We will commence with sections 26 to 42 in the first session.
Vol. 3 No. 2
We will commence with sections 26 to 42 in the first session.
I move amendment No. 47:
In page 54, subsection (1)(d), to delete lines 26 to 29 and substitute the following:
"referred to in clause (i), the certificate referred to in clause (ii) or, as the case may be, the certificate referred to in clause (iii), of subparagraph (f) of that”.
The purpose of this amendment is to rectify a minor drafting error in section 26 of the Bill. In page 54, lines 26 to 29, there are incorrect cross references to subparagraphs (i), (ii) and (iii) of paragraph 9 of Schedule 2A to the Taxes Consolidation Act, 1997. The correct cross references should be to clauses (i), (ii) and (iii) of subparagraph (f) of that paragraph.
I move amendment No. 48:
In page 58, subsection (1)(f)(i)(IV), line 20, to delete “paragraph (d)” and substitute “this section”.
This amendment rectifies a minor drafting error in section 26 of the Bill. In page 58, line 20, there is an incorrect reference made to "paragraph (d)”, being paragraph (d) of subsection (3) of section 172F of the Taxes Consolidation Act, 1997. The correct reference should be to “this section”, being section 172F of the Taxes Consolidation Act, 1997.
I move amendment No. 49:
In page 60, subsection (1)(f)(ii), line 54, to delete “or payment”.
This amendment rectifies a minor drafting error by removing the words "or payment" in line 54 of page 60 as they are superfluous.
I wish to bring to the attention of the committee that I am currently considering bringing forward an amendment to the dividend withholding tax legislation on Report Stage. This amendment is of a technical nature and as a result of representations from a representative body for auditors.
Section 26 concerns the scheme of dividend withholding tax which was introduced in last year's Finance Act.
DWT is a complex tax in terms of its administration by Revenue and compliance with the governing legislation by affected parties. This is particularly so because of the number of players involved - paying companies, company registrars, shareholders - both domestic and foreign - and intermediaries such as banks and stockbroking firms - again both domestic and foreign. Over the past year, Revenue engaged in a wide-ranging series of consultations with representatives of the parties concerned. Revenue officials met representatives of Irish company registrars, stockbrokers and custodian banks. In addition, given the importance of US and UK investment in the country, officials also visited London and New York to meet representatives of UK and US custodian banks. Moreover, there were a number of representations made to my Department by industry generally about the DWT scheme.
There were some calls made to abolish the tax. This is simply not on. DWT is now expected to raise some £50 million a year. In addition, given that paying companies are now obliged to make a return to Revenue of their dividend payments, it acts as an incentive for taxpayers to include details of dividend income in their tax returns. This, in turn, should generate further revenue from high rate taxpayers as there is little doubt but that, prior to DWT, there was a degree of non-reporting of dividend income by taxpayers generally. Nonetheless, it was clear from the feedback received from the parties affected by DWT that there was a concern about the compliance obligations associated with obtaining exemption from DWT. There were also concerns expressed about the administrative burden that compliance with the DWT record keeping and reporting obligations will impose on banks and stockbroking firms who wish to become qualifying intermediaries for the purposes of the scheme. Moreover, there were requests to apply double taxation treaty benefits automatically in operating DWT in a situation where the recipient of the distribution would not be entitled to exemption under the DWT legislation but would under a double taxation treaty be entitled to a full or partial refund of the tax deducted.
Having considered the various issues raised by interested parties, I have decided to introduce changes to the DWT scheme which are intended to ease the administrative workload which the management of the tax imposes on Revenue and reduce the compliance burden on affected parties without diminishing Revenue's powers to police the legislation so as to ensure that only qualifying persons gain exemption from the tax.
The changes proposed are set out in some detail in the explanatory memorandum to the Bill. Perhaps the most significant change is the proposal to grant full exemption from DWT to companies resident for tax purposes in another EU member state or a country with which Ireland has a double taxation treaty and which are not controlled by Irish residents. In effect, this will ensure that double taxation treaty benefits will apply at source. Indeed, it may go further in some cases as full exemption is being given, whereas if one was to rely on a tax treaty for relief a reduced rate of withholding could apply. To qualify for exemption, the necessary declaration of exemption must be accompanied by a certificate of tax residence from the tax authority of the country concerned and a certificate from the company's auditor confirming that it is not controlled by Irish residents.
Of importance too, in the context of reducing the administrative burden of qualifying intermediaries, is the proposal to change their reporting obligations from a full and automatic annual return of all dividend payments to a requirement to make a return only on request from Revenue and only in relation to the class or classes of dividends specified by Revenue. Other changes to note are the proposed extension of DWT exemption to amateur or athletic sports bodies, designated stockbrokers operating special portfolio investment accounts on behalf of individuals and non-resident companies wholly-owned by two or more companies each of which is quoted on a stock exchange in a relevant territory. In the latter case a necessary declaration of exemption must be accompanied by a certificate from the company's auditor certifying that the company is so owned. The change proposed received a general welcome from the industry and I am now asking the committee to endorse the changes.
Normally we would wave something like this through and would take it on trust that everything has been properly pegged on. The situation in Ireland, however, has changed significantly because of the large numbers of people who have invested now in the stock market, particularly in Eircom shares. There are about 500,000 Irish Eircom shareholders. It would have been an esoteric area of tax law a couple of years ago as far as the majority of citizens would be concerned, but now it has a relevance. It would be an area where the ordinary taxpayer would be totally unsure of his liabilities. Would the Minister take us through the general obligations and its workings in relation to Eircom, for example? I have Eircom shares.
The Deputy has not received his dividend yet. Eircom actually pays the dividend. I do not have any Eircom shares myself
The Minister should ring his accountant.
There seem to be more Eircom shareholders than credit union account holders.
As in any case of the withholding of tax, I assume the obligation is on the company in the first instance, if it issues a dividend, to withhold tax at the standard rate of income tax from that dividend and that this applies in all disbursals of dividends without exception. I know it is possible to become an exception but one must activate the exception clause oneself. In so far as the obligation exists in law, it is on the company to withhold tax at the standard rate of income tax from every person to whom a dividend is paid unless a case is made by the shareholder that he does not have a liability.
I will go back and give the origins of this tax which I introduced last year. It came about as a result of the significant decision to go to a single low rate of corporation tax of 12.5%. Further background to it was that it looked like Europe might go this route in years to come. I deemed it important to introduce a dividend withholding tax in last year's Finance Bill given the decision we made to proceed to a single rate of corporation tax. In simple terms, that means that if a person is resident in the State, the paying company is obliged to deduct dividend withholding tax from resident shareholders at the standard rate of tax. As Deputy Noonan pointed out, it is the obligation of the company to ensure that is done. If a person is a non-resident other rules apply. Non-residents in countries with which we have a double taxation treaty, or an EU country, are not obliged to have the withholding tax deducted.
For normal residents dividend withholding tax will be deducted from the dividend. When a person does his income tax return, he will obliged to include that gross dividend on the income tax return. In the computation there will be relief for the tax deducted.
I ask this for the purpose of illustration because many people are unsure of the situation. There is an obligation, then, on the shareholder if he has a general income tax liability to make a return on the gross amount of the dividend and they are liable to pay that at the marginal rate of income tax, but it would be offset against the withholding tax.
No, withholding tax would be offset against income tax. There would be a credit given for that. It is part of one's total income and must be returned on income tax the same as other profits.
What about a retired couple on a pension of less than £15,000 who own a few shares?
Those taxpayers have the same obligations as anyone else. Everyone is obliged to make a tax return if their income comes into the tax bracket. If their total income, occupational pension, social welfare pension, any deposit interest and their gross dividend is below the exemption limit they will not pay tax and will get a full refund of the withholding tax.
Will the tax be withheld by the company?
Yes, but tax held over by the company will be paid to the Revenue.
Is there a mechanism for them to get a rebate?
Yes. It is the same as when someone does his income tax return at the end of the year and, even though he is on PAYE, because there are other sources of income, he may be due a refund. The full computation is done and the refund sent out. The same will apply to this category of taxpayer.
Will they get the refund as soon as they are issued with their dividend cheque or do they have to wait until the end of the tax year?
They will have to wait until the end of the tax year because one's income cannot be worked out until all the sources are put together. If it was clear that the couple was well below the exemption limit, they could get it sooner.
Supposing the shareholder is an Irish resident company and withholding tax applies, would that apply at corporation tax rate or income tax rate?
If it is an Irish resident company there is no dividend withholding tax in the payment of that dividend.
Is the obligation to withhold from individuals but not companies?
Yes, if it is an Irish resident company. If it was a non-EU company or a company in a country with which we do not have a double taxation treaty, dividend withholding tax at the standard rate would have to be deducted.
What other exceptions are there where the company paying the dividend would not have to withhold tax?
Dividend withholding tax would not have to withheld if paying to non-resident individuals in an EU country or a country with which we have a double taxation treaty or to a company in either of those categories.
Dividend withholding tax will not apply where the shareholder receiving the dividend is a company resident in Ireland for corporation tax purposes, an Irish resident pension fund or charity, a person resident in an EU country or in a country with which the State has a double taxation treaty or a company resident in a country other than an EU country or treaty country where it can be shown that such a company is ultimately controlled by shareholders in an EU country or treaty country. Dividend withholding tax will not apply to dividends paid by a credit union or building society. These are treated differently for tax purposes.
The Deputy asked last year if I was sure that dividends paid by credit union would not be subject to DWT and I gave the assurance that they would not be because it was treated as interest. Further investigation into the matter left some doubt that was the situation and section 28 of the Bill removes that doubt.
In the groups exempt, how is the exemption triggered? Is it by correspondence between the individual and the company or does the Revenue have to certify it?
No. Declarations are made by the receiving company or individual to the paying company. That is what many of this year's changes are about. It imposed an onerous burden on the paying company to go through its records and through the procedures put forward in last year's Finance Bill. During the course of the year, many meetings were held between the Revenue and the bodies to which I have referred - stock brokers, registrars and so on. The purpose of this year's change is to alleviate some of that administrative burden. We anticipated a burden but the rules a company had to apply to ensure that receivers were non-resident were more onerous than even the Revenue foresaw. Most of this year's changes are designed to lift that burden somewhat.
If an Irish citizen whose tax liability is in Ireland has shares on the New York Stock Exchange, for example, what is his paying obligation? Is there a withholding tax under double taxation treaties?
An Irish resident is taxed on his worldwide income so dividends from the New York Stock Exchange, for example, are fully taxable here as part of his total income. There is a double taxation agreement between Ireland and the United States. I understand there is withholding tax in the United States as well so the dividend from New York would be paid to the Irish resident, subject to some withholding tax. I am sure in the Irish person's taxation computation at the end of the year he would get credit for the tax which had been deducted. I am not au fait with United States legislation but I am told there is a 15% withholding tax in the United States.
As introduced last year the withholding tax which applies here only applies to Irish companies.
Irish companies registered here, yes.
It does not go beyond that.
We would have no jurisdiction to administer it otherwise.
What is the position when an Irish company, registered here, pays a dividend to a foreign national?
It depends what category he falls into. If he is a resident of an EU country or a country with which we have a double taxation treaty, the dividend withholding tax is not deducted, provided he has made the necessary declarations to the registrar of the paying company.
Can the Minister clarify what he said when speaking on section 26 with regard to reducing reporting obligations?
The emphasis this year is to alleviate some of the administrative burden imposed by the introduction of new procedures last year. Most of the changes relate to alleviation of the burden on intermediaries such as custodian banks, stockbrokers and so on. I understand an onerous obligation was placed on such people, involving going through the share register of millions of shareholders. After negotiation, these changes have been made and they have been generally welcomed by the people concerned.
In the Budget Statement of December 1998 I estimated a figure of £15 million from dividend withholding tax for one year. The figure was £50 million. There was a little bonus there.
That would suggest that many people in receipt of dividends do not declare them.
No. This is the amount of dividend being paid by Irish companies of which we had not made a full assessment. There is now an obligation on registrars to return their dividend lists to the Revenue and it is expected that this will also turn up a greater yield from individual taxpayers. As with other institutions, people do not automatically state these things on their tax returns so we expect a bonus there also.
Is it proposed to change the tax form to make it easier for people to make declarations?
Over the years, tax forms has been made more user friendly. They are more user friendly than they were 20 years ago. I accept that for most people it is quite an intimidating document. There are sections which deal with dividends and so on.
There is a section on credit unions which is blocked out.
That has been there for a long time. The form used to say "including credit unions".
It still does. Now that ownership of shares has become so widespread, a simple tax form would probably bring in extra revenue. I do not think people set out to evade tax.
I accept that. Over the years the Revenue Commissioners have made the forms more user friendly while complying with the law; some explanations must be given. The Revenue Commissioners continually review the forms.
There are similarities between this matter and the way we used to tax deposit interest before the introduction of DIRT, when people had a certain amount of tax deducted at source and were responsible for returning the rest. Genuinely, people felt that when retention tax had been deducted they had discharged their tax liability. I suspect that relatively few people made returns for the purpose of the surchage, that is the difference between the standard and marginal rate. Is this not likely to happen in this case?
The current position is better. Before the introduction of withholding tax interest was paid out gross and we relied on individuals to return the income on their tax forms. Now at least, we will get £50 million. People are becoming more aware of their income tax obligations. With the growth in share ownership people should know that they have an obligation to declare share income.
I am not sure the Minister is correct. When Telecom Éireann was floated last year I formed the impression from casual conversations with people who had acquired shares that income tax and CGT was not the foremost thought in their minds. Some people who had not previously invested in shares, quite innocently did not feel that a tax liability arose.
The smaller players in the share market might qualify for CGT exemptions. Strict compliance with the law obliges everyone to declare dividends and capital gains, even when they are exempt from tax liability. The Revenue Commissioners are continually being told by sub-committees of the Dáil and by the Comptroller and Auditor General to enforce the law.
Are EU resident companies and individuals exempt from taxes? Withholding tax is not deducted at source but are they exempt from tax on dividends?
That depends on the rules relating to the tax obligations in the country concerned but they are exempt from withholding tax. In Irish corporate tax law, if an Irish company receives a dividend on an investment in another country the dividend income is subject to further corporation tax in Ireland.
Are EU resident companies and individuals exempt from Irish tax?
There is no question of a balancing of, for example, French tax against Irish tax because there is no Irish tax liability.
One of the reasons for making this complicated reference to EU and tax treaty countries is that, although Greece is part of the European Union, we do not have a tax treaty with that country at the moment. Of course, the answer to this problem is to conclude a tax treaty with Greece.
What is the position with regard to non-tax treaty countries?
Withholding tax on dividends applies. A resident of a country with which we do not have a tax treaty is liable for 20% withholding tax on dividends.
Irrespective of whether the taxpayer is a company or an individual? I am thinking typically of offshore companies resident in tax havens.
Of which there are many. There have been no direct representations but I have read representations in some Irish tax magazines that dividend withholding tax should not be applied for the reason outlined by the Deputy, that it makes it unattractive for many people throughout the world to invest in Irish shares. I am open to correction by the Department but the IDA may have made some soundings in this regard in recent years, that the tax might prove to be a drawback or negative in relation to investment in Irish companies. On balance, however, the idea of a dividend withholding tax is a good one, as a compensation mechanism in reducing the rate of corporation tax to 12.5% by 2003. The alternative, as advocated by the tax magazines, would be to scrap it. It has, however, brought in more money than anticipated and is a reasonable imposition. If a company resident in a tax haven is receiving dividends it suffers the 20% and does not get it back. It was announced in a press statement in May 1997 that a 12.5% rate of corporation tax would be introduced. It was also mentioned that there would be a dividend withholding tax.
May I take it that the reverse also applies? What is the position on companies tax resident in Ireland owned by foreign nationals in relation to the dividend withholding tax?
In such cases the corporation tax laws of Ireland would apply to the overall income of the company concerned. The distribution of the dividends of the company would be subject to the rules that apply here. If they are resident in a tax treaty or EU country no dividend withholding tax would be payable——
It relates therefore to the recipient as opposed to the ownership of the company.
Twenty per cent would have to be deducted.
On the thrust of the section, will the Minister talk me through the reporting responsibility of auditors and intermediaries? Am I right in saying that we are talking about those who receive dividends on behalf of clients?
No. We are talking about companies or individuals who claim that they are not subject to the dividend withholding tax of 20% on account of being resident in a tax treaty or EU country. That is what the declarations apply to. I am informed that it is at the level of intermediary in the custodian banks that the auditing declarations come into force. There will be a further amendment on Report Stage in regard to this matter. It is proving difficult to ask auditors to certify that a company or individual is non-resident for X number of years.
This relates therefore to a case where dividends from an Irish company are paid to a stockbroker who is acting as an intermediary for a person who is non-resident.
At present that person has to certify that his or her client is non-resident.
Is it the case that the Minister is reducing the reporting requirement?
We are trying to make it somewhat easier to comply with it. The auditor will have to express an opinion, rather than state a fact. That is all he can do.
I accept the Minister's judgment. I get worried when I start to read——
The matter is dealt with in the explanatory memorandum and various sections. I said to my officials that the easiest thing to do would be to abolish the whole idea but £50 million has been brought in. I also envisage that there will be a better return from individuals reporting and paying tax on dividends. There is therefore a gain to the Exchequer. As the Deputy is well aware, the EU directive on savings and interest has not been finalised as agreement was not obtained in Helsinki where the matter was the subject of major debate but it looks as if European treaty countries will move towards a system under which there will be a minimum withholding tax on dividends and interest. This will not cause us any great difficulty however as we have a system in place.
I presume that the rate payable would be lower than the standard rate.
The rate being spoken about was 20%. The United Kingdom and Greece are the only countries in the European Union in which a dividend withholding tax is not applied.
On the practicalities of the section, there could be up to one million shareholders in Eircom and the Irish Permanent. In recent days I received a cheque of £3.83 from Eircom in respect of an investment of £1,000. My wife received 98p on an investment of £300. Twenty per cent of the total dividend payable was deducted at source. At the marginal tax rate I therefore owe a further £1 approximately which I will have to declare on my tax return which will be processed by computer in the Revenue Commissioners who will issue a balancing statement. Given the paperwork involved this is daft.
While it is great that £50 million has been brought it, the taxation system is not just about the collection of money, it is also about ensuring every taxpayer can meet their full liabilities easily. The current system is not guaranteed to facilitate this. I would be surprised if the number of taxpayers who are aware of their legal obligations was as high as 100,000. Given that building societies are assuming plc status and following further privatisations it is inevitable that there will be hundreds of thousands of non-compliant taxpayers. The amounts involved are minuscule.
Yesterday the Minister referred to tax relief on VHI and BUPA contributions and mortgage interest being dealt with at source. It is possibly easier to do this as the relief is standard rated but I presume one of the reasons it is being done is the heavy workload involved in processing applications for relief. I suspect that the numbers involved in respect of dividend withholding tax are similar. While any change would involve matching tax and share certificate numbers to permit deduction at source at the top rate of tax, it would reduce the paperwork involved.
Given the high numbers of shareholders involved, shareholdings in companies such as Eircom and the Irish Permanent should be listed separately on the tax return to be ticked off as appropriate. The Minister would be justified in doing this. It would also help to prompt taxpayers' memories. Sooner or later this committee will have to deal with the issue of balancing the dividend withholding tax and the top rate of tax for the hundreds of thousands of taxpayers involved. It may not be administratively possible in this Bill but the Minister will have to come up with a more practical way of reducing the paperwork involved.
I note what the Deputy has said but it is hard to devise a system which would be administratively simple, yet enable everyone to comply with their tax obligations. I accept our friends in the Revenue will make the forms simpler with regard to dividends and in light of what Deputy Noonan said will, perhaps, list the dividend sources, for example, Eircom, Norwich Union, credit unions etc. That is a matter for the form.
I know what the Deputy is trying to achieve but we cannot have it both ways and say people should be fully conversant with their obligations and complete them. I could take the other view. Some years ago I thought I might do something about it but I do not think I will now. Some people would recommend that one way of cleaning up tax evasion would be if everybody had to make a tax return - the self-employed, proprietary directors and directors do so in any event but people have other incomes, such as rent. If everybody, including the unemployed, had to make a tax return, say, every five years to keep their affairs up to date, much evasion might be alleviated in many areas.
I am inclined to calculate that in time that is the way the system will proceed - given computerisation and better technology it is possible to do things which we could not have dreamt of some years ago. For example, five years ago it would not have been possible for me to announce that medical insurance relief and mortgage interest relief could be taxed at source by the financial institutions and the medical insurers but that is possible now. It may be possible in time for people to have lots of taxes dealt with in that way. As a general principle, if one has taxable income one should be obliged to return it.
The other alternative, which was not mentioned here, would be to regard dividend withholding tax as full and final liability, as DIRT is. I am not sure whether that is the proper way to do it, or if it is proper in the case of DIRT. DIRT was not always like that - I think the system only applied to DIRT from 1992. From 1986 to 1992 it was treated the same as dividend withholding tax, it was a deduction and one had to return it. As and from 1992 it has been regarded as full and final liability.
I recall comments during the Committee of Public Accounts inquiry - about which I was asked, possibly in the Dáil but certainly by the press - when a tax inspector said a new form of tax evasion was the operation of the special savings accounts, which the form specifically states do not have to be returned. I had to answer a parliamentary question or a press inquiry about that during the Public Accounts Committee inquiry because they have to be returned. One could get over all those problems if the dividend withholding tax was at the standard rate and had to be returned. My thinking is more on those lines rather than to make more things a full and final liability.
I am not sure whether the system that applies to DIRT, where it is regarded as full and final liability, is the correct way to go. I do not see much difference in a person having, say, £1,000 in a deposit account subject to DIRT and a person having £1,000 in Eircom shares getting a dividend of £3 or thereabouts and paying an additional amount of tax because one's total income brings it into the higher tax bracket. One's colleague next door who may have £1,000 in a financial institution, subject to DIRT, does not have to pay any more on it. I think the full and final liability system is not the best way about it and maybe I will change it in a future budget.
I suggest that if the target number of taxpayers, 80%, are at the standard rate, it might be a pragmatic approach to take at that stage but not yet given the number on the higher rate. If in a few years there are only 10% or 15% on the higher rate it might be a pragmatic approach.
Section 26 extends the categories of non-residents who are exempt from dividend withholding tax on distributions made by Irish resident companies. Section 27 now amends section 153 of the Taxes Consolidation Act, 1997, to make a similar extension to the categories of non-residents who are exempt from the charge to Irish income tax distributions. Thus, the following additional categories of non-residents will now be exempt from that charge: non-resident companies which are resident in another EU member state or in a country with which Ireland has a double taxation treaty but which are not controlled either directly or indirectly by Irish residents and non-resident companies which are wholly-owned by two or more companies, each of whose principal class of shares is substantially and regularly traded on a recognised stock exchange in another EU member state or in a country with which Ireland has a double taxation treaty or any other such exchanges that may be approved of by the Minister for Finance.
In the case of non-resident individuals, qualification for the exemption applies only to those individuals who are neither resident nor ordinarily resident in the State and who are resident for tax purposes in another EU member state or in a country with which Ireland has a double taxation treaty. It follows that other non-resident individuals are, in addition to being liable to the dividend withholding tax, liable to any residual income tax charge on distributions received from Irish resident companies. Thus, if the dividend withholding tax deducted from the distributions is not sufficient to meet the tax liability on the distributions, for example, in the case of a high rate taxpayer, such individuals are statutorily advised to pay any additional tax due.
The enforcement of income tax on non-residents is, in most cases, not practicable. It is highly likely, therefore, that the dividend withholding tax is the only tax likely to be collectable in respect of distributions made to those non-resident individuals who do not qualify for exemption from income tax. However, a strict legal position must be reflected in prospectuses etc. It has been argued that the existence of a residual charge to income tax, while largely unenforceable in practice, acts as a disincentive for non-residents considering investment in Irish companies.
A number of representations have been made to make dividend withholding tax a final liability tax for those non-residents who do not qualify for exemption from Irish income tax under section 153 of the Taxes Consolidation Act, 1997, thus removing from such non-residents the obligation to pay any residual tax charge arising in respect of distributions from Irish resident companies. In truth there seems to be no logic in maintaining what is, in practice, a theoretical residual charge. Accordingly, section 27 of the Bill amends section 153 of the Taxes Consolidation Act, 1997, so as to provide in the case of non-residents, who do not qualify for exemption from the charge to income tax on such distributions, that the charge to income tax will be confined to the standard rate. In effect this will make the deduction of the dividend withholding tax from the distribution a final liability tax in such cases. Section 27 will apply to distributions made on or after 6 April 2000.
Is it possible to say what the revenue foregone will be because of these amendments?
I presume there is a take from tax on non-resident companies in other member states.
There might be a few honest non-residents who are making returns.
Even in tax treaty or EU countries?
Is this the section that puts the case of credit unions beyond doubt?
Yes. I will read the note for the Deputy. Section 28 amends section 700 of the Taxes Consolidation Act, 1997, so as to rectify an unintended consequence of the Credit Union Act, 1997, in so far as the application of dividend withholding tax is concerned. Section 700 of the Taxes Consolidation Act, 1997, provides that share interest paid by a society is chargeable tax under Case III of Schedule D payable without deduction of tax and not treated as distribution. The term "share interest" means any interest, dividend, bonus or other sum payable to a shareholder of a society by reference to the amount of his or her holding in the share capital of the society. The term "society" means a society registered under the Industrial and Provident Societies Acts.
Prior to the Credit Union Act, 1997, societies became registered as credit unions under the Industrial and Provident Societies Acts. However, societies may not now become so registered except under the Credit Union Act, 1997. That Act provides that no provisions of the Industrial and Provident Societies Acts now apply to a credit union. Accordingly, as credit unions are no longer covered by the term "society" in section 700 of the Taxes Consolidation Act, 1997, a dividend payable by a credit union comes within the meaning of distribution for tax purposes and thus is liable to DWT.
It was never intended that dividends paid by credit unions be within the scope of dividend withholding tax. Accordingly, section 28 provides that for the purposes of subsection (1) of section 700 of the Taxes Consolidation Act, 1997, the term "society" will now also include a credit union. In essence, this will restore the position with regard to the tax treatment of credit union dividends to what it had been prior to the Credit Union Act, 1997. This tax treatment is that such dividends are not distributed for tax purposes and, consequently, are not liable to dividend withholding tax but are instead payable without deduction of tax. They remain chargeable under Case III of Schedule D and should be included in a person's annual return of income. The removal of credit union dividends from the scope of DWT is made retrospective to 6 April 1999, the date of the introduction of dividends withholding tax.
