encourage investment in industrial buildings, hotels, etc. It was never envisaged that the provisions in section 24 would be sold as a tax shelter. People are seeking to lease buildings in other countries — hotels or unused buildings — and use them to offset the industrial buildings allowance against their income, regardless of whether they become involved in the designated trade attached to such buildings.
The Revenue must be aware an anti-avoidance measure has been in operation for some time. The purpose of amendment No. 23 was to close that loophole. It was ruled out of order because it imposed a liability on the people of the State but it, in fact, seeks to do the opposite. That is why I was surprised to be ruled out order when opposing a liability on the State. It does the exact opposite. It removes this anomaly, because my amendment was to insert the words "in the State". I am fully supportive of the relief, but surely it is to encourage buildings in Ireland. The people using this device are very wealthy individuals and are using the tax avoidance measure by taking somebody anywhere in the world to find them a building unused. They do not even bother to see it as long as they can be deemed to have used it.
Even if the building was built in the last ten years, they can use the unused capital allowances on that building, no matter where it is, and offset them against their profits here in Ireland or their income, be they barristers, solicitors, or accountants. It is one of the most amazing tax avoidance schemes that I have ever come across and I know it was never the intention of the Legislature to put that type of avoidance scheme into place. I was surprised that the Revenue Commissioners had not closed the loophole. The effect of my amendment was to close the section and that is why I was amazed. This is opposing a charge on the State.
I urge the Ministers to look at my proposal. This seems to be an extraordinary tax avoidance measure, and I speak as an accountant who would normally be advocating tax avoidance measures to people. This is the best one I have come across. It has been widely used in the past two years. I was amazed to come across it. I am disappointed I did not find it myself some years ago, but it is totally abusive of the whole purpose of the original legislation in regard to industrial buildings allowance. It shows the ingenuity of tax avoiders but it is one that definitely should be closed.
There is very little disagreement between us on this issue. I will talk about amendment Nos. 23 and 24 together.
You had better talk about amendment No. 23 because it has been ruled out of order, even though it opposes a charge on the State.
Chairman
I will explain. It is based not on any judicial interpretation but on the Hapsburg precedent, whereby Franz Josef banned people from praising him on the basis that if people praised him they might also criticise him.
That is very funny.
Chairman
You cannot cancel a relief just as you cannot impose a relief.
Are you serious?
Chairman
So I am told.
Is this Ireland? The whole purpose of the Finance Bill is to give reliefs and cancel reliefs.
Chairman
This can be done if it is in a Bill supported by the Government, but Private Members may not do it.
In earlier sections we put forward amendments which increased tax exemption limits.
That is bad news for the Exchequer and good news for the taxpayer.
That is a charge on the State.
We can disimprove the Exchequer's position but we cannot disimprove any taxpayer's position.
Chairman
Cancellation of a relief would be tantamount to imposing a new tax, I am told. We will get you a note on the precise interpretation of this.
Written by St. Thomas Aquinas.
I wish to speak about amendment No. 24 which is for the same purpose, although Deputy McCreevy's is wider, and then maybe I could suggest something which might deal with the situation. An amendment is necessary to confine the capital allowances available for hotels to hotels located in the State. This change is necessary to ensure that Irish tax capacity is not used to fund the purchase, construction or development of hotels located outside the State, as you suggest. Hotel construction has traditionally received favourable treatment under the Irish tax code as part of Government assistance to the tourism sector.
Unlike other commercial buildings apart from those in urban renewal areas, hotel buildings are entitled to capital allowances. The annual rate for these allowances for many years was 10 per cent. This rate was increased to 15 per cent in 1994. This rate is much higher than, for example, the corresponding rate for hotels in the UK where it is only 4 per cent per annum. The relevant legislation does not, however, specify that the hotel has to be located in the State. Where, for example, a hotel is leased, there is nothing to stop the lessor claiming the capital allowances in respect of a hotel located outside the State. Information has recently emerged of a number of cases, either taking advantage or planning to take advantage of this loophole. This situation cannot be tolerated.
The special capital allowances regime for hotels was brought in to help Irish tourism and not hotels located outside the State. While it is possible that some hotels in Northern Ireland could benefit from the present hotel leasing regime, and Irish tourism is increasingly being marketed on a 32 county basis, we cannot realistically distinguish in tax law between Northern Ireland and Great Britain and so a blanket ban is necessary. It should be noted that the UK has complex legislation which effectively debars capital allowances being used for leasing of hotels outside the UK.
Deputy McCreevy's amendment which has been ruled out of order is wider in scope but if on examination of the points he made in relation to wider abuse — although I think it is unlikely because the rate of capital allowance is so much lower — that is thought to be a problem, we will certainly deal with that quickly on Report Stage with a further amendment.
Thank you, Minister. It is so unusual for me to bring forward a proposal which will close off a tax avoidance scheme that it should be considered. I understand that the original purpose of some of the hotel capital allowance was to allow Irish hotel groups who invested abroad in hotels to have the relief and I do not want to close that off. I am interested in closing off the obvious avoidance mechanism which someone discovered in order to get the industrial buildings allowance written off against their Irish income, wiping it out totally in most instances by getting a lease or whatever. I have seen contacts for it which were perfectly legitimate. They do not even know where the place would be. It would be an unused building in some obscure part of the globe. They take a lease for a year. They can use the unused capital allowance as long as it is less than ten years old or built up to maybe 80 per cent or thereabouts. They wipe out their total income. They technically own it for a year, it then goes back to the owner. It costs them nothing at all, except that they save all their income tax. This is one of the best schemes I ever heard about and the purpose of my amendment is to close off that particular loophole.
I do not want to close off legitimate Irish business, particularly hotels who may be operating abroad, which was the original purpose of the relief. This scheme only came to my attention quite recently by pure accident. I then made a few further discoveries through a friend of mine who had brought it to my attention and told me that this is being used by tax advisers. I thought it was so extraordinary that I was inspired to put down an amendment to close it off.
Are you aware that the abuse exists extensively outside of hotels?
Yes. It did not come to my attention through hotels. It came to me through someone who came across it where it had nothing to do with hotels at all.
We will look at that and come back on Report Stage.
That is what I am more interested in. This has been used in the last year. It has been touted as a tax scheme.
Above and beyond hotels?
Yes.
We also may have another provision to bring forward on this.
Now that I have brought it to your attention we are quite willing to let the experts in the Revenue Commissioners and the Department of Finance draw their own particular way of closing loopholes. It was never the intention that people would get an industrial buildings allowance on the theory that they owned a building in some obscure part of the globe and were able to get write off their total Irish income.
Question put and agreed to.
Chairman
Before turning to section 25, amendment No. 24, with the leave of the committee Deputy Connor will take the Chair for a few minutes.
NEW SECTION.
I move amendment No. 24:
In page 36, before section 25, to insert the following new section:
25.—Section 255 of the Income Tax Act, 1967, is hereby amended in subsection (1) by the insertion of the following additional proviso after the proviso to that subsection:
‘Provided also that expenditure incurred on or after the 23rd day of April, 1996, either on the construction of or on the acquisition of the relevant interest in, a building or structure which is not situated in the State shall not be treated as expenditure on a building or structure in use for the purposes of a trade of hotel keeping.'.".
We have already dealt with this amendment.
Amendment agreed to.