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

SECTION 45.

Mr. Quinn

I move amendment No. 59:

In page 72, between lines 18 and 19, to insert the following subsections:

"(2) Paragraph (c) of subsection (4) of section 28 of the Finance Act, 1987, shall not have effect in the case of a letting on charter of a ship referred to therein where the lease in respect of the ship is a lease, the terms of which comply with the provisions of clauses (I) and (II) of subparagraph (i) of paragraph (b) of subsection (1) of section 30 of the Finance Act, 1994, and where the lessee produces to the Revenue Commissioners a relevant certificate within the meaning of this section.

(3) (a) In this section, a ‘relevant certificate' means a certificate issued, with the consent of the Minister for Finance, by the Minister for the Marine in relation to the letting on charter of a ship, certifying, on the basis of a business plan and any other information supplied by the lessee to the Minister for the Marine, that the Minister for the Marine is satisfied that the lease is in respect of a ship which

(i) will result in an upgrading and enhancement of the lessee's fleet leading to improved efficiency and the maintenance of competitiveness,

(ii) (I) has the potential to create a reasonable level of additional sustainable employment and other socio-economic benefits in the State, or

(II) will assist in maintaining or promoting the lessee's trade in the carrying on of a qualifying shipping activity, and the maintenance of a reasonable level of sustainable employment and other socio-economic benefits in the State,

and

(iii) will result in the leasing of a ship which complies with current environmental and safety standards.

(b) Before issuing the certificate referred to in paragraph (a),the Minister for the Marine shall be satisfied that the said lease is forbona fide commercial purposes and not as part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax.

(4) In this section ‘lessee', in relation to a ship provided for leasing, means the person to whom the ship is or is to be leased and includes the successors in title of a lessee.

(5) This section shall apply and have effect as respects a ship, a binding contract in writing for the acquisition or construction of which was concluded on or after the 1st day of July, 1996.".

Section 45 broadens the scope of the definition of a qualifying ship for the purpose of the 10 per cent rate of corporation tax which applies to qualifying shipping activities such as the carrying for reward of passengers and cargo. At present, to qualify a ship must be 51 per cent Irish owned. The section relaxes this requirement by also allowing vessels which are leased from a foreign lessor without crew to qualify. Qualification for the 10 per cent rate will, however, be subject in such cases to compliance with all the requirements of the Merchant Shipping Acts. These include meeting Irish standards on ship safety and the manning of such ships with seafarers having Irish certificates of competency or certificates recognised as equivalent by the Irish authorities. The purpose of this measure is to extend the range of financing options for Irish ferry and cargo operators.

The section also makes a technical change to the way Irish ownership is defined. Irish ownership in future will be defined in terms of residence rather than ordinary residence as is the case at present.

The amendment to section 45 adds a further provision to the section. Again, it targets the leasing of ships. At present, capital allowances and losses in respect of the leasing of a ship can only be set against the leasing income of that particular ship. This is a very tight ring fence which was introduced when the 10 per cent rate of corporation tax was extended to shipping and in an era when accelerated capital allowances were the norm. Now the maximum annual rate of capital allowance for ships is 15 per cent. It is, therefore, proposed that, subject to certification by the Minister for the Marine, this ring fence should now be partly relaxed. The amendment proposes that capital allowances and losses could in future be offset against all leasing income. However, a general ring fence will still remain in place which will ensure that capital allowances and losses cannot be offset against any other type of business.

The certificate process requires that the Minister for the Marine must be satisfied that a ship which is the subject of a lease will result in the enhancement of a fleet and meet current safety and environmental standards, as well as having potential positive economic and other benefits. The certification process will, furthermore, allow ship leasing to be monitored and remedial action be taken later if necessary. The amendment involves a measured relaxation of some of our current rules and is aimed at encouraging increased investment to enable our shipping fleet to grow and prosper in an increasingly competitive sector.

Mr. M. McDowell

Since ships certainly affect intra state trading in the EU, does the EU go along with us giving preferential treatment to ships employing Irish nationals?