I am trying to understand the logic. Clearly they are dividends in the hands of the recipients and liable to tax. Are we approaching this from the other end? Is that the reason the exemption from DWT is still applied, that we do not regard it as being profit which is distributed but rather a surplus which is distributed? Is that the Minister's thinking?
This is a tremendous point and I would like to see the Deputy argue against the case he made for exempting credit unions——
I am merely trying to tease out the Minister's position in this.
——in the past few weeks. The Deputy is correct however. Credit unions want to treat credit union dividends as a totally different concept from interest because when people put money into credit unions, they put so much into a deposit account and the majority goes into the shares on which they get dividends. The credit unions, the Deputy and others have argued that that money should be treated separately but, on the other hand, they want that dividend to be treated for tax purposes as if it was a special type of interest, and not a dividend, and subsequently they do not want it subject to dividend withholding tax at the standard rate of 22%. As with most people, they want the best of all worlds.
No, the Minister is missing the point.
No, I am not missing the point. Rather than stir up another row last year when I brought in dividend withholding tax, it was the intention of the Bill to ensure that dividend withholding tax would not apply to credit union dividends, that they would be treated separately. That is what has happened but, unfortunately, section 700 of the Taxes Consolidation Act, 1997, refers to the Industrial and Provident Societies Acts and in order to ensure we comply with that we have now brought in this section 28 which makes that absolutely sure, as and from 6 April 1999. The logic of the Deputy's observations is inescapable.
I did not actually observe anything. What I am saying is that the Revenue is in a completely invidious position in so far as it insists on treating the dividend as a dividend in the hands of the recipient. The Minister rightly said that I and others argue that it should not be treated as such but it is not treated as a dividend for the purposes of DWT. I do not understand the logic of that, or is this just part of the limbo the Revenue has got itself into?
No. It is part of the débâcle that the Irish credit unions do not want to pay any tax.
It is not. Does the Minister not regard it as a dividend because he does not regard it as being a profit? Is that the thinking or is it just that he would regard it as being an anomaly?
It would be better to ask the credit unions what they regard it as. I am not having another row with——
They will say it is not a profit, it is a surplus and therefore the dividend should be treated differently.
Before we go any further, what would the Deputy regard as the profit of a company? The profits of a company are a surplus of the excess of revenue over expenditure.
Surely the Minister is not going to start making the case for corporation tax?
Is that what a surplus is?
The point being made by the credit unions is that a credit union share is a unique financial instrument and consequently——
But what is it in your view, Deputy Noonan?
—— would require unique tax treatment. It is certainly not a share in the accepted sense of the word "share" because it does not have the features of other shares. First, there is no market and, second, the nominal value is always the value. There is never a capital gains or capital loss in a credit union share. There is no market, there is no real risk and there is no potential capital gains.
How would the Deputy classify a share that a person has in a mutual building society?
Traditionally they were all similar but since they are now all going the PLC route——
Two of them are not.
I do not think the Minister has the solution here.
I have a solution to this because I am not taxing it. I am in enough trouble with the credit unions without taxing them on this.
The section increases from £16,000 to £16,500 the capital value threshold used to determine the capital allowance and the deduction for running expenses to be granted for tax purposes for cars used in the course of a trade, profession or employment. In the case of capital allowances, the increased threshold applies only to new cars provided on or after 1 September 1999. The threshold for second hand cars remains at £10,000.
In the case of running expenses, the increased threshold applies to both new and second hand cars used in the course of business expenses incurred on or after 1 December 1999. The cost of this measure will be an estimated £0.25 million in 2000, £1.5 million in 2001 and £2.5 million in a full year. We have increased this figure every year since 1994 in line with a formula.
Is there a formula or did the Minister just decide to give them £500?
No, we examined the prices of cars and things like that.
And there is no variation on the value, size or capacity of car?
No. One of my officials tells me that the original benchmark was taken as a 1.6 litre car, the normal seat car, and it has been increased every year.
I would like to hear the Minister's note on this section.
This section relates to the scheme of capital allowances for expenditure on private convalescent facilities which was introduced in section 48 of the Finance Act, 1999. This section proposes to treat a convalescent home as if it were a nursing home within the meaning of the Health (Nursing Homes) Act, 1990. This Act provides a statutory basis under which nursing homes are regulated. By including convalescent homes within the terms of this Act, its regulatory provisions will now apply also to convalescent homes. Regulation of convalescent homes in this manner will mean that guidelines will no longer have to be issued by the Minister for Health and Children with my consent, as previously envisaged, before convalescent homes can avail of the capital allowances provided for by section 48 of the Finance Act, 1999. The aim of these capital allowances is to free up hospital spaces by encouraging the private sector to provide alternative facilities for those recovering from treatment in an acute hospital.
I would like to explore the demarcation lines separating nursing homes, convalescent homes and hospitals. Deputy Deenihan kindly brought some people to see me recently who talked of setting up a private psychiatric hospital in Limerick. They discussed whether it would be tax efficient and were of the view that they might be able to avail of this section. Is there a clear definition of when a hospital ceases to be a hospital and becomes a convalescent facility? While patients get medical treatment in hospitals, they also convalesce in hospitals and the period after an operation is a convalescent period. Is it possible to have one part of the building designated as a hospital and another part a convalescent area comprising a series of wards where patients can recover for a few days until they are strong enough to return to work? Where is the demarcation line between the two? Is this simply what we would call step down temporary residential accommodation?
I introduced a section on capital allowances for nursing homes in the first Finance Act I introduced in 1998——
There was no problem with that.
——in order to encourage an increase in the supply. Last year we made a change to include step down facilities and included convalescent homes, and this is a tidying up measure.
It is interesting that the Deputy said Deputy Deenihan brought people to see him who were interested in setting up a private hospital in Limerick because within the past fortnight another group visited me. They are thinking of setting up a hospital in a town in Ireland and were wondering whether it would qualify for capital allowances. While I passed the matter to my official, I do not think that hospitals as such are covered by the capital allowances. I thought nobody here was willing to set up a hospital. However, as that the Deputy has met a group of people interested in setting up one in his part of the country and the group I met is considering setting up one near enough to my county, it seems some people are interested in this area.
What about psychiatric hospitals? There would be a difference in that regard.
Yes. I will ask my officials to examine that area. We will have to consult the Department of Health and Children on its policy on this area. Deputy Noonan would be aware of that from his time as Minister for Health. I am not sure whether the general policy of the Department of Health and Children over a number of years has been to encourage people to avail of these facilities. It seems its thinking in this area is to encourage people to return to their home environment. I asked my officials to discuss this matter, whether it be a psychiatric hospital as suggested by Deputy Deenihan or another hospital, with the Department of Health and Children. If, as in this case, people are willing to put up their money to build a private hospital and seek a tax break on the capital cost involved, such a proposal is worth considering. There is a need for such hospital projects, given that this one is proposed for a county where there is no adjacent hospital.
Deputy Noonan asked about the distinction in the scheme made between a hospital, a convalescent home and a nursing home. As I understand it, a convalescent home can be part of a hospital. When people in the health area put forward a proposal last year requesting that the scheme be extended to include convalescent homes, a convalescent home was regarded as an adjacent part of a hospital. Patients were taking up hospital beds and the hospital management wanted to move them to somewhere near the hospital. A convalescent home was regarded as a step down facility. I am well disposed to doing something further if the Deputy wishes.
I would like the Minister to examine this matter. None of these facilities can work, no more than the Mater Private or the Blackrock Clinic, unless they have insurance cover or VHI cover.
That is the opening position. If they get over that hurdle, which is difficult enough to do, a tax efficient way of writing off the capital cost involved would provide a lever. For example, if an alcoholic gives up drinking and he or she goes into a psychiatric hospital for 19 or 21 days, given that the person has given up drinking before going into hospital, it is arguable that his or her period in hospital is a convalescent period.
There are a number of areas, particularly in psychiatry, where that position could apply. The same position would apply to a person who abused drugs. For example, once such a person comes out of, say, a drug detoxification unit in Dublin, the next period during which that person would get counselling in a psychiatric environment would be considered a convalescent period. I understand a submission will be made to the Minister shortly on the proposal with which Deputy Deenihan and I are familiar and I would like him to consider it favourably.
It is coincidental that Deputies Deenihan and Noonan had such a request and I had a similar request. In my time as Minister I have had all kinds of requests, but I have not previously had one from a group interested in building a private hospital or psychiatric facility. I do not think I will be in a position to have something ready by Report Stage, but if Deputies Deenihan and Noonan make a submission I promise I will examine it intensively before next year's Finance Bill. Unless a major argument is put forward by the Department of Health and Children on health grounds, I cannot see any great objection being made to it. There will always be objections from my Department about giving more tax breaks. We take that as given. I appreciate the benefits of this proposal.
The reason there are not more private hospitals is the difficulty in getting insurance cover. The Bon Secours group is in the business of building private hospitals at present. It has an agreement with the Mid-Western Health Board to build a private hospital on the site of Limerick Regional Hospital. That proposal is being considered by the Department of Health and Children. The approach made to the Minister was not unique. This activity is happening around the country and it is quite common in the UK and other European Union countries.
While we would know BUPA mainly as an insurer, its primary activity abroad is as a hospital builder and hospital manager. Its involvement in the provision of private hospitals is worldwide. Such activity is levered by health insurance cover in the first instance. Such groups want to write off capital investment against any potential profit they would make because, like everything in the private sector, the activity is driven by the bottom line.
The Deputy has extensive knowledge of the health area which I do not have. I will undertake to examine this in more detail for next year's Finance Bill.
A plethora of capital allowances have been provided for various projects in areas where there has been a deficit during recent years and I do not have a difficulty with that. A problem in granting such allowances is that, effectively, we are giving a State subsidy to parts of what could be competitive markets. That does not apply to hospitals, at least not yet. I am thinking of crèches where, say, a person used his or her money to set up a crèche before the relief came in and must compete in terms of price with a crèche owner up the road who got a tax break. In such a case, we would be intervening in a competitive market to give an advantage to one competitor. In those circumstances there is a difficulty. It does not apply to most cases where these capital allowances are availed of. I do not think there is great competition between multistorey car parks, etc. There is increasing competition between nursing homes, but there is still a lack of supply and, therefore, the competition in terms of price is not as strong as it might be. I envisage a difficulty could arise under this scheme down the road, particularly in the area of crèches or child care facilities.
If I were to bring forward such a scheme, it would be subject to EU Commission approval and an announcement would signal that. Such a scheme would fall into the State aids regime and it would have to be cleared by Brussels. I would hope we would be able to get such a scheme cleared, but as I pointed out yesterday we also had to get the measure in respect of crèches cleared by Brussels. This scheme would fall into that category. The capital allowance initiatives I introduced in terms of the rural renewal scheme and in other areas had to be cleared by Brussels. If such a scheme was mooted, it would also have to be cleared by Brussels. That would fall within the State aids regime and would have to be cleared by Brussels. We hope it will be cleared but, as I pointed out yesterday, we have to get the creche scheme cleared by Brussels as well. It falls within that category. Even if I brought in the reliefs, the changes and the initiatives taken on the capital allowances, rural renewal and other areas, they must also be cleared by Brussels. This one, if it were moved, would have to be cleared by Brussels.
There is a loss to the Exchequer as a result of giving tax breaks. One can work out from the tax break how much the cost will be to the Exchequer. As Minister for Finance one might ask if one would give that money if it were a direct grant. Sometimes it is hard to answer that question. If one looks at it from the viewpoint of the economist, it is the same amount of money and has the same effect.
One matter has not been trumpeted enough. The changes I made in my first Finance Act on the restriction of capital allowances were dramatic.
We voted with the Minister for them in the Dáil.
Yes. It has made sense throughout the area because we were going too far. The restrictions I imposed, particularly the £25,000 ring fence provision, has put some law and order in this area. I am inundated every month with applications to break out of that ring fence for certain desirable ideas but I fought such a hard battle to try and get that through, that I am not inclined to move further. It put some amount of control on the use of capital allowances. I will certainly look at the suggestion put forward by the Deputies between now and next year's budget.
We are rolling back the date for the availability of double rent allowance in Temple Bar.
These sections relate to the agreement we have finally concluded with the EU. Section 33 amends section 333 of the Taxes Consolidation Act, 1997 which provides for double rent allowance in respect of rent paid for certain business premises in the Temple Bar area. The relief is available only for a bona fide commercial lease. This section brings forward the termination date for assigning leases for this relief from 5 April 2001 to 30 July 1999 to comply with the EU state aid rules.
It is being rolled back to a date which has passed.
This only relates to the double rent allowance. My officials tell me that this change was cleared with the Temple Bar authority.
Nobody got caught?
There might have been one person but I am not sure of that. We were told at the time it was all right.
I move amendment No. 50:
In page 76, before section 35, to insert the following new section:
35.-(1) Section 324 of the Principal Act is amended by the insertion after subsection (4) of the following:
'(5) Notwithstanding any other provision of this section, subsection (2) shall notapply -
(a) in respect of rent payable, under a qualifying lease, for any part of a relevant rental period between 3 December 1998 and 31 December 2003 unless-
(i) in the case of a qualifying premises within an area or areas included in the definition of "the Custom House Docks Area" by virtue of being described in an order of the Minister for Finance made under section 322(2), an agreement in writing or a contract in writing to secure the development of the building or structure, which comprises the qualifying premises or in which the qualifying premises is located, was entered into in the specified period, but by 2 December 1998, with the Dublin Docklands Development Authority (within the meaning of section 14 of the Dublin Docklands Development Authority Act, 1997), or
(ii) in the case of any other qualifying premises, an agreement in writing or a contract in writing to secure the development of the building or structure, which comprises the qualifying premises or in which the qualifying premises is located, was entered into in the specified period, but by 2 December, 1998, and such development was wholly or mainly completed before 1 January 2000,
(b) in respect of rent payable, under a qualifying lease, for any part of a relevant rental period between 1 January 2004 and 31 December 2008, in the case of a qualifying premises to which subsection (2) applies by virtue of paragraph (a)(i)
(c) in respect of rent payable, under a qualifying lease, for any part of a relevant rental period between 1 January 2004 and 31 December 2008, in the case of a qualifying premises to which subsection (2) applies by virtue of paragraph (a)(ii), unless-
(i) the construction or refurbishment of the qualifying premises, which is the subject of the qualifying lease, was completed prior to 1 April 1998, or
(ii) (I) the construction or refurbishment of the qualifying premises, which is the subject of thequalifying lease, commenced prior to 1 April 1998, and (II) such premises was occupied by a lessee, under a qualifying lease, prior to 9 February 1999,
(d) in respect of rent payable, under a qualifying lease, for any part of a relevant rental period after 31 December 2008.’.
(2) This section shall be deemed to have applied as on and from 3 December 1998.".
This amendment proposes to insert a new section before the existing section 35. The new section amends section 324 of the Taxes Consolidation Act, 1997 which provides a double rent allowance in respect of qualifying premises located in the Custom House Docks area.
It restricts the availability of the allowance in line with the decision of the EU Commission. Capital allowances for certain buildings in the 27 acre and 12 acre sites in the area were approved by the Commission in January 1999 for qualifying expenditure incurred up to June 2000 and these allowances are unaffected by the Commission's decision on double rent and rates relief. In accordance with the EU Commission decision, the double rent allowance will continue for the normal ten year period, subject to an end date of 31 December 2008, where either the construction or refurbishment of the building was agreed to before 1 April 1998 or the construction or refurbishment of the building commenced before 1 April 1998 and the intended occupation of the completed building commenced before 9 February 1999. In other cases where certain contractual arrangements were entered into by 2 December 1998, the double rent allowance will terminate at 31 December 2003 in accordance with the EU Commission decision.
Will this secure most of the pledged investment in the Custom House Docks area? Is that reasonably clear at this stage?
What about the retrospective complaint that was made about the provision of double rent allowance? Is that resolved?
That is what this is about. As the Deputy is aware, we fell into considerable hot water about the non-notification of these reliefs back in the mid-1990s. There were very good reasons that they were not notified and everybody assumed they would have got them in any event. If we had applied at the time, we would have got them. However, things moved on and then we were under threat of having all this rolled back——
From Commissioner Monti.
Yes. There was the threat that they would be rolled back and we would be penalised for it. Before the Commission was changed, we thought we had reached final agreement. Every month we thought it would be put before the full Commission but it was not. Then the Commission changed and Commissioner Monti got this portfolio. He decided to look at the whole thing again which necessitated a visit from myself and my officials to meet him in October. Arising from that, we have now reached final agreement and the Finance Bill puts it in place. The danger was that the arrangements we had entered into were out of the way but that the State would be caught for the moneys.
So there is no clawback of any kind?
No. The agreement includes all that. The proceedings are terminated and the scheme, as modified, is now approved.
That includes double rent and the rates relief?
Yes. At this point, I praise my officials. Nothing has taken up as much time as this in recent years. I commend my officials for the work they have done. Nothing has taken up so much of my time either.
Is the Minister satisfied that the absence of these reliefs for the future will not be a major problem for the Custom House Docks area?
I honestly do not think so. A tax relief or break should be given if it makes the decision between the investor doing the thing and not doing it. That is my opinion of a tax relief. When tax relief schemes were introduced from the mid-1980s, that was the underlying rationale.
The BES scheme introduced by Deputy John Bruton, regardless of whether one thinks it was a good or bad idea, was the start of tax breaks. I think it was a good idea. That idea was built upon by the urban renewal and rural renewal schemes, despite objections from people trying to protect the tax base, and one can now see the benefits. My overlying principle in this area has been that if the tax break makes the decision to do or not to do a thing, it should be considered. However, if it was going to be done in any event there is no reason I should add to the cream on top of the cake.
At present, the market is strong enough in most parts of the country for people to operate their businesses. That is not to say that in certain deprived areas and in certain unique circumstances one should not consider tax breaks. However, the situation is far different now with regard to property and general economic development from ten years ago.
I agree with the Minister in terms of the general principle. I understood that some of the major investors who had indicated an interest in the Custom House Docks area were throwing shapes, as it were, in the course of this debate. I take it one or two of them backed off.
They threw some shapes during the course of the debate. However, because of the agreement we reached, that has been brought to a successful conclusion. By the way, I and my officials undertook ancillary discussions about the Custom House Docks area with many of these people. We had to deal with Europe and get a resolution not only of our present sins but of our past sins. At the same time, we were being harried by people at home and those details had to be worked out. Most of them have been brought to a conclusion. There might be one of a small nature overhanging, but I do not wish to anticipate what people might do in that regard. The major ones are certainly out of the equation at this stage.
These matters do not get much publicity for the politician concerned in the Department of Finance or the officials, but a huge amount of brain power is applied to and effort made on them. People do not get any credit for it because they are not politically sexy matters like tax breaks or tax bands but an extraordinary amount of effort is put in.
I appreciate the investment is major in terms of capital and the number of jobs that will be provided.
I am aware of the investment to which the Deputy is referring and there is no difficulty in that regard. They were the least of our difficulties. They did not cause as much trouble as others.
They will be lucky to get the workers now.
That is true.
I move amendment No. 51:
In page 78, before section 36, to insert the following new section:
"36.-(1) Part 9 of the Principal Act is amended-
(a) in section 288-
(i) by the substitution in subsection (1)(d) of ’that machinery or plant’ for ’the computer software concerned’,
(ii) by the insertion after subsection (3) of the following:
'(3A) Where, in relation to an event referred to in subsection (1)(d), a balancing allowance or balancing charge is to be made to or, as the case may be, on a person for the chargeable period related to that event and following that event, the person retains an interest in the machinery or plant, then, for the purposes of this Chapter-
(a) the amount of capital expenditure still unallowed at the time of the event, which is to be taken into account in calculating the balancing allowance or balancing charge, shall be such portion of the unallowed expenditure relating to the machinery or plant in question as the sale, insurance, salvage or compensation moneys bear to the aggregate of those moneys and the market value of the machinery or plant which remains undisposed of, and the balance of the unallowed expenditure shall be attributed to the machinery or plant which remains undisposed of, and
(b) the amount of capital expenditure incurred on the machinery or plant in question shall be treated as reduced by such portion of that expenditure as the sale, insurance, salvage or compensation moneys bear to the aggregate of those moneys and the market value of the machinery or plant which remains undisposed of.’,
(iii) by the insertion in subsection (4) after paragraph (b) of the following:
'(c) Where subsection (3A) applies, the amount of any allowances referred to in paragraph (b) made in respect of the machinery or plant in question shall, for the purposes of this Chapter, be apportioned so that:
(i) such portion of those allowances as the sale, insurance, salvage or compensation moneys bear to the aggregate of those moneys and the market value of the machinery or plant which remains undisposed of, shall be attributed to the grant of the right to use or otherwise deal with, referred to in subsection (1)(d), and
(ii) the balance of those allowances shall be attributed to the machinery or plant which remains undisposed of.',
(b) by the insertion in section 318 after paragraph (a) of the following:
'(aa) as respects machinery or plant consisting of computer software or the right to use or otherwise deal with computer software, where the event is the grant of a right to use or otherwise deal with the whole or part of that machinery or plant, the consideration in money or moneys worth received by that person for the grant of the right,’.
(2) This section shall apply as on and from 29 February 2000.
The amendment proposes to insert a new section in page 78 of the Bill, before the existing section 36. The new section amends Part 9 of the Taxes Consolidation Act, 1997, which deals with capital allowances and, in particular, the provisions dealing with balancing allowances and balancing charges in relation to machinery or plant in so far as they relate to computer software. The measure is essentially an anti-avoidance one to prevent the early taking of allowances in cases where a licence or right to use computer software is granted but the software remains undisposed of.
Where a person develops or acquires computer software for the purposes of his or her trade, then the computer software is considered to be machinery or plant for capital allowances purposes. In addition, the purchase of a licence or right to use computer software is deemed to be the purchase of machinery or plant and thus the normal capital allowances apply to such transactions. When a person grants a licence or right to another person to use software, this is treated as if it were a disposal of an asset and it triggers a balancing allowance or balancing charge depending on the consideration received for the grant of the licence or right to use.
The amendment proposes a number of changes to clarify the position relating to balancing allowances and charges in cases where a licence or right to use software is granted to another party but the software is retained by the party granting that licence or right. This is essentially a part disposal but, as things stand, there is some doubt as to whether it can be treated as such. This could give rise to the possibility of over-generous balancing allowances being triggered on the granting of a licence or right, as distinct from the sale of the software itself, especially when the consideration is relatively small.
To deal with the difficulty, it is proposed to provide for apportionment of the tax written down value of the original cost of developing or acquiring the software concerned so that only a portion of that tax written down value is attributed to the licence or right to use the software with the balance being attributed to the software which remains undisposed of. Similar apportionment of the original capital expenditure incurred and of the allowances already made before the grant of the licence or right to use is provided for.
The amendment in effect treats the grant of a licence or right to use computer software and the remaining software as two separate assets for capital allowances purposes. The amendment is to apply on and after 29 February 2000. I commend the amendment to the committee. It is an anti-avoidance measure.
The original section 36 extends the car park breaks to the counties of Kildare, Meath and Wicklow. I presume this relates to the proposals about park and ride facilities which were published last year, or does it relate to multi-storey car parks?
It is not only related to that. Section 36 amends Chapter 3 of Part 10 of the Taxes Consolidation Act, 1997, in so far as it relates to capital allowances for certain enterprise areas, multi-storey car parks and double rent allowance in respect of multi-storey car parks. It provides for a one year extension to 31 December 2000 of the scheme of capital allowances for qualifying buildings located in certain enterprise areas adjacent to regional airports and in those areas described in Schedule 7 of the Taxes Consolidation Act - Cherry Orchard/Gallenstown, Finglas and Rosslare Harbour - where the local authority certifies that 50% of the total cost of the project involved had been incurred by 31 December 1999. To comply with EU requirements, the section provides that capital allowances in the enterprise areas at regional airports cannot be claimed by property developers.
In relation to capital allowances for multi-storey car parks, the section extends the qualifying period by three months to 30 September 1999 in the case of projects which previously qualified for a termination date of 30 June 1999. It extends the qualifying period in the case of multi-storey car parks outside Cork and Dublin to 31 December 2002 where 15% of the project costs are incurred by 30 September 2000 and also includes the councils of counties Kildare, Meath and Wicklow as relevant local authorities for the purposes of the scheme. A three month extension for double rent allowance purposes is provided for in the case of projects mentioned above which qualify for the three month extension for capital allowance purposes. The changes apply from 1 July 1999.
Why is the Minister including the three counties at this stage?
It was originally provided for inner city Dublin but the changes made some years ago with regard to multi-storey car parks applied to places outside Dublin and Cork. One of the sections refers to a qualifying local authority and people went ahead and built facilities in some counties. However, it turned out that when a local authority was ready to sign the agreement, after the car park had been built, it had not been named as a qualifying local authority. This came to my attention when a constituent of mine had approval from Kildare County Council to build but when the council was about to certify it, it emerged that it had not been named in the Act. That was not the intention and the amendment will solve the difficulty.
It will bring that particular project within the scope of the provision?
Yes. It was the intention that the relief for multi-storey car parks would be available.
Was the original intention that the relief would be available everywhere outside Dublin?
The original intention was to give this break outside Dublin.
Is it being rolled back to include just Kildare, Wicklow and Meath?
A change was made in last year's Finance Act or the previous year's Act to give it to areas outside Dublin and Cork.
Everywhere outside Dublin and Cork?
Perhaps the committee could go into private session to deal with this point.
The Select Committee went into private session at 11.38 a.m. and resumed in public session at 11.45 a.m.
There has been much talk about park and ride facilities but has anything happened?
The Department of Finance would not set up the scheme. Whatever about the Finance Bill, we would not do anything more about it. I will get information from the Department of the Environment and Local Government on what is happening in that regard before Report Stage. The Revenue Commissioners do not have statistics in that area either.
Is anything happening in relation to the enterprise zones and the regional airports?
The Cork one is up and running.
Is that the only one?
I understand the Cork enterprise area has moved ahead. There is also some movement in the Knock area.
Is the Minister extending it to the end of this year?
This scheme appears to have been singularly unsuccessful.
That is it.
This section provides that a person can qualify for tax relief for expenditure incurred on the construction, conversion or refurbishment of certain residential buildings on designated islands up to 31 December 1999, where 15% of the total cost of the project was incurred by 30 June 1999, instead of 50% of the cost as currently required in section 360. This amendment applies from 6 April 1999.
Did it work?
My officials tell me there are a couple of buildings on Sherkin Island.
