Select Committee on Finance and General Affairs debate -
Wednesday, 24 Apr 1996

SECTION 37.

Mr. Quinn

I move amendment No. 48:

In page 68, between lines 32 and 33, to insert the following:

"(10) Where any part of the profits of an accounting period of a company are charged to corporation tax in accordance with this section then ——

(a) for the purposes of section 41 of the Finance Act, 1980, the relevant corporation tax in relation to the accounting period shall be reduced by an amount determined by the formula

	R	×	S
	100

where——

R is the rate per cent specified in subsection (1) in relation to the accounting period, and

S is the specified amount in relation to the accounting period, and

(b) notwithstanding the provisions of subsection (10)(b) of section 155 of the Corporation Tax Act, 1976, in determining the income of a company, referred to in the expression ‘total income brought into charge to corporation tax', for the accounting period for the purposes of subsection (2) of the said section 41, it shall be the sum determined by the said subsection (10)(b) for that period reduced ——

(i) in accordance with sections 10A and 16A, and

(ii) by the specified amount in relation to the accounting period.'.".

This amendment adjusts the technical rules in section 41 of the Finance Act, 1980, for the calculation of manufacturing relief. Those rules interact with the new 30 per cent tax rate which applies to the first £50,000 of income of an accounting period so as to reduce the level of manufacturing relief in respect of income from manufacturing activity. As a result, the effective rate on manufacturing income of a company can be higher than the 10 per cent rate. The 10 per cent rate can be restored by reducing total income used in the computation of manufacturing relief by the specified amount and reducing "relevant corporation tax" used in the computation by 30 per cent of the specified amount.

As a consequence of changing corporation tax provisions this year, there are changes we have to make to the rest of the system to maintain the previous situation as it was. This is a technical amendment to ensure the entitlements were as before.

Mr. M. McDowell

When the Finance Act, 1995, was discussed the Minister indicated that he proposed to bring the rate of corporation tax down by instalments. Why did he change his mind this year?

Mr. Quinn

The taxation strategy group met on a number of occasions. I was persuaded by it that one would get a more targeted tax relief on small and younger companies by reducing the tax rate for small companies with small profits to 30 per cent. A reduction from 38 per cent to 36 per cent, which was my preference, would have made no distinction between young or mature companies or between companies with large or small profits. There are not many criteria available, but it was felt that this approach was a more effective way of providing tax relief for small industry. I was persuaded by the argument.

Mr. M. McDowell

Why did you not consider doing both?

Mr. Quinn

The subsequent tax revenue loss would be too high.

Mr. M. McDowell

In the future will the Minister increase the lower rate profits band or return to his original intention, having kept faith with the small and medium enterprises?

Mr. Quinn

The original intention was to make our corporation tax rate comparable to our nearest competitor, the UK. That can be approached by tackling the nominal tax rate or the effective tax rate. This year we have tackled the effective rate. A means of achieving comparability, and thereby levelling the playing pitch, would be to raise the threshold from £50,000. The alternative would be to reduce the rate from 38 per cent to 36 per cent. Ultimately, I will be guided by what is the most effective way of doing that for the least cost in terms of tax revenue lost.

Mr. M. McDowell

The problem is that we are making the same mistake with corporation tax as has been made with income tax. We have high rates with exemptions and allowances and maintain that the rate does not matter as much as the bottom line. Large companies had an expectation, based on what the Minister said last year, that in five year's time they would be have a 30 per cent effective tax rate. Having done something for small companies, the Minister should return to trying to achieve low tax rates for all companies. A profit is a profit, whether it is for a large or small company.

Mr. Quinn

I did not do what ISME or the SFA wanted, that was to have a two tiered system.

Mr. M. McDowell

I was also against that.

Mr. Quinn

We have introduced a tier available to everybody so that everybody's tax will come down. However, the focus of the reduction of the tax burden is concentrated on the companies with small profits. That does not necessarily mean they are small companies; large companies can have small profits. However, it gives them back a little more.

Mr. M. McDowell

That is my point. A large company with a small profit does better from this measure than a large company with a large profit. We should encourage large companies to make large profits.

Mr. Quinn

Yes.

Mr. McCreevy

What is the effect of the amendment?

Mr. Quinn

It is to restore certain equilibria which existed prior to the reduction of the tax rate. It is to restore balances which existed prior to the introduction of the new £50,000 tax rate of 30 per cent.

Mr. McCreevy

Why did the Minister not go for a figure of £100,000?

Mr. Quinn

It would have cost too much.

Mr. McCreevy

How much?

Mr. Quinn

I will get the figures for the Deputy. It was a question of the cost of tax revenue that would be lost.

Mr. McCreevy

How much will the exemption of £50,000 cost and an exemption of £100,000?

Mr. Quinn

An extra £12 million.

Mr. McCreevy

And the cost of the £50,000?

Mr. Quinn

The cost would be £1 million in this year, £23 million in 1997 and £31 million in a full year for the £50,000 limit.

Mr. McCreevy

Is it the intention to keep reducing the 38 per cent rate? Policy makers will have to be cognisant of the exemption until 2010 of the 10 per cent manufacturing rate. Unless we expect to be able to renegotiate with the Commission that we be allowed to keep the lower rate, we will have to start preparing for that by bringing down our overall corporation tax rate. If in the year 2010 the rate was at 32 per cent there would be a substantial increase for the companies on the 10 per cent rate. One of the main attractions to doing business in Ireland is the low manufacturing tax rate.