Mr. Quinn

I am informed that all EU countries give preferential treatment to their own national fleets or shipping industries. We do not envisage any EU complications or difficulties with this provision.

Mr. M. McDowell

That is interesting.

Mr. Quinn

In fact, what we are doing is quite minimal, relative to what exists in other regimes.

Chairman

That raises the question "why?". The business expansion scheme was withdrawn from shipping some time ago. Has any consideration been given to reintroducing it or extending it?

Mr. Quinn

It is too asset based. We feel this is a better way of doing it because of the facility for shipping operators to lease ships and vessels which now exists.

Mr. McCreevy

I presume there were specific cases which arose——

Mr. Quinn

The background to this is that the Minister for the Marine, following consultations with and representations from the Irish shipping industry, made proposals. In the course of the finalisation of the Finance Bill we entered into discussions with him. It was agreed that between the publication of the Bill and now we would incorporate these negotiated partial relaxations. It is not everything they wanted.

Mr. M. McDowell

Does the provision that it has to result in an upgrading and enhancement of the lessee's fleet imply that a new entrant who has no fleet cannot avail of this?

Mr. Quinn

That is a good question. I do not think it could apply. The other criteria would apply — they would have to abide by Irish safety standards and ensure that people with Irish certificates of competence or relevant certificates were employed.

Mr. M. McDowell

But it seems they are all cumulative conditions.

Mr. Quinn

A new entrant could buy an existing ship and upgrade it accordingly. Is the Deputy expecting new entrants?

Mr. M. McDowell

I am just asking. The phrase "upgrading and enhancement of the lessee's fleet" implies the lessee has to already be in business and have a fleet.

Mr. Quinn

As I said, the provision reflects representations made by the current industry.

Mr. M. McDowell

That is what I am wondering about. It seems to be tailor made to their particular requirements and not to any competition.

Chairman

What if it was merely a transfer from one company to another, where one lessee's fleet would be increased and the other's would be reduced? Is that covered?

Mr. M. McDowell

It has to be additional employment.

Chairman

It could mean additional in one group because it could be offsetting losses in another group.

Mr. M. McDowell

It has to be additional in the State.

Mr. Quinn

There is certification process required by the Minister for the Marine. They will have to get a certificate from the Minister for the Marine in the first instance before the tax provisions will kick in. That requirement is to ensure the Minister for the Marine will have primary responsibility to ensure there is no exploitation of this provision by existing operators simply upgrading what is currently there without any improvement and getting a better tax break for what they already have.

Chairman

Are you happy that point has been covered?

Mr. Quinn

I will come back and tell you in a year if I am happy. We do not know; we are not sure how it is going to work. I told you the genesis of the proposal. We have been convinced by the arguments of the Minister and the Department of the Marine. The volume of trade and cargo on the Irish seas is growing rapidly and there is a need for extra capacity and safety. We were told this is one of the ways that would be facilitated.

However, it will have to be monitored like all financial provisions. If it does not have the desired effect, which I set out fairly clearly earlier, we will come back and tell you and make the necessary changes. If we are not happy about it, we can go back and talk, in the first instance, to the Minister for the Marine about the certification process he is exercising. There will be consultation about certification before the formal certificate is written. They have to get a certificate from the operational department as well as applying for tax.

Mr. Cullen

There is a great deal to be concerned about. In terms of taxation, we have been extremely generous in trying to encourage this development, which one welcomes. However, I have grave reservations about major companies which are setting up in this country as so-called Irish shipping fleets. I had a very sad experience with a major shipping company in this country, which I will not name, which decoupled itself from its parent company and set itself up as an Irish company. The first thing it did was to get rid of every Irish man and woman working on the ships. They have now got to the stage where they are even trying to get rid of the Irish officers on the ships. We have, on paper, an Irish shipping fleet but we are fast approaching the stage where we will not have one Irish person working on its ships.

This raises safety questions. It also raises the question of ethos. Are we going in the right direction in encouraging this development? The reality is that, in the way it is being used and with the hire of crews from all over the world in the form of cheap labour, we have no Irish people left on them.