I understand this relief must be claimed on tax returns. The Revenue is, therefore, not in a position to assess how successful the relief has been in promoting development. It would help us in assessing the benefit or otherwise of the various allowances if we knew the take-up. Can we devise some means of assessing it?
We should, by the end of this year or early next year, have a better idea of the Exchequer cost of the seaside resort renewal scheme from an analysis of the taxation returns. The cost is multiples of what we thought originally. Some people might ask if that is a bad thing. There are different views on it. We could look at the Exchequer cost but also at the development. The development money and the Exchequer cost in tax foregone would be greater than was forecast when the scheme was initiated. It should be possible in the other schemes as well.
I accept it takes time for these things to happen. Nevertheless, we should be able to assess their effectiveness in promoting development as well as their cost.
That is only fair. We have a tendency to start schemes but not to end them. We should be able to assess the cost and to say if it has outlived its usefulness and whether it should be continued.
I move amendment No. 52:
In page 82, subsection (1)(f), line 36, to delete “paragraph (a) of”.
This is a technical amendment to section 38 of the Finance Bill, 2000, to correct an error in the section as drafted. It deletes a reference to "paragraph (a) of” in section 38(1)(f).
Perhaps the Minister could read the section note on the tax package for the new small town developments.
Section 38 amends Chapter 7 of Part X of the Taxes Consolidation Act, 1997, the chapter which deals with the latest urban renewal scheme. The section extends the scheme to 31 December 2002 for both the residential and business incentives.
It provides, in line with EU requirements, that capital allowances are not available to property developers or in respect of buildings in use in certain sectors and industries or which are provided for certain large investment projects. The EU approval ruled out the availability of double rent allowance and accordingly orders designating areas for the purpose of that allowance will not be made.
The section provides that capital expenditure incurred may be written off by owner-occupiers and lessors by means of an initial allowance of 50% in year one, with an annual allowance of 4% in later years. Free depreciation of up to 50% is available to owner occupiers. This section confirms that 100% of qualifying expenditure incurred on commercial premises qualifies for capital allowances.
The section amends a number of sections in Chapter 7 to allow a premises located in part of a building or structure, situated in a qualifying area, to qualify under the scheme and apportionment of expenditure, on a floor area basis, is provided for where a building straddles the boundary of a qualifying area.
The section provides that where an individual on joint assessment is entitled to owner-occupier relief in respect of residential accommodation, the individual may deduct the relief from the income of his or her spouse, if any, as well as from his or her own income, as is currently the case. The provision will not apply where separate assessment is made. The changes apply from 1 July 1999.
I am glad the Minister is pursuing the practice of at least making allowances interchangeable between spouses.
Amendments Nos. 53 and 54 are related and both may be taken together by agreement.
I move amendment No. 53:
In page 86, before section 41, to insert the following new section:
41.-(1) Section 823 of the Principal Act is amended-
(a) in subsection (1), by the substitution of ’11 consecutive days’ for ’14 consecutive days’ in paragraph (a) of the definition of ’qualifying day’,
(b) in subsection (2A), by the substitution of ’11 consecutive days’ for ’14 consecutive days’ in paragraph(b), and
(c) in subsection (3), by the substitution of ’whichever is the lesser; but that amount, or the aggregate of those amounts where there is more than one such office or employment, shall not exceed £25,000.’ for ’whichever is the lesser.’.
(2) (a) Paragraphs (a) and (b) of subsection (1) shall apply as on and from 29 February 2000, and
(b) paragraph (c) of subsection (1) shall apply-
(i) as respects the year of assessment 2000-2001 and subsequent years of assessment, and
(ii) as respects the year of assessment 1999-2000, as if the reference to 'that amount, or the aggregate of those amounts where there is more than one such office or employment' were a reference to 'such portion of that amount, or such portion of the aggregate of those amounts where there is more than one such office or employment, which arises by virtue of income, profits or gains accruing or paid on or after 29 February 2000'.".
Amendment No. 53 proposes to insert a new section before the existing section 41. The new section amends section 823 of the Taxes Consolidation Act, 1997, which provides a deduction for income earned outside the State. This deduction, known as the foreign earnings deduction, was introduced with effect from the tax year 1994-95. It provides for deduction from income proportionate to time spent on working assignments abroad, other than in the United Kingdom, by non-public sector resident employees. To qualify for relief, an employee must spend at least 90 qualifying days in a tax year or in a 12 month period. A further condition stipulates that each period of absence must be for a minimum of 14 days at a time.
Since its introduction in 1994, abuses of the deduction have been identified and in last year's Finance Act I introduced measures designed to counteract some of those abuses. Those measures exclude items such as severance payment, share options, benefit-in-kind and restrictive covenants from the calculation of foreign earnings deduction and provide that separate calculations were required where more than one employment was involved where the duties are performed wholly or partly outside the State.
Since the introduction of these measures in 1999, it has come to light that the deduction is being availed of in circumstances for which it was not intended and that substantial amounts of revenue are being lost to the Exchequer. Accordingly, I am introducing an overall cap on the amount of the deduction which may be availed of by an individual in any year of assessment.
In a sample survey conducted by the Revenue Commissioners, it emerged that most claims for the deduction are in the £10,000 to £15,000 range, although a number of claims are in excess of this amount. Accordingly, I have decided to set the cap on the deduction at £25,000 for any year assessment. While this figure may restrict the deduction in some cases, it will cater for the majority of genuine claims and will still constitute generous relief. The cap at £25,000 applies for the year 2000-01 and subsequent years, whether there is one or more qualifying employment involved. For the current tax year, the £25,000 limit only applies in relation to so much of the deduction as arise by virtue of income, profits or gains accruing or paid on or after 29 February 2000.
In order to qualify for the deduction, an employee must spend at least 90 qualifying days abroad in a tax year or in a 12 month period and that each period of absence must be a minimum of 14 days at a time. I am relaxing this later requirement and in future, periods of absence of 11 consecutive days will qualify. This eases the situation of those who would typically spend two working weeks abroad and up to now would lose entitlement to the time counting as qualifying days if, for instance, they did not spend the second weekend abroad. This change, which is also the subject of an amendment by Deputy McDowell, will also apply on 29 February 2000. I commend the amendment to the committee.
I tabled the amendment which the Minister accepted, or replicated, at the request of a constituent of mine who will be grateful to him for implementing it. It is still subject to the requirement that 90 days be spent abroad in a particular year. Is there any connection between the absence or the presence of the individual abroad and the earning of the money? As I understand, this foreign earnings deduction or relief was intended to cater for people who went abroad to work on contract for the ESB or whatever and they came to Ireland. They basically lived in Ireland and spent a period abroad during the year. Is there anything to stop somebody who simply spends time abroad and who earns money not by toil, but derives income from a foreign source? I understand the problem here was that money was transferred off shore.
One should never be taken aback by the brilliance of some tax avoidance schemes. Some avoidance mechanisms were being used to shield massive amounts of income and legitimately so by people living here and who were tax residents in Ireland but who were able to use the foreign earnings deduction to ensure that no income tax was paid on substantial amounts of income. Therefore, all the income went into the pot. The changes I made last year were to get over a particular problem.
If my memory serves me correctly, one individual used the section to throw his redundancy money, his benefit-in-kind and his share options into a pot. He availed of the foreign earnings deduction legitimately and paid income tax on the lot. I changed that loophole last year. However, some even better and more brilliant schemes came to light and that is why I decided to put a cap of £25,000 on the relief rather than tinkering around with loopholes and avoidance mechanisms. I am sure next year some more brilliant tax advisers and accountants will come forward with something else.
I also made the change in line with the request the Deputy made. Heretofore, one had to be abroad for 90 days and in 14 day blocks. That was causing undue hardship because it meant a person might have had to spend two weekends abroad even though they were finished on the eleventh or twelfth day. In order to qualify, they had to stay a further weekend. I have closed off the loophole by having a £25,000 cap and I have lessened the qualifying conditions by reducing the 14 day block to 11 days.
One particularly brilliant scheme ensured that a group with substantial earnings paid no tax.
Were they transferring money offshore?
No. They used the scheme and earned the income offshore.
How do we define foreign earnings in that sense?
In the original Act, the Finance Act, 1994, it was apportioned on time spent. People in certain occupations or professions were able to use that section - time spent abroad - to ensure 100% relief. All their income was included.
So it was not just income earned during the period abroad?
I see; so we do not define foreign areas to all intents and purposes?
No. It was a bit of a misnomer to describe it as foreign earnings because it is all earnings.
It would simply be the earnings of somebody who spends the requisite period of time abroad?
Yes, on a proportionate time basis. If one organises one affairs in such a way one could legitimately have 100%.
It would be great.
It would not be worth it to someone earning £40,000, £50,000 or £60,000 to have the trouble of living like that. However, in certain occupations, if one was abroad as part of one's business for a long time and there were gigantic amounts of income earned in that period, the foreign earnings exemption would apply.
One would have to be able to sing as well.
The Deputy might be close to it there.
Amendments Nos. 55, 56, 57, 58 and 59 are related and may be discussed together.
I would prefer if we took amendments Nos. 55 and 56 separately.
You might prefer it but the system says that they must all be taken together.
I move amendment No. 55:
In page 87, paragraph (a), between lines 22 and 23, to insert the following:
"(iii) by the substitution for the definition of 'relevant deduction' of the following definition:
"'relevant deduction" means a deduction of an amount equal to 100 per cent of the relevant investment in respect of a film where the total cost of production does not exceed £4,000,000 and 80 per cent where the total cost of production of a film is in excess of £4,000,000;',".
The Minister may remember that last year we had a fairly extensive discussion on the film industry. On that occasion I pointed out that the uncertainty created by the failure of the Minister at that time to extend section 48(1) over a five year period, as I suggested, would damage the industry. Reports would seem to indicate that revenue from activity in the film industry could have decreased by anything up to 50%. The Minister's action last year took the steam out of the industry. Newspaper reports indicate that the Minister for Arts, Heritage, Gaeltacht and the Islands, Deputy de Valera, received a very positive response recently in Los Angeles. However, last year's experience was a major decline in the film industry here which was directly related to the Minister for Finance's refusal last year not to extend section 48(1).
He may have had reasons for doing so, including waiting for the Kilkenny report and other reports before making up his mind. The Minister has now confirmed that there was no reason whatsoever for not extending the section last year. I pleaded with him to do so and I gave the reasons it should have been done. The arguments I put forward then have since been confirmed. I was right in what I said but still the Minister did not do it.
When the Minister, Deputy de Valera, launched her Department's strategy for the film industry in December 1999, she committed the Government to fully implementing the recommendations of the think-tank report which came to be known as the Kilkenny report. I understand that he has now left the Arts Council.
The Minister said that in future film will be a simple plank of the Government's industrial policy. One of the principal recommendations of the Kilkenny report was that section 48(1) should be extended for seven years with a 100% tax relief for films with budgets under £4 million. Yet, in the Finance Bill the Minister is only extending it for five years and he is maintaining the tax relief at 80%. The film industry is concerned that if the level of tax relief remains at 80% while the top rate of personal tax is declining it will be increasingly difficult to attract personal and private investment into the film industry. In the past, the Minister has advised me that the film industry under this section is a great tax shelter. He provided figures about that and no doubt he will do so today, but nevertheless it was that section which really drove the film industry in this country. I am convinced that recent films like "Saving Private Ryan" and "Angela's Ashes" would not have been made here but for our generous tax incentives.
The Minister should look at what is happening in the United Kingdom at present. Because the UK lost films like "Braveheart" to Ireland, Britain looked at its incentives in the light of our success. The Labour Government has introduced some very attractive tax incentives which have been backed up by major funding from the British national lottery. As a result they are more competitive than we are. I also understand that countries such as Holland, Luxembourg and Germany have sent their film commissions here to examine our incentives for the film industry. They have now introduced their own incentives and thus they are more competitive than we are.
The Minister will have received reports and representations from every sector of the film industry and sectors that have not been associated with that industry in the past, such as IBEC, SIPTU and the Screen Commission, requesting 100% tax relief for films with budgets not exceeding £4 million. In view of those representations and the competition from other countries, my amendment seeks an increase of tax relief under section 48(1) to 100% for films with budgets under £4 million. It also seeks to extend that relief to 80% for films with budgets over that figure.
Perhaps the Minister could respond to amendment No. 55 first, and I will deal with amendment No. 56 after to avoid getting confused with what I am trying to achieve.
Amendment No. 55 seeks to have 100% of a person's investment in films allowed to be deducted for tax purposes where the film has a budget of £4 million or less. At present a deduction of 80% is allowed no matter what the film's budget is. Based on the number of such films made in 1999, that proposal would have a cost of approximately £2 million. I am not at all convinced that the expenditure by the Exchequer of such moneys would generate a return of any significance in economic terms to what is incurred by the film industry. With present interest rates the return to investors in films is quite attractive when the existing tax relief is taken into account.
In 1999 a total of 28 films with budgets of under £4 million were made; that was out of a total number of 35. In each of the previous two years the number was 20 out of a total of 32. I do not have any evidence that the 80% relief is making film investment unattractive. I cannot extract £2 million from Exchequer costs and on that basis I must reject this amendment.
The second amendment in the name of Deputy Deenihan proposed that the amount of a film budget that can be eligible for tax relief be increased——
On the first amendment, Minister——
Whatever about the quibble with the 80%, I have extended the relief this year by a further five years. When previous extensions were made to this relief it was by a maximum of three years. When I said in the budget that I would increase it to five years, it was quite a significant gesture towards the film industry and will allow people to plan ahead. I will not go over all I said about the film tax breaks involved except to say that it is the one gilt edged tax break left in the tax code. Effectively, one cannot lose on it. I do not have the figures with me now but I considered this matter last year. I looked up various reports that were done internally in the Department of Finance prior to my previous budget and I was very conversant with this relief. I was amazed at the return that a person could get without any hassle or exposure at all. The post tax return is about 17% per annum. There is no other return in any area equivalent to that, unless one wanted to speculate in stocks and shares and take one's chances. However, this would be a guaranteed return. In the case of most films here, there are pre-sale agreements and insurance bonds, so there is no real exposure to risk. I do not think the 80% restriction is restricting investment in the film sector.
I delayed making a decision about it last year until the reports came in. I extended it in last year's Finance Act by one further year so that nobody would lose out. When I got the reports I took advice, some of which was to scrap the relief entirely and some of which was to extend it in the way the Deputy is saying. I decided to extend it for another five years at the 80% restriction.
Does the Minister agree that when other countries saw how successful Ireland was, they developed more competitive incentive programmes than ours? Is he concerned about that? Does he accept the prestige that the making of a major film brings to this country? While I accept "Angela's Ashes" is creating some controversy among Irish Americans, it is also creating a great deal of attention and free publicity for Ireland in America. A huge impact was made by "The Quiet Man" on Leenaun and by "Ryan's Daughter" on Kerry, although I know that was before tax exemptions.
Film making is one of the greatest advertisements a country can get. This is sending out a negative message for the sake of £2 million. While the figures are not yet available, there was a major decline in film production in Ireland last year. There was a period when it went totally dead. I am convinced that was related to the uncertainty that was created. The Minister is reneging on the commitment given by the Minister, Deputy de Valera, who committed herself entirely to the Kilkenny report. She emphasised that the Government saw film making as being of major importance in the future of industrial development in this country. This is much bigger and more important than the Minister realises.
This measure was part of a package of measures we put in place for the industry following the report of the film think tank and the presentation to the Government for proposals for a strategic plan for the film industry by my colleague, the Minister for Arts, Heritage, Gaeltacht and the Islands. I understand these plans are being worked on in her Department and include an extended role and increased resources for the Irish Film Board and closer co-operation between the industrial agencies of the State in the further strengthening and development of the industry.
Some interesting figures are available. I understand that while 1999 was a disappointing year in that levels of production were lower than in 1998, all the signs for 2000 are encouraging as the industry is making good use of the extension of section 481. The announcement in the budget has led to Ireland being able to be sold as an attractive place to do business. On a recent visit to Los Angeles, the Minister, Deputy de Valera, received a very positive response from the studios and industry there. I am confident this extension of the section 481 scheme at its current level, with other measures approved by the Government, is sufficient to ensure the continued orderly growth of the film and television production sector.
I am prepared to look at Deputy Deenihan's other amendments. However, I do not believe the 80% reduction is injuring investment. As I said in the debate last year and in reply to parliamentary questions by the Deputy, this tax break is the pièce de résistance of tax breaks. It is the best ever. I do not avail of it myself, but if I am ever forced into another profession I will avail of it if it is still around.
Apparently there is a new forthcoming political blockbuster that relates to recent events in Irish political history. Perhaps we can all invest in that.
I hope I do not feature in that.
My second amendment concerns the percentage of the total production budget for a feature film that can be raised under section 481. At the moment it is 60%. I believe it should be 66% for films with budgets below £4 million and 55% for projects with budgets of £5 million upwards, which is not a major change. This was one of the key recommendations of the Kilkenny report. The Minister indicated in his response to my first amendment that he might look favourably at this.
I will have a look at that before Report Stage.
In regard to amendment No. 55, if the Minister cannot give 100% during the extension of section 481 over the next two or three years, will he consider raising the tax relief to compensate for that lack of incentive to 85% or 87%?
The Deputy's amendments Nos. 57, 58 and 59 appear to be an alternative to previous amendments. The amendments propose that the maximum amount of tax relief finance that can be raised for any one film project be increased from £7.5 million to £10 million, and for films made in the winter months from £8.25 million to £11.5 million. This increase would give extra tax relief finance to films with a total budget of between £15 million and £20 million, and for winter projects of between £17.5 million and £23 million. I will consider these amendments further for Report Stage, with a view to looking favourably upon them.
I thank the Minister.
However, I will not change the 80%, although the Deputy made a good case for it. I am prepared to look at the others.
They might move upwards a little. This has major implications for the film industry. The word should go out that the Minister is very positively disposed towards the film industry because, although it is a very attractive tax shelter, it makes a very important contribution to Ireland in terms of jobs. The perception is that the Minister has placed a question mark over this industry. I know he has to look at it strictly from a Minister for Finance point of view.
I accept there is a broader picture. I would like to think I take the broader view of some of these schemes and the overall interest. Most of the schemes I have announced in recent years, such as rural renewal, were my own ideas but I was not bowled over on the plinth for announcing them. I like to take a broader view of the film industry, except to say that the tax break for investors in the film industry is so tremendous that a Minister for Finance would have to control it. I am inclined to keep the 80% rule. However, I will look at the Deputy's other suggestions.
The rural renewal scheme was one of the key recommendations of our task force report on rural development.
I am not saying I thought up the idea. However, I was the only Minister mad enough to introduce it because successive Ministers had been advised not to go down that route.
The Minister did introduce it.
From what I have seen of it, it is working very well and will have a tremendous effect.
Absolutely. I have tabled a later amendment to extend it to the lower Shannon region.
I am sure the Deputy has, as have Deputies from all over the country. However, I am afraid I will be rejecting it.
I move amendment No. 60:
In page 88, paragraph (b), to delete lines 34 to 36 and substitute the following:
"(I) such period shall include, as respects determinations made by the Revenue Commissioners in accordance with paragraph (a)(ii)-”.
This amendment is necessary to correct a minor drafting error in section 42(b) of the Bill as published. That paragraph rewrites the rules as to what constitutes reasonable access for the public in relation to buildings and gardens approved under section 482 of the Taxes Consolidation Act. The amendment corrects a slight flaw in the construction of the rewritten rule and I commend it to the committee.
I move amendment No. 61:
In page 88, paragraph (b), line 48, after “hours” to insert “between 10.00 a.m. and 6.00 p.m.”.
The Minister is extending the requirements regarding public access to houses and gardens which would be designated as houses and gardens of public interest. The amendment presents the committee with an opportunity to discuss this issue. It also proposes to confine the opening hours to between 10.00 a.m. and 6 p.m. What are the Minister's views on the amendment and why are the changes being made in the section applicable only to new qualifiers for the scheme, that is, for houses and gardens not already in the scheme? Did he have a problem making it applicable to those already included?
Section 42 introduces a refinement of the public access requirements in relation to tax relief for designated buildings and gardens. Up to now one of the requirements was that property was open to the public on at least 40 days each year, from 1 May to 30 September, to avail of the relief, with at least ten of the days at weekends. This measure is in response to justified criticism of instances where some of the properties were open on days that were inconvenient to the public.
While I am sympathetic to the amendment, the legislation requires the Revenue Commissioners to make a determination of access that is affordable to the public for not less than four hours on each of these open days and that these hours are at reasonable times. While each case must be considered on its merits, the Revenue's view of what constitutes reasonable time conforms with the Deputy's proposal. If in taking the facts of each case into account, including convenience for the general public, the Revenue Commissioners are not satisfied that the property is open at reasonable times, they will not make a determination and without it no relief can be obtained.
Without disagreeing with the broad thrust of the amendment I am satisfied that the current arrangements work satisfactorily and are flexible enough to take account of the unique circumstances which might be relevant in a specific case. Such flexibility would not be possible if this proposal was conceded. Therefore, I do not propose to accept the amendment. Section 42 proposes that the premises must be open for at least 60 days per year, of which 40 must be within the period from May to September.
Deputy Noonan asked why it cannot be applied to houses and gardens already within the scheme. If somebody applies for relief under the scheme now there must be compliance with these rules. However, we will not withdraw relief already granted. If a person has been granted relief and reapplies the old rules will apply. The relief is applied to the tax year in which a person incurs expenditure on a significant building or garden and applies for relief. If a person applies for the relief in the tax year 2000-01the changed rules regarding reasonable access will apply. He or she can have applied for it every year for the previous number of years, which would normally be the case if expenses are ongoing.
However, we do not claw back relief granted to somebody in each of, say, the past three years if that person does not reapply because such relief was granted under the old rules. Even where major renovations or repairs are not being undertaken on a significant building, the qualifying expenses include public liability insurance, security and alarm systems and such like. Under the existing provisions a person who claimed last year must open his building and gardens for the next five years.
If owners of currently designated houses and gardens have availed of tax relief in the past they are still caught by the new provisions if they want to avail of the scheme from 6 April. Is that correct?
If they wish to claim against expenses incurred from 6 April they must comply with the new access rules.
I take it the Minister is not making an old and a new list.
If a person has an interesting garden and he complies with these provisions, is there a quality control aspect to decide on whether the garden is sufficiently interesting to enable the person to benefit?
On behalf of the Department of Arts, Heritage, Gaeltacht and the Islands, Dúchas certifies them as gardens worth visiting. There are two such gardens in the country. To date, 125 determinations have been made and of the 120 houses or buildings, three are guesthouses and two are gardens.
Various competitions are organised by local authorities and bodies such as the Irish Association of Gardeners, and prizes are awarded to county and national winners. Would they come within the scope of these provisions if their gardens were open to the public?
I will check on that, but I doubt it. Approved garden means a garden other than a garden being land occupied by or enjoined with an approved building. It also covers grounds of an ornamental nature. An application to the Minister and the Revenue Commissioners by or on behalf of a person who owns or occupies the ground must be determined by the Minister to be a garden which is intrinsically of significant horticultural, scientific, historical, architectural or aesthetic interest and by the Revenue Commissioners to be a garden to which reasonable access is afforded to the public. When Dúchas makes a determination in this regard it must be satisfied that it is a garden which is intrinsically of significant horticultural, scientific, historic, architectural and aesthetic interest. Most tidy towns garden winners would not qualify under that definition. The measure basically applied to gardens attaching to estates.
When I was Minister for Tourism and Trade I inserted a special subsection in the last operational programme to address the problem of gardens in disrepair. It has worked effectively. I opened one such garden in Doolin House in north-west County Kildare last summer.
If people consider that the conditions are too onerous, can they sign out of the scheme or will the gardens have to remain open for five years?
Under the rules of the old scheme, for example, they must stay open for the next five years. However, if they do not want to apply for the tax relief, they need not apply for it and, therefore, when the five years are up the rules of the old Act apply, but I doubt that will happen much because each year there are ongoing expenses.
I am required to take the vote on amendment No. 55, which was postponed earlier in this session.
I move amendment No. 62:
In page 93, between lines 27 and 28, to insert the following:
"(ii) the payment for the benefit of the Exchequer by an approved institution of the value of the tax relief granted in respect of a relevant gift made to it to the extent that that gift has not been used by it for the purposes of an approved project or an approved development fund, as the case may be;".
This amendment proposes to make a change to section 43. Section 43 amends section 485 of the Taxes Consolidation Act, 1997, which provides tax relief for gifts of money made to Irish universities and other third level institutions in respect of specific approved projects in areas such as research, the acquisition of capital equipment etc.. Among the changes proposed in section 43 is the introduction of approved development funds in the third level institutions to which gifts of money may be made as an alternative to making them for specific approved projects.
The purpose of the amendment is to make it clear that the guidelines issued for the purposes of this section by the Minister for Education and Science, with the consent of the Minister for Finance, may include a provision which will enable the value of tax relief granted under section 485 in respect of a gift of money to be recouped from the third level institution to the extent that any such gift is not used by that institution in a manner required by section 485, that is, if it is not used in respect of an approved project or an approved development fund.
Why is the Minister introducing this amendment? Does he believe there has been abuse?
This is probably best explained by referring to the purposes of section 43. Until now, for relief to be granted under section 485 of the Taxes Consolidation Act the specific project had to be approved each time. Universities suggested that a fund could be created and the objectives could be agreed by the universities and the Minister for Finance. The Minister for Education and Science will set out the guidelines for which specific projects will qualify, subject to the agreement of the Minister for Finance. Therefore, if people make donations to the fund, they will get tax relief. This will be a more effective way of donating money, rather than a university having to inform the Minister for Finance each time it is promised money for a project which has to be approved. The fund will be approved. This has never arisen but the section is a safety provision. We do not believe we will have to use this section.
Is the fund confined to capital expenditure?
It can contain current items. We were lobbied by representatives of the universities and my Department and the Department of Education and Science investigated this in some detail. After a great deal of discussion I agreed to include some current expenditure. Section 43 makes a number of changes to section 485 of the Taxes Consolidation Act, 1997, a section which grants tax relief for gifts of money made to Irish universities and other third level institutions. The fund is approved by the Minister for Education and Science in specific areas, covering research, certain infrastructural developments and so on. Personal and corporate donations qualify provided a minimum donation of £1,000 is made.
I propose to amend section 485 in a number of respects, with the objective of encouraging increased private investment in third level education. As an alternative to an approved requirement, gifts may, from 6 April 2000, be made to approved development funds in third level institutions. The objectives and operation of these funds will be subject to approval and guidelines laid down by the Minister for Education and Science, with my consent. This will introduce a greater flexibility to the relief, approving institutions to raise funds for a broad range of approved areas rather than specific approved projects as heretofore. The range of projects covered by section 485 can be widened to include new ones approved by the Minister for Education and Science, with my consent.