Mr. Quinn

That matter is under consideration. With regard to the 2010 provision guarantee, we dispute that the 10 per cent tax rate is a State aid. Some other member states would argue that it is a State aid. From our point of view it is not because it is applicable to everybody — there is no distinction between indigenous firms and incoming firms. The extension of the 10 per cent rate to additional activities would be problematic because all such tax changes have to have the part consent of the Commission. Any changes in taxation, within the Commission or ECOFIN, are still subject to the rule of unanimity.

Unless we change the institutional rules on voting on the Council, no change will be imposed on our taxation system without our consent. We are talking about 2010 and it is most likely that an extension of qualified majority voting will prevail at that time. It is our view that unless the Commission or the ECOFIN Council wishes to go to a higher corporation tax rate, we will not. If we could all be extrapolated to that year, because we all did so well in terms of corporation tax yield at 10 per cent, there would be no argument for extending or increasing that rate from our domestic economic point of view. If the overall view of the Council, on foot of a Commission proposal, is to have a recommended set of bands as with VAT, or a minimum or standard rate or corporation tax and a special rate, we would have to examine that. However, there is no compelling economic or tax gathering argument for altering those tax rates ourselves.

Mr. McCreevy

I am not disputing anything the Minister says or the arguments he puts forward but I ask him to clear up another point. Successive Ministers often gave as the excuse for not extending the 10 per cent tax rate to other activities that we had agreed this with the Commission and had an extension until 2010 — I thought it was until 2005. How does this square with that supposition? The two do not add up. I have heard Ministers ask me that, perhaps this Minister also.

Mr. Quinn

I accept what the Deputy is saying. However, now that we have reached this point in the integration of the Internal Market, a specific extension of the 10 per cent regime to a new category of activity would be deemed as a State aid to that sector.

Mr. McCreevy

Such as to services?

Mr. Quinn

Yes. At the commencement of corporation taxes, our tax rate for manufacturing and internationally traded services was 10 per cent. One could argue conversely that the low rates of personal income tax in the UK are a "State aid" because it is a subsidy of labour costs.

Mr. M. McDowell

One certainly could argue that.

Mr. McCreevy

To close off this point about the Commission, 15 years from now——

Mr. Quinn

The year 2010 applies to the general flat rate of 10 per cent across the entire authority of the State, manufacturing and related internationally traded services. That is universal and is fixed until then. For the International Financial Services Centre and the Shannon area, that is extended to 2005.

Mr. McCreevy

At present the policy position is that even if the change had taken place overnight, that is not a State aid and we do not need Commission approval for it. Subject to a Single European Act, perhaps everything will change before 2010 but at the moment, is that the argument for not changing it?

Mr. Quinn

We argue coherently and consistency that the application of a 10 per cent tax rate for manufacturing until 2010 is not a State aid. The continuation of the other rate until 2005 is specific because it is confined to two geographical regions, the IFSC and Shannon. That is State aid as an instrument of regional policy agreed with the Commission.

Mr. M. McDowell

This is a momentous moment because the Minister for Finance, Deputy Quinn, is stating that the continuation of the 10 per cent regime until 2010 is not a State aid. By implication, he is saying it is there because he wants it to be there and it does not exist to attract industry to Ireland or distort international trade — it exists because he considers it to be the appropriate rate for manufacturing corporation tax. I hope this philosophy spreads throughout the whole tax system — that we believe in low rates and high returns.

Amendment agreed to.

Section 37, as amended, agreed to.

Sections 38 to 40, inclusive, agreed to.

NEW SECTIONS.

Mr. Quinn

I move amendment No. 49:

In page 70, before section 41, to insert the following new section:

"41. — (1) Section 36 of the Corporation Tax Act, 1976, is hereby amended in subsection (2) by the insertion of the following proviso:

‘Provided that in computing that part of those profits for the purposes of paragraph (b), subsection (1A) of section 13 shall apply as if the rate per cent. of capital gains tax specified in subsection (3) of section 3 of the Capital Gains Tax Act, 1975, were the rate per cent. of corporation tax specified in paragraph (b) of subsection (1) of section 1.'.

(2) This section shall have effect as on and from the 1st day of April, 1995.".

This is to counter an unintentional consequence of the change in the corporation tax rate from 40 per cent to 38 per cent in last year's Finance Act, under which capital gains arising from the disposal of investments held as part of the life business of an insurance company became liable to tax at an effective rate of 28.4 per cent rather than the intended rate of 27 per cent. The problem arose because existing law requires that companies are in general charged a corporation tax rather than capital gains tax. The law requires that the capital gains tax liability of a company be converted to an amount of profits which, if charged to corporation tax, would result in the same amount of tax being payable. Thus, a capital gain of £100 which would give rise to a capital gains tax liability of £40 is converted into £105 corporation tax profits which when taxed at 38 per cent gives a liability of £40.

Life funds of an insurance company were given a tax rate of 27 per cent in 1993. This is achieved in law by taxing their profits. However, if the £105 in the example is taxed at 27 per cent, a liability of 28.4 per cent arises. This was already discussed with amendment No. 42.

Amendment agreed to.

Mr. Quinn

I move amendment No. 50:

In page 70, before section 41, to insert the following new section:

"42. — (1) Section 36A (inserted by the Finance Act, 1993) of the Corporation Tax Act, 1976, is hereby amended in subsection (6) by the insertion of the following proviso:

‘Provided that in computing profits for the purposes of this subsection, subsection (1A) of section 13 shall apply as if the rate per cent. of capital gains tax specified in subsection (3) of section 3 of the Capital Gains Tax Act, 1975, were the rate per cent. of corporation tax specified in paragraph (b) of subsection (1) of section 1.'.

(2) This section shall have effect as on and from the 1st day of April, 1995.".

Amendment agreed to.