I have had serious discussions over the past couple of months about this. If we, the Department of Finance and the Revenue Commissioners are doing the right thing, which they have done and are doing, there are serious questions to be asked of those within this country who are setting up or expanding their fleets and doing it on the basis of cheap foreign labour, using a flag of convenience to avail of the tax breaks we are making available.

We were all aware that was happening with regard to unskilled crews on ships but on cargo ships our best qualified officers are being squeezed out. I take grave exception to Irish companies doing, in theory, the right thing but then getting rid of every Irish person involved.

Revenue should keep on eye on this as should the Minister, in consultation with the Minister for Enterprise and Employment and the Minister for the Marine. There should be a proviso in these arrangements whereby if we are being generous there is an expectation that the employment uptake should be of Irish men and women. Our tax incentives are creating jobs for people who have nothing to do with this country at the cost of Irish jobs. If the tax incentives were not there we would probably still have more Irish people involved in our shipping fleets. This extremely serious problem is getting out of hand.

Mr. Quinn

To qualify, an applicant will have to present to the Revenue Commissioners a relevant certificate. This is defined in the subcomponents of the new subsection. The proposed section 59(3)(a) states, inter alia, that the activity:

(i) will result in an upgrading and enhancement of the lessee's fleet leading to improved efficiency and the maintenance of competitiveness,

(ii) (I) has the potential to create a reasonable level of additional sustainable employment and other socio-economic benefits in the State,. . .

The proposed section 59(3)(a)(ii)(I) is the critical clause in this respect. We take this drafting to cover the point that one cannot engage in a form of social dumping.

Mr. M. McDowell

Certificates may be issued but can the crewmen be safeguarded?

Mr. Cullen

This is the problem. Once the criteria have been met, the Irish crews are dumped. I take the gravest exceptions to companies doing this. What has occurred here is outrageous. I appreciate the Minister's point but once the criteria are met it is a case of doing the opposite to what is required.

Mr. Quinn

I have noted the Deputy's comments. We will bring it to the attention of the Department of the Marine which is the front-line monitor. If this kind of exploitation of the tax regime is taking place, we must ensure it does not continue.

Chairman

Do we have any figures regarding the number of Irish personnel and officers employed in Irish shipping companies?

Mr. Quinn

I do not have them to hand. I will try to get them for you.

Amendment agreed to.

Section 45, as amended, agreed to.

Section 46 agreed to.

NEW SECTION.

Mr. Quinn

I move amendment No. 60:

In page 73, before section 47, to insert the following new section:

47.—Section 56 (as amended by section 51 of the Finance Act, 1994) of the Finance Act, 1992, is hereby amended——

(a) by the substitution in paragraph (a) of subsection (2) of ‘31st day of December, 1997,' for ‘31st day of December, 1996,', and

(b) by the substitution for subsection (3) of the following subsection:

‘(3) Subject to subsection (2), where a company (hereafter in this subsection referred to as the "donor") makes a gift to which this section applies and claims relief from tax by reference thereto, the net amount thereof shall, for the purposes of corporation tax, be treated as ——

(a) a deductible trading expense of a trade carried on by the donor, or

(b) an expense of management deductible in computing the total profits of the donor,

incurred by it in the accounting period in which the gift is made:

Provided that in determining the net amount of the gift, the amount or value of any consideration received by the said donor as a result of making the gift, whether received directly or indirectly from the company or any other person, shall be deducted from the amount of the gift.'.".

This amendment rewrites section 56(3) of the Finance Act, 1992, to correct a number of drafting errors in that subsection. The purpose of that section is to provide relief from corporation tax for companies which may make gifts to a company called the Enterprise Trust Limited. Section 55(1) defines the Enterprise Trust Limited as the company, subsection (3) provides relief for companies which make gifts to the Enterprise Trust Limited and so on.