Regarding the level of relief, the amount of the minimum donation is being reduced from £1,000 to £250. In future, unused relief may be carried forward by a donor for up to three years. Current expenditure will be included in the guidelines. I can get that information for the Deputy.
Will it include research projects?
Yes. The existing section 485 covers specific approval for research, certain infrastructural development etc.
I move amendment No. 63:
In page 94, line 5, after "acquisition" to insert "or the market value on the date of acquisition, whichever is greater.".
I put down this amendment to facilitate discussion. The current SAYE scheme allows people to acquire shares after a three year period at up to 25% reduction on the price of the shares at the time they entered the scheme. I do not understand the relationship between this trust or any holding fund and the beneficiary of the shares. The acquisition price, for CGT purposes, is deemed to be the price one actually pays for them rather than what they are worth at the time they are acquired. If someone acquires shares in a firm after three years and sells them immediately, CGT is charged.
This section makes two principal changes to the tax relief for save as you earn employee share option schemes which I introduced last year. There are two interlinked elements to these schemes. The first is an approved share option scheme which allows a company to grant an option to an employee to purchase shares at a pre-determined price. The second is a contractual savings scheme which is deposit-based and allows the employee to save for the purchase price of the shares. The relief takes the form of an exemption from income tax in respect of the grant and exercise of the options. Instead, any gain made on the shares is subject to capital gains tax when they are sold. While the relief has only been available for a short time, all the indications are that these schemes are becoming very popular.
The first change relates to the use of a trust or subsidiary company under an approved scheme. The SAYE legislation was based on the premise that new shares would be issued to employees under the scheme. This is not, however, always possible or desirable from a company's perspective and in some circumstances the use of existing shares would be more appropriate. Largely because of company law restrictions on the right of companies to acquire their own shares, the use of a trust or subsidiary company is necessary to achieve this. While there is nothing in the current tax legislation to prohibit this, the transfer of the shares from the trust or subsidiary company to the employees could give rise to a capital gains tax charge on the trust or subsidiary company. This possible charge is now being removed to facilitate schemes which might wish to use existing shares.
Two consequential amendments are necessary because of this change. To ensure that the tax charge foregone in the case of the trust or subsidiary is borne instead by the employee, the cost of the shares, for capital gains tax purposes, to the employees is being set at the price actually paid. Without this provision, the probably higher market price on the day the option is exercised would operate. To prevent any manipulative abuse of the concession, the company operating the scheme is to be denied a corporation tax deduction for expenses incurred in enabling the shares to be acquired by the trust or subsidiary company. The purpose of these changes is to ensure that the tax treatment of the company operating the scheme and their employees is the same, whether a trust or subsidiary company is used or not.
The second change relaxes the pensionable age rules of the scheme. At present, the SAYE legislation requires that the employee must save for a minimum of three years before exercising their options to qualify for the relief. However, provision is made to allow the early exercise of options where the employee reaches pensionable age - 66 years - although he or she may not have saved for the required period. I now provide for the early exercise to take place where a person retires at any time from 60 to 66. This means that employees who take early retirement will still be able to qualify for the relief. That was section 44 as initiated.
I support the scheme because it is good in that it encourages the various elements we want to see, such as gain sharing, financial participation in companies and other matters. To that extent, it deserves support. What I was looking at was how it could be made more attractive. At present, as the Minister has pointed out, there is no charge to income tax from the benefit-in-kind element of the reduced price of the shares, but there is a potential immediate charge of capital gains tax if we deem that they have been acquired at the price for which they were paid as opposed to what they are worth on the day they are acquired. It requires the State to forgo a gain or to forgo charging tax on a gain to work with a higher base, but it seems to be a way to make it more tax efficient and more beneficial from the point of view of the beneficiary. I do not understand why this causes complications with the trust.
The best thing is to go into private session so that an expert can deal with that point.
The Select Committee went into private session at 2.21 p.m. and resumed in public session at 2.24 p.m.
Is there any reason the Minister has changed the definition of pensionable age from 66 to between 60 and 66?
We were told that certain people were being caught because they retired at 60, so we wanted to give greater flexibility. That is the only reason.
Is the amendment being pressed?
I will leave it stand because more discussion may be helpful on Report Stage, but I do not intend to press it.
I move amendment No. 64:
In page 97, line 46, to delete "meanings" and substitute "meaning".
This amendment corrects a minor drafting error.
I move amendment No. 65:
In page 98, to delete lines 17 to 32 and substitute the following:
(I) the amount receivable by the company in the accounting period from the disposal in the course of the excepted trade of residential development land, exclusive of so much of that amount as is attributable to construction operations (within the meaning of section 21A) carried out by or for the company on the land, bears to
(II) the total amount receivable by the company in the accounting period, exclusive of so much of that amount as is attributable to construction operations (within the meaning of section 21A) carried out by or for the company on land disposed of by it, in the course of the excepted trade,
This amendment is a technical amendment necessary to ensure that the apportionment of corporation tax provided for in the new section 644B being inserted into the Taxes Consolidation Act, 1997, by section 45 works as intended. Before going into detail, I remind Deputies that a 25% rate of corporation tax applies to non-trading income and to trading income from certain specified trades referred to in the legislation as "excepted trades". These include mining, petroleum and land dealing. Where a trade includes dealing in land and construction activities, it is to be divided into two parts and construction activities are not to be regarded as part of the excepted trade. Profits from the construction activities will be taxed at the standard corporation tax rate while profits from the land dealing will be taxed at the 25% rate.
The new section 644B is designed to achieve an effective 20% rate of corporation tax on disposals of residential development land. Subsection (2) contains the rules to achieve this where the disposal takes place in the context of a trade. It provides for a one fifth reduction in tax referable to income from disposals of residential development land. The tax referable to income from disposals of residential development land is determined in accordance with subsection (2)(b) of section 644B. Two steps are involved. First, corporation tax which is charged at the 25% rate for an accounting period is to be apportioned between income from an excepted trade and other income charged at that rate on the basis of the amounts of income involved. This determines the amount of corporation tax attributable to income of an excepted trade. As I have already said, income of an excepted trade can include income from disposing of residential development land and other income such as income from disposing of non-residential land and income from mining and petroleum activities.
Second, tax attributable to income of the excepted trade is to be apportioned between income from residential development land and other income of the excepted trade. This apportionment is done on the basis of receipts from disposing of residential land as compared with total receipts of the excepted trade. As a reference in legislation to land includes any buildings on the land, it is necessary to specify that, in making this apportionment, receipts from the disposal of residential development land do not include any amount attributable to construction operations carried out by the company on the land. This is specified in subsection (2)(b)(i). However, the reference to total receipts of the excepted trade should also exclude any amount attributable to construction activities on land disposed of in the course of the excepted trade. Such a reference was omitted and its omission could lead to incorrect apportionments.
This amendment now rectifies that omission. As the additional words being inserted into paragraph (b)(i) make subparagraph (i) more difficult to read, the amendment breaks up the subparagraph with clauses Roman "(I)" and Roman "(II)". I commend the amendment to the committee.
What exactly is residential development land?
Does the Deputy want the legal tax definition?
Is it land zoned residential or is it any land with the potential to have a building erected on it?
It is in the section. Section 45 states:
'residential development' includes any development which is ancillary to the development which is necessary for the proper planning and development for the area in question;
'residential development land' means land-
(a) disposed of to-
(i) a housing authority (within the meaning of section 23 of the Housing (Miscellaneous Provisions) Act, 1992),
(ii) the National Building Agency Limited (being the company referred to in section 1 of the National Building Agency Act, 1963,) or
(iii) a body standing approved of for the purpose of section 6 of the Housing (Miscellaneous Provisions) Act, 1992,
which land is specified in a certificate in writing given by a housing authority or the National Building Agency Limited, as appropriate, as land being acquired for the purposes of the Housing Act, 1966 to 1998 . . .
(b) in respect of which permission for residential development has been granted under section 26 of the Local Government (Planning and Development) Act, 1963, and such permission has not ceased to exist, or
(c) which is, in accordance with a development objective (as indicated in the development plan of the planning authority concerned), for use solely or primarily for residential purposes.
I am informed that that is the exact definition of residential development land used in the Bacon Bill - the Finance (No. 2) Act, 1998.
When is somebody a dealer in property?
That is a question that many accountants and tax advisers have brought to the appeals commissioners in the past. It depends. It is like dealing in any trade. There are laws going back maybe 100 years in this regard and it is always a matter of debate. I remember many years ago reading that a famous UK judge stated that this depends very much on when something can be deemed a trade, which does not just relate to dealing in land. For example, I have seen at least one example of a person getting planning permission and building a house. He moved on after two years when he got a good offer and built another house on another half-acre somewhere else. They were always described as his residences, but after the third time the inspector of taxes said he was a dealer in land. A compromise had to be reached in that case. A dealer in land is, per se, a person involved in construction generally. There would be a prima facie case for the inspector of taxes to say he was a dealer in land.
Am I right in saying that if the Minister or I went out to buy and sell land we would be liable for CGT on any gain we made?
If it was the first time and it was a once-off transaction we never intended to carry out again we would qualify for capital gains tax, but if, after the first time we intended to do it again and again, the inspector of taxes would probably say when we got to the repeated transaction that from day one we were dealers in land.
And one would then be liable to income tax or corporation tax, depending on——
Depending on whether it was a case of an individual or a company. The memorandum in the articles of a company would have to have been dealing in land as one of the stated objectives. For an individual, which is an easier way to deal with this. the inspector of taxes could say one was always a dealer in land. It is the same with any other trade.
This section looks to apportion it as between someone who does that and someone who does other business?
No, what this section is trying to do is, in order to encourage development land onto the market, there is a very attractive capital gains tax rate for, say, once off individuals, such as farmers who own development land. He or she could sell land and pay capital gains at 20% and that has proved attractive on the basis of hurrying land into the market to increase supply. However, when we decided to bring corporation tax rates down to 12.5% by 2003 we excepted certain things, such as mining, petroleum and dealing in land. There is a 25% rate for that. A developing building company might have one part of the business building houses while another part is dealing in land. The trade in houses will eventually come down to 12.5%, because that is normal trade - the corporation tax rate is now 24%, whereas the dealing in development land, as excepted, will still be at 25%. I have applied the special capital gains rate to dealing in land to hurry people into putting land on the market by making it somewhat attractive. These sections seek to apportion the total income between the two types of businesses.
The next section deals with individuals. If an individual is a dealer in residential land - I cannot think of anyone who is, but I am told there are people who do this - they will be taxed the same as if they were running a pub, with some taxed at 46% because dealing in land is part of their trade. Therefore, to make it more attractive to them, if their land qualifies as residential development land I am also giving them the 20% capital gains tax rate in order to get them to put the land on the market. That is the principle behind this - to increase the supply of residential land.
I could have sworn the Minister said at least a year ago that he was not going to do this.
I remember saying that when we left the 25% rate for petroleum and mining that we could have used the argument that dealing in land was somewhat different, but my first Finance Bill brought in the CGT of 20%, but subsequent to that Mr. Bacon recommended further concessions for residential development land to be at 20%. When I reduced CGT from 40% to 20% in my first Finance Act, I left out all types of development, but Mr. Bacon said it should be reduced to 20%. The Finance (No. 2) Bill, 1998, brought in that concession.
People in the business of trading property would not benefit from this because they would be chargeable at corporation tax or income tax levels. The Minister has now decided to round that down to 20%.
And the Minister has also decided that disposal for purposes other than residential development should also be rounded down to 20%.
The Deputy must remember that in my first Finance Act I reduced CGT from 40% to 20% with the exception of development land, residential or non-residential. That was left out. Mr. Bacon then recommended that residential land should go to 20% in order to increase supply. That left non-residential development land the only category paying 40%. We had a ridiculous situation where local authorities wanted to purchase land for a graveyard, but the landowner was not so inclined because he would have to pay tax at 40%, while it would have been 20% for housing. There was also an anomaly where a farmer who wanted to give a site to his son or daughter free would be charged tax at 40% on the value of the site though no money would change hands. It had been a great success so I decided to go the full way.
It is only a temporary concession for another two years.
The Deputy is correct and his memory is as good as it used to be. Mr. Bacon recommended that the Finance (No. 2) Bill reduce tax to 20% but that if land was not disposed of by 5 April 2003 it would go to 60%.
And fair play to the Minister for putting it into legislation.
The Deputy did not think I would.
No, I did not think the Minister would.
It is the carrot and stick approach.
That is the whole point - if nobody takes the stick seriously it is not worth an awful lot. The Minister said we are in an anomalous situation but surely it is only so when viewed from a particular angle? Bacon suggested that the tax should be reduced to encourage residential development to deal with what is I hope, a temporary problem concerning the construction of residential estates. The intention was not to encourage the construction of graveyards by local authorities.
Or industrial buildings.
It was intended as a temporary discriminatory concession. The Minister has turned it into a general relief for everyone but this takes away its focus. That sits comfortably with his general belief in low capital gains tax but it takes away the focus of the Bacon proposals.
That is at the extremity of the argument. Bacon's universal 20% CGT rate will not have a negative effect. Perhaps it will at the extremes of the arguments put by the Deputy. In introducing the corporation tax change of 20% on certain land, the income tax changes and the changes proposed by Bacon I have tried to increase the supply of residential land as much as possible. The Deputy can argue his point but it will only have a marginal effect.
What effect does the Minister expect this section to have in terms of increasing the supply of land for development as residential property?
As regards housing, I am considering asking the Revenue Commissioners and others to publicise the changes made in recent years. I am also considering the big stick approach to speed up the supply. I can only go on what happens in my area and adjacent counties. Much land is being zoned or is the subject of planning applications which are being held up by appeals, a lack of people to submit the plans and people in councils to deal with them. However, in recent months I authorised significant additional staff for An Bord Pleanála and local authorities which are under pressure through the Minister for the Environment and Local Government.
There are many problems and we will have to face up to some issues. Present company excluded, some Deputies refer to increases in house prices but are doing everything in their power to stop houses being built in their constituencies. This is happening everywhere. Everyone respects people's right to protest and to make their views known in a democratic society. However, it is becoming nonsensical in some areas where everything is subject to objection. Public representatives then start crying about the price of houses. If demand outstrips supply in potatoes, bread or housing, the price goes up.
I have recently seen interesting propositions from some economists stating that the price of houses is more or less on a par with 20 years ago. The rate of increase has decelerated but the only answer to this problem is to increase supply. I have done as much as I possibly can through the tax breaks announced in the Finance Acts. The Deputy might argue that I have gone too far. However, in the three Finance Acts I introduced, in addition to the Finance (No. 2) Act in 1992, I have done as much as I can to encourage people to take up attractive financial offers to make their land available. This is working, but other factors are limiting the number of houses being built. Last year about 46,500 units were completed and this was a record on top of a record on top of another record.
We have covered this issue in previous years so perhaps we should not do so again. The Minister is right in saying I do not share his view that we need to encourage people who are already making windfall profits by allowing them to make even greater profits. This will not necessarily produce the effect we want. Is there any way of testing whether the reduction in CGT has increased the supply of development land?
We would have to ask the Department of the Environment and Local Government to ask local authorities to make some guesstimates.
I would be interested in such an assessment.
My information is that these tax measures have not increased the supply of building land by much. However, a great deal of land will be development land with planning permission in 18 months to two years' time. At that point, there will be a sufficient supply of building land. Whether or not houses will be built is another matter, but at least there will be a supply of building land in the greater Dublin area.
That is what I have been hearing also. I wish they would hurry up. The Department of the Environment and Local Government has stated that the evidence from local authorities is that the supply of land is coming on stream but the actual planning follow-on is not in line with that supply. This supports Deputy Noonan's point about what will happen. There are long delays. My own county has this problem and there is a long delay from the time a farmer disposes of his land for housing and the actual construction of a house. The delays are inordinate. In the past two years I am aware of much land which has been sold and farmers have received amounts of money about which they could only have dreamt. However, houses have not yet been built. That is not the fault of those who bought the land but construction is being held up by all kinds of difficulties.
Even in the case of land zoned for residential use and which is already serviced, it is taking a minimum of about 18 months from the date of acquisition by the developing company to actually putting up the first house. That is a very long lead in time.
It is even longer in Kildare where land was zoned in the 1985 county development plan. This land was zoned 15 years ago and sold two years ago, but there is not one house on it as a result of all kinds of complications and objections. There were not any protests when it was zoned 15 years ago.
In many cases, national policy is at variance with local policy at official level. The policy promulgated by the Department of the Environment and Local Government is frequently not reflected in local authorities. At planning and management level, local authorities are promulgating a totally different policy. While we have been preaching up here about the lack of supply of building land leading to a shortage of houses and an increase in prices, every local authority is making planning more restrictive. One feature common to all the recent local development plans is that vast areas of land are now excluded from any development. There is a pressure zone within 12 miles of Limerick city and unless one has a strong family connection with the area one will not get any planning permission. This means that no one can come in from the outside and buy a site to build a house.
Clare has become a kind of national case and the whole area is excluded from development for the same reason. Much of the area excluded is the natural hinterland of some of the urban development areas in Clare and Limerick. It is the same all over the country. It comes down to planning. When land is zoned, planning permission will not be given in areas furthest from the centre. Planning offices set out what is zoned as residential for the coming five years, for example, but say that development will have to start in the field nearest existing buildings. Only as the city expands will permission be given to start developments further out. In other words, planning offices will leave no fallow land between developments as a general rule. Very often a person will hold on to land and not budge, and the person who owns the field beyond him will not get planning permission.
In the latest example of which I am aware, an entire area has been zoned and a builder has submitted plans for 400 houses near the city. However, the National Roads Authority says it intends bringing forward the infrastructural programme and a road, which previously did not look as though it would be built for about 20 years, is now moving to design stage. However, the exact route of the road has not yet been decided, so the entire zoned area is frozen in terms of development until a decision is made. Even when this is overcome, Limerick Corporation has decided to inform Limerick County Council that it cannot provide any more water as it may not have sufficient water to meet its own needs. At times one would wonder how any houses get built. Somebody needs to address the issues, and it is really the job of the Minister for the Environment and Local Government.
We may be straying——
We are talking about a tax measure regarding building land, so we are not straying that much.
The Government and the Minister made different recommendations regarding densities, and I do not know what local authorities are taking these into account.
It is very frustrating, with people queuing for houses. When the Department of the Environment and Local Government decided that densities could be doubled, instead of the price of houses reducing, the profits of developers doubled. Where they were building eight houses per acre, they were now able to build 15 or 16. It had no effect on house prices, with more extravagant prices being paid for building land and more extravagant profits for developers. They have doubled their profits. Somebody must re-align things as currently it is like a tug-of-war, with national policy pulling in one direction and local policy pulling in another. While this continues there will never be equilibrium between supply and demand.
I am generally in support of the measure being introduced by the Minister which will help accelerate the infrastructural programme. Some roads projects are being held up because the land which the local authority is seeking to buy is liable to a 40% rate of capital gains tax. People are not inclined to sell, and because of this it is very difficult to conclude deals. If the issue goes to arbitration, people seek increased prices based on a higher tax take. The measure will free up the process and result in far more willing sellers. This will have an effect throughout the country as everywhere land is being acquired for new roads.
I generally support what the Minister is doing in this regard.
I generally do not support what is being done. I think we should approach it from the point of view of facilitating local authorities in building up land banks, be it by way of compulsory purchase, a proactive approach to facilitating zoning or by way of set-aside as was provided for in the original planning legislation. We should take an approach which deals with these issues rather than taking the tax based approach set out in the Bill. In reality most of the tax measures have already been introduced and to that extent the battle has been lost. Therefore, while I dissent from the continuation of these provisions, I accept that most of the tax issues have already been addressed.
Amendments Nos. 66 and 69 are related and may be discussed together by agreement.
I move amendment 66:
In page 100, to delete lines 31 and 32 and substitute the following:
"730A. -(1) In this Chapter and Chapter 5 of this Part-
"assurance company" means an assurance company chargeable to corporation tax;
"new basis business" means-".
Chapter 1, Part XXVI, section 706 of the Taxes Consolidation Act gives a definition of assurance companies which carries over into new Chapters 4 and 5 being inserted by section 48 of the Bill. However, that definition would include foreign life assurance companies which, having no taxable presence in the State, could sell life policies to Irish residents. The new life assurance "gross roll-up" regime, particularly the provisions of Chapter 5 which require companies to deduct tax from payments made to policy holders, is not intended to be applicable to such foreign companies. The amendment ensures that the new regime applies only to companies liable to tax in the State. As the definition of new basis business is drafted to be applicable for the purposes of both Chapter 4 and Chapter 5, amendment No. 69 removes an unnecessary cross-reference.
I commend amendments Nos. 66 and 69 to the committee.
I move amendment No. 67:
In page 101, line 30, to delete "on or".
Section 730A inserted by section 46 of the Bill sets out the meaning of "new basis business" of life assurance companies to which the new taxation regime will apply. Subsections (1)(c) and (2) of that section apply to an assurance company which had not commenced on 1 April 2000 and gives a choice as to whether it wants to be taxed under the old or new regimes in respect of business written up to 31 December 2000. However, the reference in subsection (2) is to a company beginning to carry on a business on or after 1 April 2000. This is a drafting error and should refer to a company beginning to carry on business after 1 April 2000.
I commend the amendment to the committee.
Am I correct in saying that the essence of this is that the basis of taxation for existing assurance business is being changed?
For existing policies.
So this is relevant to existing policies in the future.
Is this based on the contract assumption that the rules of the game could not be retrospectively changed?
No, these sections involved much consultation with industry representatives and very difficult negotiations, including the drafting of amendments. I understand it would have been possible to do this in a totally different way, which at one time we considered. In the Finance Bill I announced that we were in negotiations on how this would be achieved. During the course of negotiations this method was arrived at as the most appropriate. Originally we proposed doing it in a totally different way, namely, by valuing all policies on a certain date. Following discussions with industry representatives the method now proposed was seen as the most effective.
Is it fair to say that while the life assurance companies are not exactly delighted with what is being done, they are far more pleased than they were a few months ago?
Yes, they are more pleased. Naturally, they did not want an exit tax at the standard rate plus 3% - they would prefer a standard rate on its own. Most of the difficulties have been resolved and everybody welcomes the new way of doing things, namely, the gross roll-up which will be better for everybody. This puts those inside and outside the centre on a par, which is why we had to move in this regard.
Amendments Nos. 68, 70 and 71 are related and may be discussed together by agreement. Is that agreed? Agreed.
I move amendment No. 68:
In page 102, line 8, after "any" to insert "remaining".
Amendment Nos. 68, 70 and 71 are technical drafting amendments agreed with the Irish Insurance Federation which has been consulted during the drafting process. The federation sought these amendments to clarify the intention behind specific aspects of the new gross-roll-up regime. I commend these amendments to the committee.
I move amendment No. 69:
In page 102, lines 21 to 23, to delete "within the meaning of section 730A (inserted by the Finance Act, 2000),”.
I move amendment No. 70:
In page 102, line 28, to delete "or general annuity business" and substitute
", general annuity business or permanent health insurance business,".
I move amendment No. 71:
In page 102, lines 36 and 37, to delete "on the occasion" and substitute "in respect".
Amendment Nos. 72 and 73 are related and may be discussed together by agreement. Is that agreed? Agreed.
I move amendment No. 72:
In page 105, line 19, to delete "the total of all premiums" and substitute the following:
"subject to subsection (4), an amount of premiums (in this section referred to as 'allowable premiums') being the total of all premiums".
I propose to take amendments Nos. 72 and 73 together.
Subsection (3) of section 730D provides the amount of gain from which a life assurance company is to deduct tax when a payment is made to a policy holder and on the happening of certain other events. Unfortunately, the formulae given in that subsection do not give the correct result when such a gain arises after the assignment of a policy or after an earlier gain is deemed to arise on 31 December 2000. The first amendment is to link the existing subsection (3) of section 730D with the new subsection (4) being inserted by the second amendment. The second amendment in subsection (4) (b) and (c) is to correct the error to which I have just referred. Paragraph (a) of subsection (4) states what amount of premiums are to be treated as having been taken into account in determining a gain where the gain arises from the partial surrender or partial assignment of a life policy. Paragraph (d) of subsection (4) provides how a life policy is to be treated for tax purposes after it is partly assigned.
I commend these amendments to the committee.
I move amendment No. 73:
In page 105, between lines 38 and 39, to insert the following subsection:
"(4)(a) For the purposes of subsection (3), the amount of premiums taken into account in determining a gain on the happening of a chargeable event is, where the gain is determined-
(i) under paragraph (c) of subsection (3), an amount equal to-
(P x B)
(ii) under paragraph (d) of subsection (3), an amount equal to-
(P x A)
where P, A, B and V have, respectively, the meanings assigned to them in subsection (3).
(b) Where a chargeable event in relation to a life policy is deemed to happen on 31 December 2000 then, for the purposes of determining a gain arising on the happening of a subsequent chargeable event, the allowable premiums immediately after 31 December 2000 shall be deemed to be the greater of-
(i) an amount equal to the value of the policy immediately after 31 December 2000, and
(ii) the allowable premiums immediately before 31 December 2000.
(c) Where a chargeable event in relation to a life policy is an assignment of the whole of the rights conferred by the life policy then, for the purposes of determining a gain arising on the happening of a subsequent chargeable event, the allowable premiums immediately after the time of assignment shall be deemed to be the greater of-
(i) an amount equal to the value of the policy immediately after the time of the assignment, and
(ii) the allowable premiums immediately before the assignment.
(d) Where a chargeable event in relation to a life policy is the assignment of part of the rights conferred by the life policy then the policy shall, for the purposes of determining a gain arising on the happening of any subsequent chargeable event, be treated as if it were comprised of 2 policies, that is-
(i) one policy conferring the part of the rights assigned, the allowable premiums in respect of which immediately after the assignment are an amount equal to the value of the policy immediately after the assignment, and
(ii) the other policy conferring the rights which were not assigned, the allowable premiums in respect of which immediately after the assignment are the amount of the allowable premiums immediately before the assignment reduced by the amount of premiums taken into account in determining a gain on the assignment.".
Amendment Nos. 74 and 75 are related and may be discussed together by agreement. Is that agreed? Agreed.
I move amendment No. 74:
In page 107, to delete lines 52 to 54, and in page 108, to delete lines 1 to 9 and substitute the following:
"(a) where the chargeable event falls on or after 1 January 2001, at a rate determined by the formula-
(S + 3) per cent,
where S is the standard rate per cent (within the meaning of section 4), and
(b) where the chargeable event falls on or before 31 December 2000, at a rate of 40 per cent.”.
The new gross-roll-up tax regime for existing life assurance companies will start for policies and contracts entered into on or after 1 January 2001. However, any new company setting up between 1 April next and 31 December 2000 can elect to come within the new regime immediately. Under the new regime, there will not be annual tax on the income and gains of policy holders' funds, unlike under the current regime. New companies and their policy holders would, therefore, have a competitive advantage over existing business. In order to address this, section 730F imposes a tax charge at a rate of 40% on the growth in value of a life policy taken out with a new company from when the policy commenced until 31 December 2000. However, if significant growth were to occur, all a policy holder would have to do to avoid the 40% tax charge would be to redeem the policy on 30 December. This has been addressed in this amendment by ensuring that the tax charge is at a rate of 40% up to and including 31 December 2000 and at a rate of the standard income tax rate plus three percentage points thereafter.
Amendment No. 75 is to section 730G, which provides for making returns of tax deducted from policy holders by a life assurance company. Returns are to be made and tax is to be paid twice a year. The amendment ensures that the company must make a return even if tax has not been deducted. This will ensure that Revenue knows what the position is rather than wondering whether the company forgot to make its return or whether it did not have to deduct any tax for any period. I commend these amendments to the committee.
I move amendment No. 75:
In page 109, line 41, to delete "date." and substitute the following:
"date, and where it is the case, the return shall specify that there is no appropriate tax for the period in question.".
Further amendments of a technical nature will be tabled on Report Stage.
Amendment Nos. 76, 77 and 78 are related and may be discussed together, by agreement. Is that agreed? Agreed.
I move amendment No. 76:
In page 111, before section 47, to insert the following new section:
47.-Section 420 of the Principal Act is amended by the substitution for subsection (9) of the following:
'(9)(a) References in the preceding subsections to a surrendering company shall not include references to a company carrying on life business except to the extent that such life business is new basis business within the meaning of section 730A (inserted by the Finance Act, 2000).
(b) For the purposes of this section “life business” shall be construed in accordance with section 706(1).’.”.
I propose to deal with amendment Nos. 76, 77 and 78 together. These three amendments are connected with the introduction of the new gross-roll-up regime for the taxation of life assurance companies. Section 420 of the Taxes Consolidation Act makes provision to allow group relief, that is where one member of a group which incurs a trading loss can surrender that loss for set-off against profits of another member of the group. Because the profits and losses arising to a life assurance company were, in general, not computed on a normal trading "case 1" basis but rather on an historic "income less expenses" basis, access to the group relief provisions were denied to such companies. Under the new tax regime for life companies effective from 1 January next, profits and losses of new business of such companies will be computed under "case 1". In respect of this new business, therefore, under amendment No. 76, access to group relief is being allowed.
Under the existing domestic life assurance regime, there is an annual tax at the standard rate of income tax on the income and gains of the policy holder's fund. For a policy holder who is an individual, there is no further tax to pay on redemption of the policy. However, for a company, the proceeds on disposal of a life policy is grossed up at the standard rate of income tax and brought into account as a gain accruing to the company and included in profits with a tax credit being given at the standard rate of income tax. Under the gross-roll-up regime which involves an exit tax on redemption of a policy, this treatment of companies is being disapplied by amend-ment No. 77. Companies will in general suffer a similar exit tax as individuals on a redemption policy.
Section 710 (2) provides that IFSC life assurance companies are to be taxed in accordance with the rules applicable to case 1 of Schedule D. In effect, this means that the shareholders' profits are taxed at the 10% corporation tax rate and tax is not levied on policy holders' funds. From 1 January 2001, new business of all life assurance companies come within the new gross-roll-up regime. Amendment No. 78 to section 710(2) is to ensure that from 1 January 2001, the ongoing business of IFSC life assurance companies continues to be taxed under case 1 with the same rules applying as those for new business. Furthermore, the fact that from 1 January 2001, IFSC life assurance companies can begin to sell on the domestic market, will not disturb their case 1 status and their entitlement to the 10% corporation tax rate in so far as profits relate to selling to non-residents.
I commend these amendments to the committee.
I move amendment No. 77:
In page 111, before section 47, to insert the following new section:
47.-Section 595 of the Principal Act is amended in subsection (1)(a) by the substitution for the definition of ’relevant policy’ of the following definition:
'relevant policy' means a policy of life assurance or a contract for a deferred annuity on the life of a person, entered into or acquired by a company on or after 11 April 1994, which is not-
(a) a policy to which section 594 applies, or
(b) new basis business within the meaning of section 730A (inserted by the Finance Act, 2000).”.
I move amendment No. 78:
In page 111, before section 47, to insert the following new section:
47.-(1) Section 710 of the Principal Act is amended in subsection (2)(a)-
(a) by the substitution for ’where a company’s trading operations consist solely of a foreign life assurance business’ of ’where a company’s trading operations on 31 December 2000 consisted solely of foreign life assurance business’, and
(b) by the deletion of subparagraphs (iii) and (iv).
(2) Subsection (1) shall apply as respects the financial year 2001 and subsequent financial years.”.
I move amendment No. 79:
In page 112, paragraph (c), to delete lines 23 to 32 and substitute the following:
739A.-(1)(a) In this section ’undertaking for collective investment’ has the meaning assigned to it in section 738(1).
(b) Where an undertaking for collective investment (in this section referred to as the ’first undertaking’) disposes of assets (in this section referred to as ’transferred assets’) to another undertaking for collective investment in exchange for the issue of units to the first undertaking by that other undertaking for collective investment, no chargeable gains shall accrue to the first undertaking on that disposal.”.
This amendment is a drafting amendment to section 739A inserted by section 47 of the Bill as initiated. Section 739A facilitates the reorganisation of an undertaking of collective investment which is the description in the legislation of domestic funds vehicles. Under the section, no chargeable gain arises on the transfer of assets of such an undertaking to another such undertaking where the transfer is a part of a reorganisation. This amendment is to provide a definition of such undertakings, which was omitted from the Bill as initiated.
I commend this amendment to the committee.
Chapter 1 of Part 27 deals with the existing tax regime which applies to domestic collective funds. That regime involves an annual tax at the level of the fund and will continue for funds in existence on 31 March next. Section 48 provides that new funds created after that date will have a gross-roll-up tax regime, that is, the only tax which will apply is an exit tax on payments made to unit holders. Section 47 amends the existing tax regime in three ways. First, because income tax on salaries will be at 22% from 6 April next and capital gains tax will be at the rate of 20%, the favourable tax treatment of 20% which has been enjoyed by a type of unit trust known as special investment schemes is no longer of significance. Furthermore, under section 48, the relaxation of collective funds will move to a regime where there will be no annual tax at fund level. Therefore, under paragraph (a) no further such schemes will be set up after 31 December next. Second, because of the continuing reduction in the corporation tax rate which was provided for in last year's Finance Bill, the mechanism of the legislation provides that collective funds where companies pay tax on income and gains at the standard rate of income tax will give an incorrect result. Paragraph (b) ensures that the terms under the legislation provides for the correct tax liability.
Paragraph (c) introduces a new section to allow reorganisation of domestic collective funds without triggering a tax charge. This section allows one fund to transfer all its assets to another fund in exchange for the issue of units to that other fund. There is no capital gains tax charge on the transfer of those assets. When the units required in return for the transferred assets are themselves disposed of, the cost of the units for capital gains tax purposes will be the cost of the assets transferred or, where any of those assets have been subject to a deemed disposal and regular acquisition under the tax Acts, the value thereof at the time and date of such disposal.
Are we dealing with the taxation of the fund, the taxation of the recipient from a pay out from the fund, or both?
No, we are dealing with the taxation of the fund. The policy holder will not know any different. It should be possible to see the growth of the fund as it progresses. This should be beneficial to the growth of the fund because money will not have to be taken out each year for tax purposes. This is how it has been sold to the industry. In the end, there will be a standard rate of tax, plus 3%.
As the Minister says, the advantage of these funds has been the reduction of investment in Irish equities. They have been reducing in any event in recent years.
Is it necessary to make it impossible to set up such funds in the future or is it expected to happen anyway?
The interest was changed because it was felt it would not be maintained. They did not protest too loudly about it.
Does the Minister expect it to make a difference in terms of the attractiveness or otherwise of Irish products?
Amendments Nos. 80, 84, 85, 86. 94, 95, 97, 98, 99, 102, 103, 118, 119, 121 and 124 are related and will be discussed together by agreement.
I move amendment No. 80:
In page 113, subsection (1), between lines 9 and 10, to insert the following:
" 'approved minimum retirement fund' has the meaning assigned to it in section 784C;
'approved retirement fund' has the meaning assigned to it in section 784A;".
These amendments allow three further categories of investors in investment to have gross payments made to them. In the Bill as initiated gross payments can be made to pension schemes, life assurance companies, other investment undertakings, special investment schemes, certain unit trusts and charities. The new categories being added by these amendments are approved retirement funds, approved minimum retirement funds and certain companies in the IFSC. As with the existing categories, a declaration procedure governs the entitlement of any of these entities to have payments made gross and, therefore, these amendments provide for such declarations. Because the introduction of these new declarations has disturbed the numbering system in the Bill, eight of these amendments are for the purposes of re-numbering. I commend the amendments to the committee.
Amendments Nos. 81 and 83 are related and will be discussed together by agreement.
I move amendment No. 81:
In page 113, subsection (1), to delete lines 47 to 49, and in page 114, to delete lines 1 and 2 and substitute the following:
"but does not include-
(A) any exchange of units in a sub-fund of an investment undertaking which is an umbrella scheme, for units in another sub-fund of that investment undertaking, and
(B) any transaction in relation to, or in respect of, units which are held in a recognised clearing system;".
Where units in collective funds are traded in the market and held in a clearing system, it is not possible for the administrators to establish whether a particular seller is resident or ordinarily in the State. That being so, and since some of our funds in the IFSC are held in a clearing system, it is appropriate that the units in such funds be taken out of the exit tax regime which is imposed generally by section 48. That is what the two amendments do. I commend the amendments to the committee.
I move amendment No. 82:
In page 115, to delete lines 50 and 51, and in page 116, to delete lines 1 to 12 and substitute the following:
"(II) each of the shareholders of which is a collective investor,
(d) an investment limited partnership (within the meaning of the Investment Limited Partnerships Act, 1994),”.
The types of investment vehicles at present available to the IFSC funds industry are unit trusts, undertakings for collective investment under the EU directive, certain investment companies and investment limited partnerships. When providing for the investment vehicle which will be available for both IFSC and domestic funds in the new gross-roll-up regime, it was unclear at the time of drafting the Bill whether all these vehicles were necessary. Following consultations with the IFSC funds industry all the investment vehicles currently available to the IFSC regime will continue to be available. This amendment, therefore, includes in the definition of "investment undertakings", certain investment companies and investment limited partnerships. I commend the amendment to the committee.
I move amendment No. 83:
In page 116, between lines 43 and 44, to insert the following:
" 'recognised clearing system' means any system for clearing units which is for the time being designated for the purposes of this Chapter by order of the Revenue Commissioners as a recognised clearing system;".
I move amendment No. 84:
In page 116, between lines 43 and 44, to insert the following:
" 'qualifying fund manager' has the meaning assigned to it in section 784A;".
I move amendment No. 85:
In page 116, between lines 43 and 44, to insert the following:
" 'qualifying management company' has the meaning assigned to it in section 734(1);".
I move amendment No. 86:
In page 117, to delete lines 44 to 46 and substitute the following:
" 'specified collective investment undertaking' and 'specified company' have, respectively, the meanings assigned to them in section 734(1);".
I move amendment No. 87:
In page 118, line 48, to delete "purposes." and substitute the following:
"purposes; but such construction shall not render the trustee, management company or other such person liable in a personal capacity to any tax imposed by this Chapter on an investment undertaking.".
This amendment is to subsection (2) of section 739B, inserted by section 48 of the Bill. That subsection provides that where it is necessary for any purpose of the new gross-roll-up funds regime to address matters to the fund's trustee or administrator rather than the fund itself, that can be done. Funds can be nebulous entities and do not necessarily have any legal personality.
This amendment, however, removes beyond doubt, that any tax liability which arises to a fund from the new regime is the liability of the fund and not that or the trustee or administrator in a personal capacity. I commend the amendment to the committee.
Amendments Nos. 88, 89, 90, 92, 93, 96, 101, 104, 110 to 117, inclusive, 120, 122 and 125 are related and will be discussed together by agreement.
I move amendment No. 88:
In page 120, line 11, to delete "and".
From 1 April next, existing funds in the IFSC come into the new funds regime. Whereas IFSC funds always have had gross-roll-up, they were precluded from selling units on the domestic market other than to certain other IFSC entities. The first two amendments ensure that where the question arises as to how much a person has invested in an investment undertaking which was an IFSC fund, the answer is the amount invested by the unit holder in the IFSC fund, before it came into the new regime.
In calculating the amount of gain arising on the disposal or transfer of units in a fund, where not all units of a unit holder are sold, the Bill provides that an average cost of all units held is to be used. At the request of the funds industry, an alternative method of computation has been provided by amendments Nos. 90 and 92. This is the FIFO, or first in first out basis. As amendment No. 92 introduces a new subsection (5) into section 739D, the remaining 15 amendments are for the purposes of renumbering cross-references. I commend these amendments to the committee.
I move amendment No. 89:
In page 120, line 29, to delete "unit." and substitute the following:
(c) references to an amount invested by a unit holder in an investment undertaking for the acquisition of a unit shall, where the investment undertaking was on 31 March 2000 a specified collective investment undertaking and the unit was at that time a unit (within the meaning of section 734(1)) held by the unit holder as a unit holder (within the meaning of the said section) in relation to the specified collective investment undertaking, be references to the amount invested by the unit holder for the acquisition of the unit (within the said meaning) of the specified collective investment undertaking, or where that unit was otherwise acquired by the unit holder, the value of that unit as its date of acquisition by the unit holder.”.
I move amendment No. 90:
In page 121, to delete lines 1 to 9 and substitute the following:
(i) the amount determined under subsection (3), or
(ii) where the investment undertaking has made an election under subsection (5), the amount of the payment reduced by the amount invested by the unit holder in the investment undertaking in acquiring the unit, and where the unit was otherwise acquired by the unit holder, the amount so invested shall be the value of the unit at the time of its acquisition by the unit holder,
(d) where the chargeable event is the transfer by a unit holder of entitlement to a unit,
(i) the amount determined under subsection (4), or
(ii) where the investment undertaking has made an election under subsection (5), the value of the unit transferred at the time of transfer reduced by the amount invested by the unit holder in the investment undertaking in acquiring the unit, and where the unit was otherwise acquired by the unit holder, the amount so invested shall be the value of the unit at the time of its acquisition by the unit holder, and".
I move amendment No. 91:
In page 121, lines 29 and 30, to delete "subsection 2(c)” and substitute “subsection (2)(c)”.
This amendment seeks to correct a drafting amendment whereby brackets were omitted from the designation of a subsection. I commend the amendment to the committee.
I move amendment No. 92:
In page 123, between lines 10 and 11, to insert the following subsection:
"(5) The election referred to in paragraphs (c) and (d) of subsection (2) is an irrevocable election made by an investment undertaking-
(a) at the time it is set up or commenced, or
(b) where the investment undertaking was on 31 March 2000 a specified collective investment undertaking, on 1 April 2000, in respect of all its unit holders at that time or any future time, so that, for the purposes of identifying units acquired with units subsequently disposed of by a unit holder, units acquired at an earlier time are deemed to have been disposed of before units acquired at a later time.”.
I move amendment No. 93:
In page 123, line 11, to delete "(5)" and substitute "(6)".
I move amendment No. 94:
In page 123, line 49, to delete "or".
I move amendment No. 95:
In page 124, between lines 8 and 9, to insert the following:
"(g) is a qualifying management company or a specified company and has made a declaration to the investment undertaking in accordance with paragraph 8 of Schedule 2B, or
(h) is a person who is entitled to exemption from income tax and capital gains tax by virtue of section 784A(2) (as amended by the Finance Act, 2000) and the units held are assets of an approved retirement fund or an approved minimum retirement fund and the qualifying fund manager has made a declaration to the investment undertaking in accordance with paragraph 9 of Schedule 2B,”.
I move amendment No. 96:
In page 124, line 13, to delete "(6) Subject to subsection (7)" and substitute "(7) Subject to subsection (8)".
I move amendment No. 97:
In page 124, line 23, to delete "8" and substitute "10".
I move amendment No. 98:
In page 124, line 27, to delete "9" and substitute "11".
I move amendment No. 99:
In page 124, lines 40 and 41, to delete "8(g) or 9(f)” and substitute “10(g) or 11(f)”.
Amendment No. 123 is related to amendment No. 100 is related and they may be taken together by agreement.
I move amendment No. 100:
In page 124, to delete lines 49 to 51, and in page 125, to delete lines 1 to 14 and substitute the following:
"(8) (a) A gain shall not be treated as arising to an investment undertaking on the happening of a chargeable event in respect of a unit holder where-
(i) the investment undertaking was on 31 March 2000 a specified investment undertaking and the unit holder was a unit holder (within the meaning of section 734(1)) in relation to that specified collective investment undertaking at that time, and
(ii) the investment undertaking on or before 30 June 2000 makes to the Collector-General a declaration in accordance with paragraph 12 of Schedule 2B,
otherwise than, subject to paragraph (b), in respect of a unit holder (in this subsection and in section 739G referred to as an ’excepted unit holder’)-
(A) whose name is included in the schedule to the declaration by virtue of paragraph 12(d) of Schedule 2B, and
(B) who has not made a declaration of a kind referred to in subsection (5) to the investment undertaking.
(b) A gain shall not be treated as arising to an investment undertaking on the happening of a chargeable event in respect of an excepted unit holder where the chargeable event is deemed to happen on 31 December 2000.”.
These amendments are redrafts of the transitional provisions under which existing IFSC funds move on 1 April next from being almost exclusively investment vehicles for non-residents to being open to Irish investors generally.
The non-resident unit holders in these IFSC funds as at 31 March next will not be required to make a non-resident declaration to ensure future payments without the deduction of tax. However, these funds are required to make a declaration to the Revenue by 30 June 2000, declaring that, apart from named exceptions, all their unit holders as at 1 April 2000 are non-resident. Unless the persons included in those exceptions are entitled to and make a declaration under the new regime, so that they can be paid gross, the fund will have to deduct an exit tax on all future payments to them. The one exception to this is where a deemed tax charge arises on 31 December 2000. This deemed tax charge is provided to ensure fair competition between the funds industry and the life assurance industry who cannot avail of the "gross roll-up" regime until 1 January 2001. As the trust deed of many funds would not entitle them to cancel units of a unit holder in order to pay the tax arising on 31 December 2000, that tax liability is transferred to the unit holder himself or herself.
I commend these amendments to the committee.
Was there consultation on this with the industry?
They are happy with this.
What is the position with Irish residents' investments.
They are available to Irish residents because there was a problem with the Spanish authorities. They were claiming that because IFSC companies were unable to sell into the Irish market it meant they were not properly regulated which, of course, had nothing to do with the Central Bank regulation. There is an argument in that regard with the EU, but allowing them sell into Ireland - even if that does not take place until after 1 January next - will resolve the problem.
I move amendment No. 101:
In page 125, line 15, to delete "(8) and substitute "(9)".
I move amendment No. 102:
In page 125, line 25, to delete "11" and substitute "13".
I move amendment No. 103:
In page 125, line 38, to delete "11(e)” and substitute “13(e)”.
I move amendment No. 104:
In page 125, line 48, to delete "(9)" and substitute "10".
Amendment No. 109 is related to amendment No. 105 and they may be taken together by agreement.
I move amendment No. 105:
In page 126, line 2, to delete "section 739F" and substitute "sections 739F and 739G".
These amendments expand the provisions in the Bill relating to the taxation of unit holders and include a new provision to deal with a reorganisation of investment undertakings, following representations from the funds industry. Subsection (1) of the new section 739G deals with the transition for existing IFSC funds to the new regime. As I mentioned in an earlier amendment, these funds have to take responsibility for informing Revenue of any resident unit holders as at 1 April 2000, when they enter the new regime. If such a person is not entitled to make or does not make an appropriate declaration under the legislation to the investment undertaking an exit tax will apply to any payments made to the person. In addition, there will be a deemed tax liability arising on 31 December 2000. In order to meet this liability an investment undertaking might have to cancel units of a unit holder. This may, however, be ultra vires the trust deed establishing the investment undertaking. Subsection (1), therefore, makes this liability a liability of the unit holder himself or herself.
Subsection (2) of section 739G provides that the tax deducted by an investment undertaking on payment to an individual represents a final liability. There is no more tax to pay. In the case of units held by a company as an investment, regular income payments are treated as being income chargeable to tax under Case IV from which income tax at the standard rate has been deducted. Other payments to a company are not brought into account - the tax deducted from the payment is a final tax.
In the case of units held by a company as trading stock, all payments plus tax deducted are treated as an income of the company with the tax deducted being allowable as a credit against the resulting tax liability. Where the payment is in respect of the sale of a unit the amount of income represented by the payment and the tax deducted is reduced by the cost of the units to give the net profit on sale. A credit for or a repayment of tax deducted by an investment undertaking is only available to a unit holder which is a company.
The new section 739H permits a reorganisation of investment undertakings to take place without triggering a tax charge for unit holders. Under such a reorganisation all the assets of one undertaking are transferred to another undertaking. That other undertaking issues units to the unit holders in the old undertaking in exchange for that transfer and the units in the old undertaking are then cancelled. The cancellation of the old units will not trigger a tax charge but when the holder of the new units comes to dispose ofthose new units, the gain is calculated on the basis of the cost of the original units held by that person.
I commend these amendments to the Committee.
Is the formula of (S + 3) per cent, S being the standard rate as per section 4, simply to allow for variations of the standard rate in future?
Will the Minister not write in 25%.
No. The old system which existed was a complicated income tax system and a capital gains tax system. It was related to the DIRT tax rate - the old system of a standard rate of income tax.
Is the gain in terms of this amendment paid on the basis of transferring units as between funds following reorganisation and on the original acquisition as opposed to when they were transferred?
I understand the application of the (S + 3) per cent, but what is the position when the rate of 40% applies?
The Select Committee went into private session.
Amendments Nos. 106, 107 and 108 are related and will be taken together by agreement.
I move amendment No. 106:
In page 126, to delete lines 15 to 27 and substitute the following:
"(b) where the chargeable event happens on or after 1 January 2001 and the amount of the gain is provided by paragraph (b), (c) or (d) of section 739D(2), at a rate determined by the formula:
(S + 3) per cent,
where S is the standard rate per cent (within the meaning of section 4), and
(c) where the chargeable event happens in the period commencing on 1 April 2000 and ending on 31 December 2000 and the amount of the gain is provided by paragraph (b), (c), (d) or
(e) of section 739D(2), at a rate of 40 per cent.”.
Amendment No. 106 provides that where a payment is made on or after 1 January 2001 to a unit holder in the fund and the payment is not a regular income payment, the tax rate which applies is the standard rate of income tax plus three percentage points. A regular income payment suffers tax at the standard rate of income tax.
A payment, other than a regular income payment, made in the period 1 April to 31 December 2000, and again which is deemed to arise on 31 December 2000 will be liable to tax at 40%.
Amendment No. 107, which was tabled at the request of the funds industry, strengthens the legal entitlement of an investment undertaking to deduct the tax required by the legislation. The words added by this amendment are essentially that the investment undertaking shall be acquitted and discharged of any deduction made of any appropriation units for the purposes of meeting a tax liability.
Amendment No. 108 ensures that even when an investment undertaking deducts no tax in the six month period for which a return is required, it is still obliged to make what is known as a nil return. Many IFSC funds would be slow to open up to the domestic market and, therefore, will not be obliged to deduct any tax. Proper administration, however, is important and Revenue can distinguish whether no tax has been deducted or the investment undertaking forgot to make a return. I commend the amendments to the committee.
I move amendment No. 107:
In page 126, to delete lines 38 to 52, and in page 127, to delete lines 1 to 6 and substitute the following:
"event, where the chargeable event is:
(a) the making of a payment to a unit holder, be entitled to deduct from the payment an amount equal to the appropriate tax,
(b) (i) the transfer by a unit holder of entitlement to a unit, or
(ii) deemed to happen on 31 December 2000,
be entitled to appropriate or cancel such units of the unit holder as are required to meet the amount of appropriate tax,
and the investment undertaking shall be acquitted and discharged of such deduction or, as the case may be, such appropriation or cancellation as if the amount of appropriate tax had been paid to the unit holder and the unit holder shall allow such deduction or, as the case may be, such appropriation or cancellation.".
I move amendment No. 108:
In page 127, line 29, to delete "date." and substitute the following:
"date, and where it is the case, the return shall specify that there is no appropriate tax for the period in question.".
I move amendment No. 109:
In page 129, to delete lines 34 to 55, and in page 130, to delete lines 1 to 22 and substitute the following:
"739G.-(1) Where a chargeable event in relation to an investment undertaking in respect of a unit holder is deemed to happen on 31 December 2000 and the unit holder is an excepted unit holder referred to in section 739D(8), the unit holder shall be treated for all the purposes of the Capital Gains Tax Acts as if the amount of the gain which, but for section 739D(8)(b), would have arisen to the investment undertaking on the happening of the chargeable event, were a chargeable gain accruing to the unit holder at that time and notwithstanding section 28, the rate of capital gains tax in respect of that chargeable gain shall be 40 per cent.
(2) As respects a payment in money or money's worth to a unit holder by reason of rights conferred on the unit holder as a result of holding units in an investment undertaking to which this Chapter applies——
(a) where the unit holder is not a company the payment shall not be reckoned in computing the total income of the unit holder for the purposes of the Income Tax Acts,
(b) where the payment is a relevant payment from which appropriate tax has been deducted, and apart from this paragraph the payment would be taken into account for the purposes of computing a company’s income chargeable to corporation tax, subject to paragraph (c), the amount received by the company shall be treated as if it were the net amount of an annual payment chargeable to tax under Case IV of Schedule D from the gross amount of which income tax has been deducted at the standard rate,
(c) where appropriate tax has been deducted from a payment and the unit holder is chargeable to tax on the payment under Case I of Schedule D-
(i) subject to subparagraph (ii), the amount received by the unit holder increased by the amount of appropriate tax so deducted shall be income of the unit holder for the chargeable period in which the payment is made,
(ii) where the payment is made on the cancellation, redemption or repurchase of units by the investment undertaking, such income shall be reduced by the amount of the consideration in money or money's worth given by the unit holder for the acquisition of those units, and
(iii) the amount of appropriate tax shall be set off against corporation tax assessable on the unit holder for the chargeable period in which the payment is made,
(d) no repayment of appropriate tax shall be made to any person who is not a company within the charge to corporation tax.