Enterprise Trust Limited is a body that was set up essentially by IBEC, the employers group, and others. It was part and parcel of the Programme for Economic and Social Progress and was an initiative under the Programme for Economic and Social Progress by the employers’ organisations CIF, ICOS and IBEC. The aim is to assist the funding of area partnership companies in disadvantaged areas by providing seed capital. Tax deductions are provided in respect of corporate donations. The amendment seeks to renew this and tidy up the provisions.

Amendment agreed to.

Chairman

The insertion of this new section involves the deletion of section 47 of the Bill.

Section 47 deleted.

Section 48 agreed to.

NEW SECTION.

Mr. Quinn

I move amendment No. 61:

In page 74, before section 49, but in Chapter IV, to insert the following new section:

49.(1) Chapter VII of Part I of the Finance Act, 1983, is hereby amended——

(a) in section 44, by the substitution in subsection (5) for ‘apply for the purposes of that section' of 'would apply for the purposes of that section if "resident in the State" in paragraph (c) of the said subsection (6) were deleted', and

(b) in subsection (1) of section 47——

(i) by the substitution for clause (I) of paragraph (a)(ii) of the following:

‘(I) (A) of which the first-mentioned company is a 75 per cent. subsidiary, or

(B) which is a member of a consortium which owns the first-mentioned company,

and',

and

(ii) by the insertion after paragraph (c) of the following paragraph:

‘(d) For the purposes of paragraph (a) a company is owned by a consortium if three quarters or more of the ordinary share capital of the company is beneficially owned between them by five or fewer companies of which none beneficially owns less than one-twentieth of that capital, and those companies are called members of the consortium.'.

(2) This section shall apply and have effect as respect dividends paid on or after the 23rd day of April, 1996.".

This amendment makes a number of changes to the advanced corporation tax ACT— and eliminates difficulties encountered with regard to the ACT by Irish operations carrying out joint venture bases in non-resident companies. Under the existing rules, ACT is required to be paid whenever an Irish resident company makes a distribution. The tax credit attaches to the distribution and represents the part of the corporation tax paid by the company imputed to the shareholder. The amount of the money can be set aside against the shareholder's tax liability, and if it exceeds the liability can be repaid.

Advance corporation tax ensures that a shareholder cannot use a credit for imputed corporation tax in circumstances where, for a number of reasons, the company makes no corporation tax payment. It achieves this by requiring a payment of advance corporation tax by the company equal to the amount of the credit attaching to the dividend. The company can subsequently set the ACT against its mainstream corporation tax liability.

A number or exceptions exist to the requirement to pay ACT. Among these is a situation where an Irish resident company is owned by a consortium of Irish resident companies. A dividend paid to a member of the consortium will not carry a tax credit and ACT will not be payable. This rule is now being relaxed so that all the members of the consortium do not have to be resident in the State. The proposed amendment will provide that there was no ACT or tax credit where a company owned by a consortium pays a dividend to an Irish resident company which is a member of the consortium, and will not require that all the members of the consortium must be Irish residents.

A second exception to the requirement of the ACT is where a dividend is paid to a non-resident parent of an Irish company. The parent company must hold 75 per cent of the ordinary share capital of the Irish subsidiary and must be resident in a tax treaty partner country. It has been pointed out that businesses operated in the State as joint ventures involving foreign companies may be disadvantaged under the existing rules. If an Irish resident company is a party to the joint venture it would be denied relief from ACT because of the existence of a non-resident partner. The non-resident partner will also be denied ACT relief if the 75 per cent shareholding requirement is not satisfied.

The proposed amendment, therefore, allows ACT relief in the case of the dividend to the Irish resident consortium member and allows ACT relief in respect of dividends to non-resident members of the consortium. The amendment should not give rise to any Exchequer cost, but as the dividend will not carry a tax credit, there can be no question of a shareholder being entitled to use the credit for set off against tax liability or repayment. In addition, in the case of non-resident companies who are members of a consortium, it is possible under existing law to set a structure in place to achieve the same result. However, such bureaucracy is inappropriate and could act as a deterrent to companies to carry out their business here through joint ventures.

Amendment agreed to.

The Select Committee adjourned at 8 p.m. until 9.30 a.m. on Thursday, 25 April, 1996.