739H.-(1) In this section-
'exchange', in relation to a scheme of reconstruction or amalgamation, means the issue of units (in this section referred to as 'new units') by an investment undertaking (in this section referred to as the 'new undertaking') to the unit holders of another investment undertaking (in this section referred to as the 'old undertaking') in respect of and in proportion to (or as nearly as may be in proportion to) their holdings of units (in this section referred to as 'old units') in the old undertaking in exchange for the transfer by the old undertaking of all its assets and liabilities to the new undertaking where the exchange is entered into for the purposes of or in connection with a scheme of reconstruction or amalgamation;
'scheme of reconstruction or amalgamation' means a scheme for the reconstruction of any investment undertaking or investment undertakings or the amalgamation of any 2 or more investment undertakings.
(2) The cancellation of old units arising from an exchange in relation to a scheme of reconstruction or amalgamation shall not be a chargeable event and the amount invested by a unit holder for the acquisition of the new units shall for the purposes of this Chapter be the amount invested by the unit holder for the acquisition of the old units.".
I move amendment No. 110:
In page 131, line 10, to delete "739D(5)(a)” and substitute “739D(6)(a)”.
I move amendment No. 111:
In page 132, line 4, to delete "379D(5)(b)” and substitute “739D(6)(b)”.
I move amendment No. 112:
In page 132, line 37, to delete "739D(5)(c)” and substitute “739D(6)(c)”.
I move amendment No. 113:
In page 133, line 19, to delete "739D(5)(d)” and substitute “739D(6)(d)”.
I move amendment No. 114:
In page 133, line 50, to delete "739D(5)(e)” and substitute “739D(6)(e)”.
I move amendment No. 115:
In page 134, line 29, to delete "739D(5)(f)” and substitute “739D(6)(f)”.
I move amendment No. 116:
In page 134, line 48, to delete "739D(5)(f)(i)“and substitute “739D(6)(f)(i)”.
I move amendment No. 117:
In page 135, line 30, to delete "379D(5)(f)(i)” and substitute “739D(6)(f)(i)”.
I move amendment No. 118:
In page 135, between lines 39 and 40, to insert the following:
"Declaration of qualifying management company and specified company
8. The declaration referred to in section 739D(6)(g) is a declaration in writing to the investment undertaking which-
(a) is made by a person (in this paragraph referred to as the ’declarer’) who is entitled to the units in respect of which the declaration is made,
(b) is signed by the declarer,
(c) is made in such form as may be prescribed or authorised by the Revenue Commissioners,
(d) declares that, at the time the declaration is made, the person entitled to the units is a qualifying management company or, as the case may be, a specified company,
(e) contains the name and tax reference number of the declarer, and
(f) contains such other information as the Revenue Commissioners may reasonably require for the purposes of Chapter 1A of Part 27.
Declaration of qualifying fund manager
9. The declaration referred to in section 739D(6)(h) is a declaration in writing to the investment undertaking which-
(a) is made by a qualifying fund manager (in this paragraph referred to as the ’declarer’) in respect of units which are assets in an approved retirement fund or, as the case may be, an approved minimum retirement fund,
(b) is signed by the declarer,
(c) is made in such form as may be prescribed or authorised by the Revenue Commissioners,
(d) declares that, at the time when the declaration is made, the units in respect of which the declaration is made-
(i) are assets of an approved retirement fund or, as the case may be, an approved minimum retirement fund, and
(ii) are managed by the declarer for the individual who is beneficially entitled to the units,
(e) contains the name, address and tax reference number of the individual referred to in subparagraph (d),
(f) contains an undertaking by the declarer that if the units cease to be assets of the approved retirement fund or, as the case may be, the approved minimum retirement fund, including a case where the units are transferred to another such fund, the declarer will notify the investment undertaking accordingly, and
(g) contains such other information as the Revenue Commissioners may reasonably require for the purposes of Chapter 1A of Part 27.”.
I move amendment No. 119:
In page 135, line 42, to delete "8" and substitute "10".
I move amendment No. 120:
In page 135, line 43, to delete "739D(6)(a)(i)” and substitute “739D(7)(a)(i)”.
I move amendment No. 121:
In page 136, line 26, to delete "9" and substitute "11".
I move amendment No. 122:
In page 136, line 27, to delete "739D(6)(a)(ii)” and substitute “739D(7)(a)(ii)”.
I move amendment No. 123:
In page 137, to delete lines 12 to 35 and substitute the following:
"12. The declaration referred to in section 739D(8)(a) is a declaration in writing to the Collector-General which-
(a) is made and signed by the investment undertaking,
(b) is made in such form as may be prescribed or authorised by the Revenue Commissioners,
(c) contains the name, address and tax reference number of the investment undertaking,
(d) declares that, to the best of the investment undertaking’s knowledge and belief, no units in the investment undertaking were held on 1 April 2000 by a person who was resident in the State at that time, other than such persons whose names and addresses are set out on the schedule to the declaration, and
(e) contains a schedule which sets out the name and address of each person who on 1 April 2000 was a unit holder in the investment undertaking and who was on that date, resident in the State.”.
I move amendment No. 124:
In page 137, line 37, to delete "11" and substitute "13".
I move amendment No. 125:
In page 137, line 38, to delete "739D(8)(a)” and substitute “739D(9)(a)”.
I move amendment No. 126:
In page 138, line 2, after "declaration," to insert "to the best of the intermediary's knowledge and belief,".
Under paragraph 11, which will become paragraph 13 of Schedule 2 (b) included in section 48 of the Bill, is the detail to be included in a declaration to be made by an intermediary to ensure the payments to him or her on behalf of the unit holders of a fund are made gross. The intermediary is required to declare that the person on behalf of whom the declaration is made is not resident or ordinarily resident in the State. This amendment requires that the intermediary makes such a declaration in accordance with his or her knowledge and belief. That is all one could expect of a foreign intermediary.
I commend the amendment to the committee.
Will there be an obligation on the intermediary to improve his knowledge before he makes such a declaration? It is an "I know nothing" provision and does not mean much.
The Select Committee went into private session at 3.37 p.m. and resumed in public session at 3.40 p.m.
I move amendment No. 127:
In page 138, line 21, to delete "paragraph" and substitute "subparagraph".
This amendment is to correct a drafting error whereby a subparagraph was incorrectly referred to as a paragraph. I commend the amendment to the committee.
A few further amendments of a technical nature to section 48 will be put down on Report Stage.
Several amendments have been tabled concerning the Irish Financial Services Centre. Can the officials of the Revenue Commissioners tell us of the concerns in the industry regarding DIRT audits?
The Select Committee went into private session at 3.42 p.m. and resumed in public session at 3.49 p.m.
Amendment No. 129 is an alternative to amendment No. 128 and amendment No. 130 is related. Amendments Nos. 128, 129 and 130 may be discussed together, by agreement.
I move amendment No. 128:
In page 139, lines 2 to 4, to delete paragraph (a) and substitute the following:
"(a) in paragraph (c) of subsection (1) by the substitution of ’6 April 2003’ for ’the 6th day of April, 2000,’, and”.
Amendment No. 128 is a technical amendment to correct a drafting error.
Amendment No. 130 in my name and amendment No. 129 in the names of Deputies Noonan and Deenihan propose to amend section 50 of the Bill which deals with a special capital allowances scheme for farm pollution control.
This scheme of capital allowances was introduced in 1997 for farmers in respect of expenditure incurred by them on necessary control measures. Under that scheme which applied for three years from 6 April 1997 to 5 April 2000, a special year one allowance of 50% of expenditure incurred up to an expenditure of £20,000 was provided for and the balance of the expenditure was to be written off over seven years. In 1998 the year one expenditure was increased to £30,000. This pollution control scheme is being amended in section 50 to extend the scheme to 6 April 2003 and also to provide for an increase in the first year expenditure level of £40,000 which I announced in my budget speech on 1 December 1999.
Arising from the farm taxation proposals in the Programme for Prosperity and Fairness I am now proposing a further enhancement of the scheme as follows: a reduction in the writing down period from eight years to seven years; an increase in first year expenditure limit to £50,000 and the option to claim the lesser of 50% of that increased expenditure limit of £50,000 or £25,000 in either of the first two years of the writing down period.
The amendment in the names of Deputies Noonan and Deenihan proposed to extend the scheme to 5 April 2005. As I have outlined, this scheme has been in existence since 1997. I extended the scheme for a further three years in my budget speech and increased the year one expenditure limit. The terms of the scheme have been further generously enhanced under the Programme for Prosperity and Fairness. I do not consider it prudent or necessary at this stage to extend the scheme further and must reject the amendment in the names of Deputies Noonan and Deenihan. In these circumstances I commend my amendments to the committee.
Amendment No. 129 seeks a further extension of the scheme to 2005. There is much concern that necessary anti-pollution works in farmyards will be carried out quickly. Deadlines have been missed previously and people have to be given scope so that the extra two years are justified. I wish to indicate I shall move an amendment on Report Stage to change the pace of the acceleration provided for in the section and altered in amendment No. 130. Some of the farming representatives are not happy with what the Minister is doing in that it does not fully reflect the paragraph in the Programme for Prosperity and Fairness. They are seeking an additional acceleration and a combination of year one and year two expenditure levels to exceed 50%.
On the latter point regarding the capital allowances acceleration part of these amendments, my officials have been in contact with the ICMSA. I think we can make an amendment. Therefore, I will bring in an appropriate amendment on Report Stage which will satisfy the farming organisations concerned. I know they were also in touch with Deputy Noonan.
I will table an amendment along the lines they have suggested which will act as a prompt and I will withdraw it when the Minister tables an appropriate amendment.
For the sake of my education in these matters, what is a farm nutrient management plan?
We always come with reserves.
Given the way things are going the Minister has more than the Army, or will have shortly.
This is another field of expertise from agriculture. We will have to get a detailed note about farm nutrient management to the Deputy.
I assume the Minister had to produce a plan to the Department saying this is how he intends to control waste, pollution and so on. Is that it and that the expenditure is contingent on that?
I had a degree of responsibility for this in a former life. It is about managing, storing and spreading farm waste on the land at certain times of the year.
The nutrient management——
It is very much part of the REPS scheme. One has to produce a farm nutrient management proposal to qualify for REPS. Obviously this is an extension of that idea.
It is explained to Deputy McDowell.
I move amendment No. 130:
In page 139, lines 5 to 19, to delete paragraph (b) and substitute the following:
"(b) (i) by the substitution of the following for subsection (2):
'(2)(a) Subject to the provisions of Article 6 of Council Regulation (EEC) No. 2328/91 of 15 July 1991, on improving the efficiency of agricultural structures, as amended, and subject to subsection (3) and (3A), where a person to whom this section applies-
(i) has delivered to the Department of Agriculture, Food and Rural Development a farm nutrient management plan referred to in subsection (1)(b), and
(ii) incurs capital expenditure to which subsection (1) applies, there shall be made to such person during the writing-down periods, specified in paragraph (b), writing-down allowances (in this section referred to as “farm pollution control allowances“) in respect of that expenditure and such allowances shall be made in taxing the trade.
(b) The writing-down periods referred to in paragraph (a) shall be-
(i) 8 years beginning with the chargeable period related to the capital expenditure, where that expenditure is incurred before 6 April 2000, or
(ii) 7 years beginning with the chargeable period related to the capital expenditure, where that expenditure is incurred on or after 6 April 2000,',
(ii) in subsection (3) by the substitution of the following paragraph for paragraph (a):
'(a) as respect the first year of the writing-down period referred to in subsection (2)(b)(i), where the capital expenditure was incurred-
(i) before 6 April 1998, an amount equal to 50 per cent of that expenditure or £10,000, whichever is the lesser,
(ii) on or after 6 April 1998 and before 6 April 2000, an amount equal to 50 per cent of that expenditure or ,15,000, whichever is the lesser,',
(iii) by the insertion of the following subsection after subsection (3):
'(3A) (a) The farm pollution control allowances to be made in accordance with subsection (2) during the writing-down period referred to in subsection (2)(b)(ii), in respect of capital expenditure incurred on or after 6 April 2000 shall, subject to paragraphs (b) and (c), be an amount equal to-
(i) 15 per cent of that expenditure incurred for each of the first 6 years of the writing-down period, and
(ii) 10 per cent of that expenditure for the last year of the writing-down period.
(b) Where, in respect of capital expenditure incurred in a chargeable period an allowance is to be made in accordance with paragraph (a), that allowance may, subject to paragraph (c), be increased in either the first or the second year of the writing-down period to an amount equal to 50 per cent of the capital expenditure incurred or £25,000, whichever is the lesser.
(c) Where, in respect of capital expenditure incurred in a chargeable period, paragraph (b) applies to an allowance to be made in either of the first 2 years of the writing-down period referred to in paragraph (a), the farm pollution control allowances to be made for each subsequent year of the writing-down period in respect of the balance of that expenditure, after deducting the amount of the allowances made in the previous year, or, as the case may be, years of the writing-down period, shall, in lieu of those specified in paragraph (a), be such amounts as provide that the balance of the expenditure is written off in equal parts over the remaining years of the writing-down period.’.”.
I move amendment No. 131:
In page 139, before section 51, to insert the following new section:
"51.-The Principal Act is amended-
(a) in Part 1, by the substitution for paragraph (b) of the definition of ’capital allowance’ in section 2(1) of the following:
(b) Part 23,’,
(b) in Part 23, by the insertion after Chapter 2 of the following:
669A. - (1) In this Chapter-
"lessee" has the same meaning as in Chapter 8 of Part 4;
"levy" means the levy referred to in Council Regulation (EEC) No. 3950 of 28 December
19921, as amended;
"milk" means the produce of the milking of one or more cows and "other milk products" includes cream, butter and cheese;
"milk quota" means-
(a) the quantity of a milk or other milk products which may be supplied by a person carrying on farming, in the course of a trade of farming land occupied by such person to a purchaser in a milk quota year without that person being liable to pay a levy, or
(b) the quantity of a milk or other milk products which may be sold or transferred free for direct consumption by a person carrying on farming, in the course of a trade of farming land occupied by such person in a milk quota year without that person being liable to pay a levy;
"milk quota restructuring scheme" means a scheme introduced by the Minister for Agriculture, Food and Rural Development under the provisions of Article 8(b) of Council Regulation (EEC) No. 3950 of 28 December 1992, as amended;
"milk quota year" means a twelve month period beginning on 1 April and ending on the following 31 March;
"purchaser" has the meaning assigned to it under Council Regulation (EEC) No. 3950 of 28 December 1992;
"qualifying expenditure" means-
(a) in the case of milk quota to which paragraph (a) of the definition of “qualifying quota” refers, the amount of the capital expenditure incurred on the purchase of that qualifying quota, and
(b) in the case of milk quota to which paragraph (b) of the definition of “qualifying quota” refers, the lesser of-
(i) the amount of capital expenditure incurred on the purchase of that qualifying quota, or
(ii) the amount of capital expenditure which would have been incurred on the purchase of that qualifying quota if the price paid were the maximum price for the milk quota year in which the purchase took place as set by the Minister for Agriculture, Food and Rural Development for the purposes of a Milk Quota Restructuring Scheme;
"qualifying quota" means-
(a) a milk quota purchased by a milk producer after 1 April 2000 under a Milk Quota Restructuring Scheme, or
(b) a milk quota purchased by a lessee who entered into a lease agreement, in respect of that quota prior to 13 October 1999 and which ends on or after 31 March 2000 and which complies with the provisions of Council Regulation (EEC) No. 857/841 of 31 March 1984 and Council Regulation (EEC) No. 3950 of 28 December 1992;
"writing-down period" has the meaning assigned to it by section 669B(2).
669B. - (1) Where, on or after 6 April 2000, a person incurs qualifying expenditure on the purchase of a qualifying quota, there shall, subject to and in accordance with this Chapter, be made to that person writing-down allowances during the writing-down period as specified in subsection (2); but no writing-down allowance shall be made to a person in respect of any qualifying expenditure unless the allowance is to be made to the person in taxing the persons trade of farming.
(2) The writing-down period referred to in subsection (1) shall be 7 years commencing with the beginning of the chargeable period related to the qualifying expenditure.
(3) The writing-down allowances to be made during the writing-down period referred to in subsection (2) in respect of qualifying expenditure shall be determined by the formula-
A x B
A is the amount of the capital expenditure incurred on the purchase of the milk quota,
B is the length of the part of the chargeable period falling within the writing-down period, and
C is the length of the writing-down period.
669C. - (1) Where a person incurs qualifying expenditure on the purchase of a qualifying quota and, before the end of the writing-down period, any of the following events occurs-
(a) the person sells the qualifying quota or so much of the quota as the person still owns;
(b) the qualifying quota comes to an end or ceases altogether to be used;
(c) the person sells part of the qualifying quota and the net proceeds of the sale (in so far as they consist of capital sums) are not less than the amount of the qualifying expenditure remaining unallowed;
no writing-down allowance shall be made to that person for the chargeable period related to the event or any subsequent chargeable period.
(2) Where a person incurs qualifying expenditure on the purchase of a qualifying quota and, before the end of the writing-down period, either of the following events occurs-
(a) the qualifying quota comes to an end or ceases altogether to be used;
(b) the person sells all of the qualifying quota or so much of that quota as the person still owns, and the net proceeds of the sale (in so far as they consist of capital sums) are less that the amount of the qualifying expenditure remaining unallowed;
there shall, subject to and in accordance with this Chapter, be made to that person for the accounting period related to the event an allowance (in this Chapter referred to as a "balancing allowance") equal to-
(i) if the event is the qualifying quota coming to an end or ceasing altogether to be used, the amount of the qualifying expenditure remaining unallowed, and
(ii) if the event is a sale, the amount of the qualifying expenditure remaining unallowed less the net proceeds of the sale.
(3) Where a person who has incurred qualifying expenditure on the purchase of a qualifying quota sells all or any part of that quota and the net proceeds of the sale (in so far as they consist of capital sums) exceed the amount of the qualifying expenditure remaining unallowed, if any, there shall, subject to and in accordance with this Chapter, be made on that person for the chargeable period related to the sale a charge (in this Chapter referred to as a "balancing charge") on an amount equal to-
(a) the excess, or
(b) where the amount of the qualifying expenditure remaining unallowed is nil, the net proceeds of the sale.
(4) Where a person who has incurred qualifying expenditure on the purchase of a qualifying quota sells a part of that quota and subsection (3) does not apply, the amount of any writing-down allowance made in respect of that expenditure for the chargeable period related to the sale or any subsequent chargeable period shall be the amount determined by-
(a) subtracting the net proceeds of the sale (in so far as they consist of capital sums) from the amount of the expenditure remaining unallowed at the time of the sale, and
(b) dividing the result by the number of complete years of the writing-down period which remained at the beginning of the chargeable period related to the sale,
and so on for any subsequent sales.
(5) References in this section to the amount of any qualifying expenditure remaining unallowed shall in relation to any event be construed as references to the amount of that expenditure less any writing-down allowances made in respect of that expenditure for chargeable periods before the chargeable period related to that event, and less also the net proceeds of any previous sale by the person who incurred the expenditure of any part of the qualifying quota acquired by the expenditure, in so far as those proceeds consist of capital sums.
(6) Notwithstanding subsection (1) to (5)-
(a) no balancing allowance shall be made in respect of any expenditure unless a writing-down allowance has been, or, but for the happening of the event giving rise to the balancing allowance, could have been, made in respect of that expenditure, and
(b) the total amount on which a balancing charge is made in respect of any expenditure shall not exceed the total writing-down allowances actually made in respect of that expenditure less, if a balancing charge has previously been made in respect of that expenditure, the amount on which that charge was made.
669D.-An allowance or charge under this Chapter shall be made to or on a person in taxing the profits or gains from farming but only if at any time in the chargeable period or its basis period the qualifying quota in question was used for the purposes of that trade.
669E.-(1) Subject to subsection (2), Chapter 4 of Part 9 shall apply as if this Chapter were contained in that Part.
(2) In Chapter 4 of Part 9, as applied by virtue of subsection (1) to a qualifying quota, the reference in section 312(5)(a)(i) to the sum mentioned in paragraph (b) shall in the case of a qualifying quota be construed as a reference to the amount of the qualifying expenditure on the acquisition of the qualifying quota remaining unallowed, computed in accordance with section 669C.
669F.-This Chapter shall come into operation on such day as the Minister for Finance, with the consent of the Minister for Agriculture, Food and Rural Development, may, by order, appoint.'.".
This amendment introduces a new scheme of tax relief for the purchase of milk quota. Capital allowances will be granted in respect of expenditure incurred on the purchase of a milk quota under the proposed new national quota restructuring scheme, which my colleague, the Minister for Agriculture, Food and Rural Development, is introducing from 1 April next. The allowances will apply to milk quotas purchased from farm co-operatives or dairies as well as in the case of certain milk quota purchased directly from lessors who are currently leasing that quota. The allowances will be granted on a straight line basis over a seven year period.
On 13 October 1999 the Minister for Agriculture, Food and Rural Development announced his intention to introduce this by way of national regulations applicable from April 2000 and arranged for a transfer of milk quota other than the current system whereby such quota transfers with land. The objectives of the arrangements are to provide for more flexibility and certainty for milk producers in the operation of the milk quota regime, greater priority access to additional permanent milk quota for small scale and medium size producers, the retention of as many dairying enterprises as possible and greater competitiveness within the Irish milk production sector.
With effect from 1 April 2000 milk quota will no longer transfer with land with some exceptions such as in the case of family transactions and the sale of a holding as a going concern. Instead, the transfer of milk quota will be operated by way of a pool system at co-operative/dairy level.
Under this scheme quota holders may at the end of each milk quota year offer all or part of their milk quota for sale through their co-operative or dairy. The co-operative or dairy may only sell milk quota to eligible producers attached to that concern, under detailed rules determined by the Minister for Agriculture, Food and Rural Development. While all producers will be entitled to purchase milk quota under this scheme, priority will be accorded to small and medium size producers. The maximum price for sale of the milk quota under this scheme will be fixed at national level.
With effect from 1 April 2000 it will no longer be possible for quota holders not engaged in milk production to temporarily lease their milk quota. Such quota holders may resume milk production or sell their quota to their co-operative or dairy. Where milk quota leases expire on or after 31 March 2000 the lessee may purchase the milk quota from a lessor without the relevant land.
The capital allowances which I am now proposing are specifically intended to underpin and encourage the restructuring of the milk quota regime being undertaken by the Minister for Agriculture, Food and Rural Development. The new allowances regime will apply to purchases of a quota on or after 6 April 2000 and will be activated by ministerial order. Where milk quota is subsequently sold or disposed of, the normal balancing allowance or charge provisions will apply. This is a generous relief for the purchase of milk quota and part of a number of farm specific taxation incentives provided for in the Bill.
I commend the amendments to the select committee. I will also table some technical amendments relating to milk quota on Report Stage.
The new arrangements relating to milk quota and land are quite complex and, I understand, are arousing considerable interest in the farming community. About 600 farmers turned up at a public meeting in Mallow on Monday evening. It is only now that farmers are beginning to realise - the farming organisations seem to agree with this new departure - the implications of what is being proposed. There is, therefore, a big agrarian movement on this new provision.
We are discussing the taxation element.
While the taxation element is very welcome and will offer farmers with small quotas in particular an incentive to purchase milk quota under the new arrangements, the word is that they are being told they will not get money from the banks as they do not have the necessary purchasing or selling power. While this new provision will help to some extent, it will probably suit the bigger supplier who will gain from a tax point of view. While the Minister was helped by the ICMSA in devising it, the new arrangements are quite complex and the Department of Agriculture, Food and Rural Development will certainly hear a lot about them. They are a hot potato and appear to give rise to constitutional issues relating to milk and land ownership. Although the land ownership issue is no longer as emotive as it used to be, whenever major changes were proposed in the past there was a reaction from the ground up. It will be no different on this occasion.
I am at risk of sounding naive and do not claim any particular expertise but I always feel a little queasy when we start to talk about quotas, permits and licences as property and items which have an intrinsic value. The quota was not originally intended that way, it was intended as a control on the amount of milk produced. I agree that it developed a value very quickly but there must be a better way to ensure small or medium sized operators obtain quotas, short of creating a market which will now be underpinned - God help us - by capital allowances from the State.
I suggest that when the agriculture committee of the Labour Party is in front of 1,000 farmers that it put the Deputy forward as its spokesperson in this regard. I have no doubt about the telling logic of what the Deputy said and will pass on Deputy Deenihan's remarks to the Minister for Agriculture, Food and Rural Development.
We are moving one step further. Quotas passed with land before now. At least that was a restriction.
All I know about this matter is that the new quota regime will apply as and from this year, as agreed by the Minister for Agriculture, Food and Rural Development and the farming organisations. I am aware from letters that I have received that a group of farmers outside the farming organisations has started a campaign. I await with interest what will happen in coming months. In the negotiations on the new partnership agreement the taxation requirements relating to milk quota were discussed and a broad framework was agreed with the farming organisations. I am now implementing it.
Deputy McDowell is absolutely correct, milk quota was originally meant as a control on the volume of milk produced but it subsequently acquired a value. When it began to be sold it had to be passed with land and was, therefore, brought within the capital gains tax code. When being disposed of it was regarded as an asset. As the taxes Acts did not allow for the purchase of milk quota it was treated as an allowable expense. Over the years amendments were tabled to allow the purchase of milk quota as an asset. As I understand it the new arrangements which will apply as and from 1 April will decouple milk quota from land. It will then be treated more or less in the same way as plant and machinery and allowed to be written off over a period of time. The amendment which will give effect to the new arrangements will be triggered by a ministerial order. I am looking forward to its implementation.
In any sale there is a seller and a buyer. There are two farmers, therefore, who could have a possible tax liability. In the case of a farmer selling milk quota for X number of pounds it is treated as an asset. Is this chargeable to capital gains tax or income tax?
Under current arrangements it falls within the capital gains tax code as milk quota cannot be sold independently. It must be passed with land. As it was regarded as part disposal of an asset it was brought within the capital gains tax code. In most of the cases I dealt with in a past life no capital gains tax liability accrued primarily due to the indexation relief which applied to assets from 6 April 1974. The leasing of milk quota was allowable as an expense in the profit and loss account in the same way aswages, fertiliser and so on. The purchase of milk quota was regarded as the acquisition of a capital asset.
A farmer who sells milk quota is, therefore, liable to capital gains tax while a farmer leasing milk quota is liable to income tax. What will be the position where a farmer sells milk quota after the new provision comes into effect?
From 1 April milk quota will no longer be attached to land. A farmer who sells milk quota to a creamery after that date will continue to be liable to capital gains tax.
While it might have been difficult to work out the detail, at least there was a formula for benchmarking, which applied from 1974, while milk quota was attached to land.
The same system will continue.
No value is attributable to milk quota at present. Historically, the value was the value of milk quota plus land.
It was regarded as part disposal of an asset. There was a formula which will continue to apply. The farmer selling milk quota will not have a problem.
A farmer who has been leasing milk quota in recent years will be able to purchase from 1 April. Is the Minister saying that he will be able to offset the cost of purchase?
Yes, it will be treated in the same way as the purchase of a new tractor.
As capital allowances?
And other plant material, say, a mowing machine, he will be able to write it off over seven years.
In equal tranches?
No acceleration here?
No, equal sevens, I am told.
And will the prices be controlled?
Yes. This has all been agreed and anyone who has studied the Brussels scene in the past number of years would have heralded the change in the quota. The danger is that in a few years' time these quotas might be abolished. I am aware of a considerable campaign, particularly in the south - nothing to do with taxation, by the way - to retain the existing regime regarding quota and to allow free market disposal and so on. It has nothing to do with taxation of course.
The real danger in doing that with any kind of licences is that it makes it very difficult to change the licensing regime at a later stage. The argument would be that if the number of pub licences was increased in the morning, we would be interfering with the property rights of those who currently own them. Presumably the same argument could be made in regard to milk quotas.
I am sure lawyers would advise in that regard. That matter would have to be fought out in another forum.
Is there a situation where there would be in-pocket quotas around the country, like the in-pocket pub licences?
Who knows what will happen in this regard. From what I hear, some farmers are making their views known. I was not aware of the meeting in Mallow to which the Deputy referred, but I am aware that a campaign has started but, for a change, it has nothing to do with taxation.
Some people on the farm retirement scheme are concerned that when the leases are up they will be left with land if the milk quota is taken from them. They will be unable to lease their land and will lose their retirement pension. That is the fear, and I do not know whether it can be allayed.
That matter is with the Department of Agriculture, Food and Rural Development.
I do not have expertise in that area.
I know but I just wanted to mention it.
There is an official here from the Department of Agriculture, Food and Rural Development who can answer that question, if we can go into private session.
The Select Committee went into private session at 4.13 p.m. and resumed in public session at 4.18 p.m.
This section deals with the allowances expenditure on child care provision. As the Minister mentioned this morning, that is subject to European Commission approval. Have we received a response from the European Commission as yet?
We had a consultation with the Commission by telephone and we were advised on the way a letter should be framed and an application made. That letter was sent two weeks ago and we are expecting a reply within the next month.
Is the Minister reasonably hopeful that something positive will come out of that?
I am reasonably hopeful in so far as one can ever be hopeful when dealing with the European Commission. I have been hopeful on a few occasions in the past about matters being disposed of, but it took two years for them to be disposed of.
I will not repeat the point I made this morning about intervening in a competitive market - it is a difficult matter.
One can ask if the areas we apply to intervene in could be a distortion of trade between member states. That can be applied to lots of things, from major developments we have planned in Dublin to small matters. One could question how the capital allowances expenditure or giving a tax break for a creche could be a distortion of trade but——
We are at cross purposes here in a sense. I accept what the Minister is saying. The European aspect does not appear to apply here. However, in terms of distorting the domestic market and competition in the provision of child care places, it seems that it does have an effect.
That is always the case when one introduces a relief, particularly in the capital expenditure area, for something which is already up and running. One could say the same with regard to nursing homes when they were introduced in that regard. Nursing homes were already in existence and they did protest about it. I do not know if they pressed it formally through their association, but I encountered a couple of irate nursing home operators at the time who were not too pleased with me. They might have protested formally as well. That has always been the case with something like that.
The purpose of this section is to encourage the creation of places. We spoke earlier about housing and this is another such incentive. As I said in my Budget Statement, it is generous relief in that other operators or investors can invest in these facilities as well to claim the tax relief. This is one area in which I hope people will avail of the tax breaks to create more child care places.
As we all do.
I move amendment No. 132:
In page 141, before section 53, to insert the following new section:
"53.-The Principal Act is amended in Part 29 by the insertion after Chapter 3 of the following:
Transmission Capacity Rights
769A.-(1) In this Chapter-
"capacity rights" means the right to use wired, radio or optical transmission paths for the transfer of voice, data or information;
"writing-down period" has the meaning assigned to it by section 769B(2).
(2) In this Chapter, any reference to the sale of part of capacity rights includes a reference to the grant of a licence in respect of the capacity rights in question, and any reference to the purchase of capacity rights includes a reference to the acquisition of a licence in respect of capacity rights; but, if a licence granted by a company entitled to any capacity rights is a licence to exercise those rights to the exclusion of the grantor and all other persons for the whole of the remainder of the term for which the rights subsist, the grantor shall be treated for the purposes of this Chapter as thereby selling the whole of the rights.
769B.-(1) Where, on or after 1 April 2000, a company incurs capital expenditure on the purchase of capacity rights, there shall, subject to and in accordance with this Chapter, be made to that company writing-down allowances, in respect of that expenditure during the writing-down period; but no writing-down allowance shall be made to a company in respect of any expenditure unless-
(a) the allowance is to be made to the company in taxing the company’s trade, or
(b) any income receivable by the company in respect of the rights would be liable to tax.
(2) (a) Subject to paragraph (c), the writing-down period shall be-
(i) a period of 7 years, or
(ii) where the capacity rights are purchased for a specified period which exceeds 7 years, the number of years for which the capacity rights are purchased,
commencing with the beginning of the accounting period related to the expenditure.
(b) For the purposes of this section, writing-down allowances shall be determined by the formula-
A x B
A is the amount of the capital expenditure incurred on the purchase of the capacity rights,
B is the length of the part of the chargeable period falling within the writing-down period, and
C is the length of the writing-down period.
(c) For the purposes of this subsection, any expenditure incurred for the purposes of a trade by a company about to carry on the trade shall be treated as if that expenditure had been incurred by that company on the first day on which that company carries on the trade unless before that day the company has sold all the capacity rights on the purchase of which the expenditure was incurred.
769C.-(1) Where a company incurs capital expenditure on the purchase of capacity rights and, before the end of the writing-down period, any of the following events occurs-
(a) the rights come to an end without provision for their subsequent renewal or the rights cease altogether to be exercised;
(b) the company sells all those rights or so much of them as it still owns;
(c) the company sells part of those rights and the amount of net proceeds of the sale (in so far as they consist of capital sums) are not less than the amount of the capital expenditure remaining unallowed;
no writing-down allowance shall be made to that company for the chargeable period related to the event or for any subsequent chargeable period.
(2) Where a company incurs capital expenditure on the purchase of capacity rights and, before the end of the writing-down period, either of the following events occurs-
(a) the rights come to an end without provision for their subsequent renewal or the rights cease altogether to be exercised;
(b) the company sells all those rights or so much of them as it still owns, and the amount of the net proceeds of the sale (in so far as they consist of capital sums) are less than the amount of the capital expenditure remaining unallowed;
there shall, subject to and in accordance with this Chapter, be made to that company for the accounting period related to the event an allowance (in this Chapter referred to as a "balancing allowance") equal to-
(i) if the event is one referred to in paragraph (a), the amount of the capital expenditure remaining unallowed, and
(ii) if the event is one referred to in paragraph (b), the amount of the capital expenditure remaining unallowed less the amount of the net proceeds of the sale.
(3) Where a company which has incurred capital expenditure on the purchase of capacity rights sells all or any part of those rights and the amount of the net proceeds of the sale (in so far as they consist of capital sums) exceeds the amount of the capital expenditure remaining unallowed, if any, there shall, subject to and in accordance with this Chapter, be made on that company for the chargeable period related to the sale a charge (in this Chapter referred to as a "balancing charge") on an amount equal to-
(a) the excess, or
(b) where the amount of the capital expenditure remaining unallowed is nil, the amount of the net proceeds of the sale.
(4) Where a company which has incurred capital expenditure on the purchase of capacity rights sells a part of those rights and subsection (3) does not apply, the amount of any writing-down allowance made in respect of that expenditure for the chargeable period related to the sale or any subsequent chargeable period shall be the amount determined by-
(a) subtracting the amount of the net proceeds of the sale (in so far as they consist of capital sums) from the amount of the expenditure remaining unallowed at the time of the sale, and
(b) dividing the result by the number of complete years of the writing-down period which remained at the beginning of the chargeable period related to the sale,
and so on for any subsequent sales.
(5) References in this section to the amount of any capital expenditure remaining unallowed shall in relation to any event aforesaid be construed as references to the amount of that expenditure less any writing-down allowances made in respect of that expenditure for chargeable periods before the chargeable period related to that event, and less also the amount of the net proceeds of any previous sale by the company which incurred the expenditure of any part of the rights acquired by the expenditure, in so far as those proceeds consist of capital sums.
(6) Notwithstanding subsections (1) to (5)-
(a) no balancing allowance shall be made in respect of any expenditure unless a writing-down allowance has been, or, but for the happening of the event giving rise to the balancing allowance, could have been, made in respect of that expenditure, and
(b) the total amount on which a balancing charge is made in respect of any expenditure shall not exceed the total writing-down allowances actually made in respect of that expenditure less, if a balancing charge has previously been made in respect of that expenditure, the amount on which that charge was made.
769D.-(1) An allowance or charge under this Chapter shall be made to or on a company in taxing the company's trade if-
(a) the company is carrying on a trade the profits or gains of which are or, if there were any, would be, chargeable to corporation tax for the chargeable period for which the allowance or charge is made, and
(b) at any time in the chargeable period or its basis period the capacity rights in question, or other rights out of which they were granted, were used for the purposes of that trade.
(2) Except where provided for in subsection (1), an allowance under this Chapter shall be made by means of discharge or repayment of tax and shall be available against income from capacity rights, and a charge under this Chapter shall be made under Case IV of Schedule D.
769E.-(1) Subject to subsection (2), Chapter 4 of Part 9 shall apply as if this Chapter were contained in that Part, and any reference in the Tax Acts to any capital allowance to be given by means of discharge or repayment of tax and to be available or available primarily against a specified class of income shall include a reference to any capital allowance given in accordance with section 769D(2).
(2) In Chapter 4 of Part 9, as applied by virtue of subsection (1) to capacity rights, the reference in section 312(5)(a)(i) to the sum mentioned in paragraph (b) shall in the case of capacity rights be construed as a reference to the amount of the capital expenditure on the acquisition of the capacity rights remaining unallowed, computed in accordance with section 769C.
769F.-This Chapter shall come into operation on such day as the Minister for Finance may, by order, appoint.'.".
The amendment inserts a new chapter into the Taxes Consolidation Act, 1997, providing for capital allowances for expenditure incurred on the purchase of long-term rights to use advanced communications infrastructure. The measure is designed as an important step on the road to developing Ireland as a European hub for electronic commerce. This requires the construction of the necessary telecommunications networks which in turn require investment in both physical infrastructure and intangible assets. Capital allowances are already available in respect of investments in the physical infrastructure such as cabling and equipment. An extension of allowances, as now proposed, to expenditure incurred on long-term rights to use assets owned by others will facilitate the investment required to assemble global networks.
The allowances will apply to long-terms rights to use wired, radio or optical transmission paths for the transfer of data and information. These rights, known as indefeasible rights of use or IRUs for short, typically span periods of ten to 25 years and are generally purchased by means of a lump sum payment made in advance. The amendment provides that expenditure incurred by a company on such rights can be written off over the life of the agreement relating to the use of the rights, subject to a minimum write off period of seven years. The measure will apply to expenditure incurred on or after 1 April 2000, subject to clearance by the EU Commission from a State aid perspective.
I commend the amendment to the committee.
I move amendment No. 133:
In page 141, lines 34 to 43, to delete subsection (1) and substitute the following:
"(1) Section 247 of the Principal Act is amended by the substitution of the following for subsection (5):
'(5) Interest eligible for relief under this section shall be deducted from or set off against the income (not being income referred to in subsection (2)(a) of section 25) of the borrower for the year ofassessment in which the interest is paid and tax shall be discharged or repaid accordingly.
(6) Where relief is given under this section in respect of interest on a loan, no relief or deduction under any other provision of the Tax Acts shall be given or allowed in respect of interest on the loan.'.".
This is a technical amendment designed to restore the effect of section 247 of the Taxes Consolidation Act, 1997, and to make the section more transparent as to its purpose.
Where a company borrows money to invest in a trading or rental company, interest on the loan will, subject to certain conditions, be tax deductible. The manner of giving relief for such interest prior to consolidation of the Tax Acts was as follows. In the case of companies liable to corporation tax, the interest could be deducted from the aggregate of the company's income from all sources and its capital gains. In the case of companies liable to income tax, the interest was deductible only from a company's income.
Companies which are resident in the State are liable to corporation tax here on their income from all sources. Companies which are not resident in the State are liable to corporation tax on income connected with any branch or agency they may have in the State. Any other Irish sourced income of a non-resident company is liable to income tax.
The income tax relief was contained in section 33 of the Finance Act, 1974. When that section was being consolidated into section 247 of the Taxes Consolidation Act, 1997, the wording was modified slightly. The effect of the changed wording was to convert the relief into a corporation tax relief. In effect, this abolished the income tax relief and caused a confusing interaction with the corporation tax relief which is contained in section 243 of the Act.
Section 55 of the Bill was intended to rationalise the situation. However, it provided for the relief to be given for an accounting period, which is a corporation tax concept. As a result the position remains confused.
The amendment makes it clear that section 247 is an income tax relief. It specifies that the relief is given for a year of assessment, an income tax concept, and is to be given against income chargeable to income tax only. It does this by importing wording from section 25 of the Taxes Consolidation Act, 1997 which deals with the taxation of non-resident companies.
I commend the amendment to the committee.
I move amendment No. 134:
In page 144, line 7, after "audit" to insert "and the number of accounts which gives rise to this additional tax".
The section requires and empowers the Revenue Commissioners to report on their DIRT audits to the Committee of Public Accounts or its sub-committee. It lays down a number of items on which the Revenue should report. For the purposes of debate I am including another area whereby they will report on the number of accounts, not just the total amount of money due from a financial institution.
Section 904(b) empowers and requires the Revenue Commissioners to report before 1 November 2000 to the Committee of Public Accounts the results of the look back DIRT audit in the case of each financial institution specifying the DIRT arrears levied, interest charged and penalties imposed, any comments they consider appropriate and if any appeal has been lodged. This is, in essence, what the Committee of Public Accounts recommended in its report.
The power given to the Revenue Commissioners to conduct DIRT audits is set out in section 904(a) which I included in last year's Finance Bill. The focus of DIRT audits under that section is a checking of a sample of non-resident accounts. The information gathered from checking the sample of non-resident accounts, together with the other information obtained by inspectors in the course of their audits, will lead to the estimate of the level of DIRT under deducted by the financial institution. That will lead to discussions with the financial institution concerned to seek its agreement as to the DIRT liability.
If such agreement was not forthcoming an assessment would be raised by Revenue and if the assessment was appealed by the financial institution, it would be necessary for each side to put their case to the Appeal Commissioners for their determination.
The focus of the report to be made by the Revenue Commissioners to the Committee of Public Accounts in November is on the DIRT arrears, interest and penalties arising from the look back exercise and fully reflects the recommendation of the Committee of Public Accounts.
What is the Minister's response to the amendment?
I do not think it is necessary. The Deputy is looking for the number of accounts which give rise to the initial tax. However, what I incorporated in the Bill is exactly what the Committee of Public Accounts sought. This involves a sampling exercise being undertaken by the Revenue Commissioners in each of these financial institutions. My experts can explain to the Deputy how the basis of the sampling exercise is being carried out. This should mean that in the time period before the autumn the Revenue Commissioners will be able to quantify the level of tax arrears in the financial institutions.
I estimate that it will not be possible in the time period involved, nor was it envisaged by the Committee of Public Accounts, and it is not provided for in the Bill that each account would be assessed and examined. It was recommended, as is reflected in the Bill, that this process would be carried out by sampling at this stage. That is what will be reported back to the Committee of Public Accounts.
If a sample is being conducted on which, effectively, an estimate of liability is being made, it should be possible to do an estimate of the number of accounts in the same sample.
It is after 4.30 p.m. and I am required to put the following question——
Regarding section 56, I intend to introduce amendments on Report Stage to sections 906A and 908A of the Taxes Consolidation Act. These amendments are necessary to address a defect in the definition of financial institution in both sections and to bring the powers contained in section 908A to obtain a District Court order to inspect books etc. into line with a provision in the Disclosure of Certain Information for Taxation and Other Purposes Act, 1996, on which section 908A was based.
Regarding section 58, I received a number of representations today about the proposed changes to the limited partnership provision. I advise the committee that I may table some amendments to this section on Report Stage.
I am required to put the following question in accordance with an order of the Dáil of 24 February 2000: "That the amendments set down by the Minister for Finance to Chapter 4 of Part I of the Bill and not disposed of are hereby made to the Bill, and in respect of each of the sections undisposed of in the said Chapter, other than section 58, that the section, or as appropriate the section as amended, is hereby agreed to."
I move amendment No. 141:
In page 153, subsection (1), line 7, after "by" to insert "or for".
This is a technical drafting amendment. Section 60 allows a company to include in its income chargeable to tax at the standard rate of corporation tax, rather than at the 25% rate, income from dealing in land which has been fully developed by or for the company. The land can be developed by the company or for the company by subcontractors. In either case the income will be taxed at the standard corporation tax rate. The land concerned is referred to in section 60 as "qualifying land". Paragraph (b) of the definition of “qualifying land” omits the words “or for” and refers only to land developed by the company. The effect of this would be to deny the application of the standard rate where the company uses a subcontractor to carry out the development. The amendment rectifies this omission. I commend the amendment to the committee.
I move amendment No. 142:
In page 154, line 11, to delete "assurance" and substitute "business".
This is a technical drafting amendment. The wording normally used in the tax Acts to cover life assurance is "life business". The amendment changes the reference to "life assurance" in section 60 to "life business". I commend the amendment to the committee.
This section amends section 21A of the Taxes Consolidation Act, 1997. That section was introduced in last year's Finance Act as part of the corporation tax reform package, following agreement with the European Commission on the phasing out of the 10% rate. Section 21A provides for certain income to be taxed at a 25% rate from 1 January 2000, when the standard rate of corporation tax falls below that level. The income to be taxed at the higher rate is non-trading income and certain trading income. The categories of trading income to be taxed at the 25% rate include income from dealing in land. This section amends section 21A in three ways, in relation to construction companies, in relation to the computation of income of an excepted trade and in relation to insurance companies.
The first issue relates to construction companies. As I said, income from dealing in land is to be taxed at the 25% rate. Income from construction activities is, however, to be taxed at the standard corporation tax rate, which will be lower than 25%. Where a company has income which derives partly from land dealing and partly from construction activities, it is required to apportion the income between its land dealing and construction operations to determine how much is to be taxed at each rate. This is likely to be the case in relation to many construction companies which buy development land, fully develop it and sell on the land together with houses, apartments, offices or factories which they have constructed on it.
As this could give rise to computational difficulties and transfer pricing issues, consultations took place following the 1999 Finance Act between the CCABI and Revenue. Those consultations led to the proposal in this section that where a company sells land on which it has constructed a building or structure and the land has been fully developed by or for the company, it will not be necessary to apportion the income from the sale of the land between land dealing and construction activities. Instead, all the income can be included in income taxable at the standard corporation tax rate. As most building companies will be selling fully developed land, I am satisfied the computational issues will not arise in the generality of cases.
Companies are entitled under section 45 of the Bill to have income from the disposal of "residential development land" taxed at a rate of 20%. As that rate is lower than the standard corporation tax rate for the financial year 2000 - the standard rate is 24% - that section provides that income in 2000 from disposing of such land may be taxed at the 20% rate. In subsequent years the standard corporation tax rate will be lower than 20% and this issue will not arise.
It should be noted that the income which may be taxed at the 20% rate in 2000 includes income attributable to demolition, service and other preparatory work to residential development. In subsequent years that income will be regarded as income from construction operations and, as such, will be taxable at the standard corporation tax rate.
The second issue relates to the computation of income of an "excepted trade". As I have indicated, certain trading income is to be taxed at the 25% rate. These trades are referred to in section 21A as "excepted trades". This section clarifies that charges on income, such as royalties, which are paid wholly and exclusively for the purposes of an excluded trade are to be deducted in calculating the income from that trade. As a general rule, charges on income are not allowed in calculating income from a particular source but are deducted from the profits of a company, that is, the aggregate of income from all sources and capital gains. This amendment will ensure the amount charged at the higher rate is not excessive.
The final issue relates to insurance companies. Certain income of an insurance company will arise in the form of a return from the investment by the company of insurance premia received. In the case of life assurance companies, existing law provides for the taxation of income attributable to policy holders at the standard rate of income tax. Income attributable to shareholders is charged to corporation tax. This section clarifies that the income of an insurance company which is attributable to shareholders is not subject to the higher rate of tax but is to be charged at the standard rate of corporation tax. This was always the intended position and the section removes any doubt on this matter.
What will happen in subsequent years when the corporation standard rate continues to decrease?
That will be the trading income of the company and it will be subject to the lower rate. That was always the intention.
Yes, but once the standard rate goes below 20% these sections become redundant.
Yes, that element of it.
I move amendment No. 143:
In page 156, line 30, before "relevant" to insert "net".
This amendment corrects a minor technical drafting error involving the omission of the word "net' from the expression "net relevant trading income" in line 30 on page 156. The omission, if not corrected, would result in a company which has net relevant trading income of between £50,000 and £75,000 paying more tax than was intended by the policy decision.
The 12.5% rate is to apply where a company's "net relevant trading income" is under £50,000. Marginal relief applies where "net relevant trading income" is between £50,000 and £75,000. "Net relevant trading income" is relevant trading income less certain losses and charges. Omission of the word "net" in line 30 of page 156 would result in a company's marginal relief being a percentage of the excess of £75,000 over the company's income before deducting losses and charges. Thus, on the basis of the existing wording, a company with relevant trading income of, say, £80,000 could be denied relief altogether, even though it had losses and charges of, say, £20,000. This is because its relevant trading income, at £80,000, is greater than the £75,000 threshold. By inserting the word "net" in line 30, as is proposed in this amendment, the company will qualify for marginal relief because its net relevant income is £60,000, which is lower than the £75,000 threshold. That is what was intended. I commend the amendment to the Committee.
What difference has the changes made? Have they led to a number of companies being——
I will read the relevant note, although it does not give much information in that regard.
There are expectations in some quarters that the number of non-resident companies registered here would——
I dealt with a parliamentary question recently which gave that background information. Perhaps my officials have the supplementary notes for that PQ, which are more explanatory.
I asked the parliamentary question.
I am advised by the Revenue Commissioners that the up-to-date position regarding the exercise they are carrying out on Irish non-registered companies is as follows.
Examination of the 24,095 companies which failed to reply to notices issued by the Revenue Commissioners on October 1999 is ongoing. As a first step, the companies are being checked against the Companies Registration Office list of companies which have been struck off. The work is continuing but, so far, it has identified that 846 of the companies have already been struck off by the Companies Registration Office.
The first stage of the examination of the 9,389 cases in respect of which letters were returned to the Revenue Commissioners indicating that the addressees were unknown also involved a check against the list of companies which have been struck off in the companies office. Follow up action includes establishing whether there are any new addresses on the Companies Registration Office's record. The work, so far, has shown that 639 of the companies have been struck off.
Of the companies that had to be cross-checked against the Companies Registration Office, approximately 7,000 were incorporated prior to the early 1990s. The process of cross-checking these companies against the Companies Registration Office's records is time consuming, as at that time companies did not have compatible Revenue and CRO numbers. Consequently, searches in respect of those companies have to be carried out manually and in each case the relevant CRO number must be identified.
Revenue is hoping to complete all examinations in time to forward cases by the end of March 2000 to the Registrar of Companies for initiation of strike off procedures. Therefore, as I understand it, the Registrar of Companies will be notified by the end of this month.
Do we have information about companies voluntarily applying to be struck off the register? Will that fall into this category?
We do not have that information. I am informed the view in the industry is that many of these companies have gone to another jurisdiction.
Therefore, the Minister would not expect them to formally seek to be struck off, as they have just disappeared? Is it correct that 24,000 have not replied?
No, there was an examination of 24,095 companies which failed to respond to Revenue's letter. Revenue then checked that list against the Companies Registration Office's list of companies that had been struck off, which showed that 846 of those companies had already been struck off. That leaves the difference between 846 and 24,000 - approximately 23,200. Some 9,389 letters were returned to the Revenue saying that the addressee was unknown. When they checked that against follow-up action on company losses it showed 639. Some companies had been struck off. One way or another , that would mean that the bulk of the 24,000 remained to be examined and possibly struck off. All examinations will be forwarded to me by the end of March and then the list will be forwarded to the Registrar of Companies for him to initiate action to strike off the companies. If this keeps going on there will be a clear out.
There will be a considerable clear out in that case.
Yes. Following the enactment of the Finance Act, 1999, the Revenue also wrote to 38,996 companies which were incorporated prior to 11 February that were not carrying out trade. The number of companies struck off by the Registrar of Companies in 1998 - the programme commenced in September 1998 - was 10,003. In 1999, 28,731 were struck off. The total number of companies on the CO register at the end of 1998 was 178,773, and in 1999 it was down to 161,284.
These are old companies that were not IRNRs?
Yes. We had a lot of companies that were added on to what was incorporated and then struck off. The number of new companies incorporated is going down also. The number of new companies incorporated in 1998 was 20,874 and in 1999 is dropped to 18,604.
Can the Minister say how many of them are Irish registered non-resident companies? Is it not possible to categorise them as such?
That was the difficulty, and the Deputy might remember the debate about this.
I move amendment 144:
In page 159, before section 65, to insert the following new section:
"65.-Section 446 of the Principal Act is amended".
(a) by the insertion after subsection (2A) of the following:
(a) on 31 March 2000 the relevant trading operations of a qualified company are the carrying on of a business of managing the activities or the whole or part of the assets of a specified collective investment undertaking (within the meaning of section 734(1)), and
(b) at any time after 31 March 2000 the specified collective investment undertaking ceases to be a specified collective investment undertaking but is an investment undertaking (within the meaning of section 739B),
then that business at that time, to the extent that the management can be directly attributed to be for the benefit of unit holders (within the meaning of section 739B) in the investment undertaking who are persons resident outside the State, shall be deemed to be relevant trading operations and to have been specified as relevant trading operations in the certificate given to the qualified company under subsection (2); and for the purposes of the Tax Acts, such apportionment as is just and reasonable may be made of any profits arising to the qualified company.
(a) on 31 December 2000 the relevant trading operations of a qualified company are the carrying on of a life business (within the meaning of section 706(1)), and
(b) at any time after 31 December 2000 the qualified company would be in breach of the conditions under which a certificate was given to the qualified company under subsection (2), solely by virtue of the qualified company commencing policies or contracts with persons who reside in the State,
then the trading operations of the qualified company at that time, to the extent that they are trading operations carried on with persons resident outside the State, shall be deemed to be relevant trading operations and the conditions under which the certificate was given shall be deemed not to have been breached; and for the purposes of the Tax Acts, such apportionment as is just and reasonable may be made of any profits arising to the qualified company.
(2D) Where on 31 March 2000 the trading operations of a qualified company are the carrying on of a business of managing the activities or the whole or part of the assets of a qualifying company (within the meaning of section 110), then such management shall, at any time after 31 March 2000 and to the extent referred to in subsection (7)(c)(ii)(V)(C) (inserted by the Finance Act, 2000), be deemed to be relevant trading operations and to have been specified as relevant trading operations in the certificate given to the qualified company under subsection (2); and for the purposes of the Tax Acts such apportionment as is just and reasonable may be made of any profits arising to the qualified company.’,
(b) in subsection (7)(c)(ii) by the substitution for clause (V) of the following:
'(V) the management of the activities or the whole or part of the assets of:
(A) a specified collective investment undertaking (within the meaning of section 734),
(B) an investment undertaking (within the meaning of section 739B) to the extent that the management can be directly attributed to be for the benefit of unit holders (within the said meaning) in the investment undertaking who are persons resident outside the State; and for the purposes of the Tax Acts, such apportionment as is just and reasonable may be made of any profits arising to a qualified company,
(C) a qualifying company (within the meaning of section 110), to the extent that the management directly relates to assets of the qualifying company which the qualifying company acquired directly or indirectly from an originator (within the said meaning) not being assets which were created, acquired or held by or in connection with a branch or agency through which the originator carries on a trade in the State.',
(c) by the insertion after subsection (8) of the following:
'(8A) Where the trading operations of a qualified company, for the purposes of carrying on its relevant trading operations, include the procurement of services from a person who is resident in the State and, in the opinion of the Minister such procurement will contribute to the development of the Area as an International Financial Services Centre, the procurement shall be regarded for the purposes of the Tax Acts as part of the relevant trading operations of the qualified company and to have been specified as relevant trading operations in the certificate given to the qualified company under subsection (2) where they are not so specified.'.".
This amendment introduces a new section into the Bill to amend section 446 on the Tax Consolidation Act, 1997. Section 446 allows the Minister for Finance to certify certain trading operations carried on in the Irish Financial Services Centre as being relevant trading operations and, therefore, having access to the 10% rate of corporation tax.
As we head towards the 12.5% corporation tax rate for all companies there will be a general dismantling of the ring fence around IFSC activities. For example, under this Bill the IFSC fund managers on 1 April next and the IFSC life insurance companies from 1 January next will be able to sell on the domestic market. However, by doing so these companies would under the terms of their 10% certificate given under section 446 lose their entitlement to the 10% rate under the legislation as it is at present. This section, therefore, under paragraph (a) continues to give access to the 10% rate for existing IFSC fund managers, IFSC life insurance companies and IFSC mangers of securitisation vehicles, in so far as their activities involve non residents.
Section 446 sets out the range of activities which the Minister has and certifies for the purposes of the 10% rate. Paragraph (b) extends that range for the future to include the management of an investment undertaking to the extent that the investment undertaking is in non-resident unit holders, and the management of a securitisation vehicle to the extent that the assets of such vehicles are provided by non-residents.
Paragraph (c) of section 65 will allow the Minister for Finance to allow an IFSC company to procure services from a resident person as part of their activities eligible for 10% rate. For example, a life insurance company in the IFSC may wish to contract out some of its operations - for example, back office administration.
I commend this amendment to the committee.
Amendments Nos. 145 and 146 are related and may be discussed together by agreement.
I move amendment 145:
In page 160, line 14, to delete "and".
The amendments are to ensure that the income and gains of the policy's' holders fund of a life insurance are taxed at the standard rate of income tax. The existing mechanism in legislation failed to achieve this following the reduction in the capital gains tax rate to 20%. The new mechanism in the Bill requires the future refining of these amendments because for life companies in a loss situation the mechanism in the Bill gave an incorrect computation of that loss. I commend these amendments to the committee.
I move amendment 146:
In page 160, to delete lines 15 to 25 and substitute the following:
"(c) the amount of capital gains tax computed for the purposes of section 78(2), otherwise than in respect of the special investment fund, is the amount so computed as if, notwithstanding section 28(3), the rate of capital gains tax were-
(i) throughout the financial year 1999, subject to paragraph (d), 40 per cent, and
(ii) throughout each subsequent financial year, the rate of corporation tax specified in section 21(1) for that financial year,
(d) where for an accounting period the expenses of management (within the meaning of section 83 as applied by section 707), deductible exceeds the amount of profits from which they are deductible, the reference in paragraph (c)(i) to 40 per cent shall be a reference to the rate of corporation tax referred to in section 21(1) for the financial year 1999.”.
I move amendment 147:
In page 161, lines 18 to 43, to delete subsection (1) and substitute the following:
"(1) Section 110 of the Principal Act is amended-
(a) in the definition of ’qualifying company’ in subsection (1), by the insertion after ’arm’s length’ of ’, apart from a transaction where the provisions of paragraph (a) of subsection (3) apply to any interest or other distribution payable under the transaction unless the transaction concerned is excluded from the provisions of that paragraph (a) by virtue of paragraph (b) of that subsection’,
(b) by the insertion after subsection (2) of the following:
'(3)(a) Any interest or other distribution which-
(i) is paid out of assets of a qualifying company, directly or indirectly, to-
(I) an original lender or, as the case may be, an originator,
(II) a company which is a 75 per cent subsidiary of the original lender or the originator,
(III) a company of which the original lender or the originator is a 75 per cent subsidiary, or
(IV) a company (other than the original lender or the originator) which is a 75 per cent subsidiary of a company such as is referred to in clause (III),
(ii) is so paid in respect of a security falling within section 130(2)(d)(iii), shall not be a distribution by virtue only of section 130(2)(d)(iii) unless the application of this paragraph is excluded by paragraph (b).
(b) Paragraph (a) shall not applywhere-
(i) an original lender or, as the case may be, an originator,
(ii) a company which is a 75 per cent subsidiary of the original lender or the originator,
(iii) a company of which the original lender or the originator is a 75 per cent subsidiary, or
(iv) a company (other than the original lender or the originator) which is a 75 per cent subsidiary of a company such as is referred to in subparagraph (iii),
(in this paragraph referred to as the "lender") advances an amount or amounts of money to a qualifying company in respect of securities falling within section 130(2)(d)(iii) held, directly or indirectly, by the lender which amount or the total of which amounts, at any time, is in excess of 25 per cent of the market value of all qualifying assets acquired by the qualifying company from that original lender or originator at the time of the acquisition of the qualifying assets.’.”.
This amendment relates to section 66 of the Bill. The purpose of section 66 is to disapply certain anti-avoidance rules contained in section 130 of the Taxes Consolidation Act, 1997, so that they do not operate or render uneconomic the location of certain securitisation transactions in this country.
In its securitisation transactions the company usually referred to as a special purpose issuing vehicle or SPV, set up to receive the assets from the company doing the securitisation, often takes out a loan from the company whose assets its acquires. The reason for such a loan is generally to provide liquidity and/or a measure of credit enhancement for the securities which the SPV issues to investors to fund the actual purchase of the assets. Interest on this loan is ranked lower than the interest paid to investors in respect of their investment in the securitisation. For this reason it is referred to as subordinated debt. The interest to be paid on this subordinated debt is usually dependent on the amount of residual profit left in the SPV after other liabilities have been paid and may sometimes represent more than a commercial return on the loan. Under section 132(d)(iii) of the Taxes Consolidation Act, 1997, this interest could be treated as distribution. Such treatment would mean that the SPV would not get a tax deduction for the interest paid. This non-deductabillity is a major factor in the economics of a securitisation transaction.
Section 66 ensures that such interest will not be treated as a distribution. Accordingly, it will be eligible for deduction for tax purposes. As a safeguard this favourable treatment will only apply where the amount of subordinated debt and securitisation transactions does not exceed 25% of the value of the assets securitised at the time of their securitisation. This amendment is designed to ensure that the changes already proposed in section 66 work as intended. It also extends to treatment proposed for the subordinated debt which applies to certain other companies which are closely connected to the company securitising its assets. To this end the amendment disapplies the rule in the definition of qualifying company in paragraph (1) of section 110 of the Taxes Consolidation Act, 1997, which requires all the transactions entered into by a company to be at arms length if it is to qualify as a qualifying company. This application will only apply in the case of transactions which are concerned with the supply of subordinated debt and only to the extent that the level of subordinated debt taken by the SPV does not exceed the 25% cap provided for in section 66.
The amendment proposes that the tax treatment be applied to subordinated debt supplied by the company carrying out securitisation or a 75% subsidiary of that company should also be available for certain other closely connected companies supplying the subordinated debt. This treatment is now also applied to a company of which the originator is a 75% subsidiary, in other words the holding company of the originator or original lender, and a company which is a 75% subsidiary of a company of which the originator or the original lender is also a 75% subsidiary.
I commend the amendment to the committee.
The Minister is very persuasive.
I move amendment 148:
In page 163, before section 68, but in Chapter 5, to insert the following new section:
68.-(1) Section 220 of the Principal Act is amended in the table to the section by the insertion of the following after paragraph 7:
'8. The Commission for Electricity Regulation.'.
(2) This section shall be deemed to have applied as on and from 14 July 1999.".
This section grants a corporation tax exemption to the recently formed Commission for Electricity Regulation. This commission was established under the Electricity Regulation Act, 1999, in response to the deregulation of the electricity market which was opened to competition on 19 February this year. The main functions of the commission are the publication of proposals for a system of trading electricity and the making of regulations establishing such a system and providing for the supervision of a system by the commission. The commission will engage in public consultation and will also advise the Minister for Public Enterprise on matters relating to the electricity industry. The members of the commission are appointed by the Minister for Public Enterprise.
In carrying out its functions, the commission can impose a yearly levy on providers of electricity. It is expected that the commission will have an excess income over expenditure at the end of each financial year. This section ensures this income will not be subject to corporation tax. The exemption takes effect from 14 July 1999, the day the Commission for Electricity Regulation was established. I commend the amendment to the committee.
I need a bit of persuading as to why we should increase the exemption limit by 50%.
This is the CGT retirement relief.
Section 68 implements the budget announcement to increase the limit for capital gains tax for retirement relief for business assets disposed of outside the immediate family from £250,000 to £375,000. The change applies in respect of disposals made on or after 1 December 1999.
Section 598 of the Taxes Consolidation Act, 1997, gives full relief from capital gains tax where the proceeds of a disposal of all or part of an individual's qualifying assets do not exceed a certain threshold. While the relief is termed "retirement relief" actual retirement is not a prerequisite for qualifying. However, the individual must be 55 years or over to qualify. The relief also applies where the individual disposes of all or part of his or her shares in a family trading or holding company of a family trading company.
Where the proceeds of a disposal exceed the threshold amount, marginal relief applies so as to limit the tax chargeable on a gain to one half of the difference between the amount of the proceeds and the threshold amount. The increase in the threshold amount for the purposes of the exemption also applies for the purposes of calculating marginal relief.
Yes, but why?
This relief was brought in when I was practising. This retirement relief is given to people aged over 55 years in order to dispose of their business. It has been there since the Capital Gains Tax Act came into operation.
I am sympathetic to the relief——
I have increased the threshold upwards.
——as it applies to people who wish to dispose of their business to their children. That is fair enough and I understand that. It is reasonable where a family business stays within the family. However, for somebody who is simply disposing of an asset, I do not understand why they should not be subject to CGT in the normal way.
It has been there since the start of the Capital Gains Tax Act to allow people over 55 years to have a level of exemption in disposing their assets. I presume the theory at that time was that if a person had been in business for a long time, wanted to get out and transfer the business, the higher capital gains tax would not apply. It only applies to trading assets and allows the business to be passed on. In 1975, or whenever the capital gains tax was introduced, that was the principle behind it. I cannot remember what the threshold was in 1975, although I should be able to. It has, however, been increased over the years and the increase from £250,000 to £375,000, in the light of the way the markets have gone, is reasonable.
It is a 50% increase in one year.
I like to do things at 50%. I reduced the rate and increased the threshold. Why move up by bits and pieces? If one believes in the principle, which I do, one should make it realistic.
We effectively discussed it earlier when we discussed the Bacon proposals which specifically recommended that for development land for residential purposes we would reduce the rate of CGT, but not otherwise. This section, as I read it, applies it to purposes other than residential ones. I said earlier the temporary relief should be focused on residential land. That is my position on the matter and, therefore, I am opposed to this section. We might use the opportunity to get the Minister to reaffirm the stick element of this.
It is mentioned in the explanatory memorandum.
I read it.
The stick is mentioned there.
I thought I might give the Minister the opportunity articulate it.
We referred earlier to the stick element. The purpose is to try to encourage people, as soon as possible, to get their residential land onto the market. That was the purpose of the stick and carrot report.
So, the Minister does notsee himself abolishing the stick at some pointin the next two Finance Bills if he has the opportunity.
I have every intention of being here for a long time.
I move amendment No. 149:
In page 168, lines 14 and 15, to delete "by local authorities (being local authorities as referred to in such Act)" and substitute "by county councils (being county councils as referred to in such Act)".
This amendment relates to section 72 which introduces a new scheme of tax reliefs to foster the renewal and improvement of certain towns. It proposes to substitute references to county councils for references to local authorities so as to ensure alignment with forthcoming legislation proposed by the Minister for Environment and Local Government in relation to the town renewal scheme.
For many towns this is the most important section in this year's Finance Bill. Section 52 will go down in history in well over 100 towns as the first real opportunity for these areas to benefit from the reliefs which have been available in the larger urban areas, towns and cities until now. I am delighted Mounthrath, Rathdowney, Portarlington and Mountmellick are included. The philosophy behind this scheme is justified because up to now most of the major county towns availed of these incentives and reliefs and this resulted in funds, which may have been available in other areas, being sucked into the major urban areas. Now these towns have the possibility to benefit from these schemes, which will be greatly appreciated.
I know there is a reference in the explanatory memorandum stating that this is because of EU regulations and so on, but the section states that premises will not qualify where they have been used for agriculture, including the marketing of agriculture produce, for the coal industry, the transport industry and also the financial services industry. I know of practical examples in towns in County Laois, through the local authority and the schemes submitted to the Department, of builders providers and agriculture merchants selling agricultural products. I would like the Minister to spell out what is meant by financial services. I know of one or two areas where a firm of accountants proposes to buy derelict premises to open an accountancy practice and where the county council would have submitted the proposal to the Department on the basis that it qualified under the scheme. Would an accountancy practice giving financial advice be considered to be part of the financial services industry?
In one or two of the towns to which I have referred some historical buildings in the heart of the towns belong to some of the main banks which would benefit from the scheme. I am concerned that these exclusions could have a negative impact. It would be a significant matter if some of these types of shops and premises were to be excluded from the provisions of what is otherwise an outstanding section.
The Special Committee went into private session at 5.32 p.m. and resumed in public session at 5.38 p.m.
I welcome this scheme. We had a good discussion last year and the previous year on the difficulties small rural towns face. The Minister has taken much of what we said on board. Sometimes when driving through, or holding a clinic in places one does not think about their structures, but the typical rural town has business premises which are either lock-up or have people living over or adjacent to them, whether they be pubs, retail outlets or whatever, while within the speed limits there is only residential local authority housing. Many people in such housing are back at work, but until recently there were innumerable blackspots of unemployment. The people who had an economically viable existence lived on the approach roads to the towns, on half acre sites and so on. This ensuing social segregation had the effect of killing towns. There was no economic viability within the speed limits. Then there were people who would provide services in the town, such has teachers, who would drive into town from the surrounding area and the quality of life would deteriorate usually after 6 o'clock in the evening. The strategy must be geared to change that pattern. On the residential aspects, people who are at work must be encouraged to live within the speed limit area of the town. Is it wise that, under the section, the Minister still maintains the right to make orders to apply one or more of the tax reliefs to a particular town? Would it not be better to apply all the reliefs and let the market decide which of them would operate within the town?
I do not think there is sufficient investment money in the designated towns themselves to facilitate town renewal. Much of the investment will have to come in from outside, and I do not think the outside investment in residential rented accommodation will work unless provision is made for section 23 type reliefs, where not only the rental income of the premises designated under this scheme but also rental income in accommodation outside of the designated area can be set off against the cost of the development. Why will the Minister not apply the whole menu of tax reliefs to all the towns? On what basis will he apply one relief to some towns and three reliefs to others? For the purposes of clarification, what exactly are the incentives in respect of both owner/ occupiers and rented accommodation?
I will deal with those three points. One good innovation which was introduced by the last Administration of which Deputy Noonan was a party, was a proposal regarding the designated urban renewal scheme. He will recall that the Government of which he was a member proposed that an expert panel would be set up, the local authorities would submit their recommendations to the expert panel, and the expert panel would make the decision. When we came into Government in June 1997, we agreed to that also and made a separate decision to the same effect.
Consequently when the urban renewal scheme came before us the last time, a big schedule was produced by the expert panel, which went into it in total, and that panel recommended the separate reliefs which would apply to the different parts of the town. The Minister for the Environment and Local Government did not change one comma in that schedule, he brought it to the Government and we endorsed it. Then I, as Minister for Finance, endorsed the tax concessions in it as I am entitled to do. That, for good or evil, took away from the political process any possible accusations of favouritism and of the issues which the Deputy raised earlier.
In the Acts since the introduction of urban renewal many years ago, it is the Minister for the Environment and Local Government, in consultation with the Minister for Finance, who can designate the particular areas and apply different reliefs, and that continues to be the situation, but for the last urban renewal scheme which we announced in 1999, use was made of the expert panel, which is made up of all types of independent persons such as architects, solicitors, business people, etc. In fact, I do not know who was on the panel which was set up under the previous Administration. We just copied the expert panel's report as it was, and that was for the best. Of course the minute we did so, we received representations from certain towns asking why a certain part of the town was only being designated residential and not business relief, for example, but in the main the process took away the pressures to which the Minister for Finance and the Minister for the Environment and Local Government would have been subjected.
It is our intention to apply the same formula in dealing with this particular tax relief scheme for smaller towns. The expert panel will make recommendations to the Minister for the Environment and Local Government in the same schedules, which were used previously and which are quite complicated, and the different reliefs will be applied. However, technically and legally it is still the Minister for Finance who authorises it, but it is our intention that the expert panel will produce the schedule to the Minister, the Minister will bring it to Government, which will endorse it, and then I will sign the relevant orders.
Have the local authorities in each case asked for a particular type of designation?
On the previous occasion in the case of urban renewal some local authorities went to considerable trouble to put towns in order and recommended the different kind of reliefs. Other county councils just sent in a list and did not prioritise it - a county quite near that of Deputy Fleming might have taken that different approach - but they also recommended different types of reliefs for different parts of the towns.
In the case of this particular scheme, they have made recommendations to the expert panel, but there is no compulsion on the expert panel to accept them. When the urban renewal was introduced, it showed that they made decisions to provide six or seven different combinations of reliefs in some small towns.
We intend to do the same thing this time, which is the better way of doing things rather than me deciding on foot of representations or pressure. Even with the best will in the world, one could be accused in the future of doing something untoward. It is a good innovation.
What about the actual reliefs?
We have a book containing details of the different reliefs, but I will summarise it for the committee. The details are also laid out on a chart, which I will forward to the members. For the construction or refurbishment expenditure on industrial buildings, that is, factories, for owner-occupiers, there is an initial 50% capital allowance in year one plus 4% per annum to a maximum of 100% or free depreciation up to 50% in year one plus 4% per annum to a maximum of 100%. For lessors, there is an initial allowance of 50% in year one and 4% per annum to a maximum of 100%. For the construction or refurbishment expenditure on commercial premises, it is essentially the same.
For the new construction of residential accommodation for owner-occupiers, there is an allowance of 5% per annum of expenditure for ten years. For the refurbishment of residential accommodation for owner-occupiers, there is an allowance of 10% per annum of expenditure for ten years against all income. For residential accommodation for lessors, it is like section 23 relief. For residential accommodation, there is 100% relief - against rental income - in respect of expenditure on construction, conversion and refurbishment of rented residential accommodation. The last question the Deputy asked related to the extent of section 23 type relief, which is the one we will grant in this area.
I am a little concerned that EU approval is a condition on the exclusion of business incentives in certain specific cases. What was the attitude of the Government to the exclusion, for example, of the fishing industry? In many villages and towns in this catchment area, a great deal of funding must be injected to ensure there is a future for the remaining fishing industry even in my constituency. Under the Common Fisheries Policy the fishing industry was decimated. There are areas where, for conservation purposes, the fishermen must purchase fishing boats of much greater capacity. In these areas, entire villages depend on the fishing industry. One of areas excluded from the section is the fishing industry and one could say the same of the horticultural sector. What was the rationale behind it and what was the attitude of the Government to this sector?
I do not want to delay too long here because I suspect the Deputy wants to discuss another section also. When considering granting approval, the EU Commission does not merely look at matters in, for example, an exclusively Irish or French context, it looks at the broad scheme as it would apply throughout the European Union. What the Commission is considering is the question of State aids and the distortion of trade vis-à-vis the internal market. Therefore, the Commission will not consider the specific deprivation which obtains in Balbriggan, Allenwood, Athy or Askeaton. The question of State aids and the distortion of trade is considered in the context of the European Union as a whole and the Commission then tries to put in place common rules which will apply across the board.
Deputy Fleming referred to the exclusion of certain businesses in small towns. Under section 372AJ of the principal Act, it is stated that sections 372AC and 372AD shall not apply in relation to any building or structure or qualifying premises "which is in use for the purposes of a trade, or any activity treated as a trade . . . in the coal industry, fishing industry or motor vehicle industry or . . . in the transport, steel, shipbuilding, synthetic fibres or financial services sectors or . . . which is provided for the purposes of a project, the regional aid for which is limited under the 'Multisectoral framework on regional aid for large investment projects' prepared by the Commission of the European Communities." I provide that example to illustrate the common language being used by the EU Commission. Whether we like it or not - we do not like it most of the time - we cannot single out a reason why a particular region in Ireland should benefit from a certain relief.
There is a common language and a common application of rules. That is why the influence of the European Commission in the tax area has been increasingly hostile, particularly to Ireland, in recent years. I know that people may not want to hear this but our taxation code must take account of European decisions. I am not making this up, I am merely stating the facts. As stated earlier, the minor reliefs provided in this year's Finance Bill had to be notified to the European Commission and approval had to be sought. I accept that it is frustrating but that is the position.
This scheme will be very important for towns in rural areas and I am confident it will be very effective. I hope my home town of Listowel will be included under the scheme because it has a very comprehensive and focused plan in place.
With regard to property in a designated area which is owned by non-residents - people living in America, for example——
These would be genuine holders of non-resident accounts in a bank branch in Tralee?
These are people who were banished from Ireland in the late 1980s. They were forced to leave the country to escape the atmosphere of fiscal rectitude which obtained at that time. A number of these people own property in Listowel and they are considering how they might avail of the scheme, which has created a great deal of interest, in terms of the incentives on offer. For example, they are wondering if they can write off rent if they upgrade their premises.
The Deputy should remember that the break is only of use to someone whose income is taxable in Ireland. If a person was obtaining a rental income here——
I am seeking information and clarification. If, for example, a person renovated a building, converted it for residential purposes and set it out as flats, they would obviously have an income in the State. Will they be allowed to write that off against the upgrade of the premises?
If there were no section 23 considerations, the income would be taxable even though the person lived in the United States. Consequently, they would be entitled to the reliefs which will be offset against that rental income. The purpose of the scheme is to encourage people, not necessarily non-residents, to renovate and revitalise our small towns and villages. In the instance to which the Deputy refers, if a person generates an Irish rental income they may be able to offset it against the relevant reliefs.
The scheme will prove to be attractive to people who emigrated in the 1980s and who want invest their money in revitalising their home towns in the west.
In my opinion the seaside renewal scheme did not take off because of a lack of good, clear and simple information. People should be provided with precise information when the scheme is announced.
A number of good booklets and guidelines have been published.
I sent one of the booklets to which the Minister is referring out to people but they were still confused.
People are inclined to copy each other, whether it be in terms of they way they decorate their houses or whatever. In certain towns throughout the country where seaside resort renewal scheme and other relief schemes were put in place, a nucleus of expertise is built up among members of the accountancy profession, the financial institutions and those who are willing to develop their properties. What is really needed is someone to kick-start the entire process in a town and the situation will then improve.
Examples are very important. Is the Minister in a position to provide one?
The Revenue Commissioners will be issuing a booklet on the new scheme. We issued a very successful booklet on rural renewal. The material we issue is very user-friendly.
That is very important.
I do not want to say a great deal about this matter. I welcome the scheme, which stands a reasonable chance of success. I do not believe it will be sufficient in terms of providing the investment that is required and it is not a solution to the problem of decline in certain urban areas throughout the country. A great deal more action is needed but the scheme is a good start.
I wish to now use and abuse my position - I not do so for constituency purposes - to deplore the decision of Clare County Council not to include Lisdoonvarna as one of the designated towns in that county. I hope there will be an opportunity to revisit that decision. I am familiar with this matter because my wife comes from Lisdoonvarna and I spend some time there.
I must admit that I was not aware of this matter.
The impact of the urban and rural renewal scheme has been over-hyped. I would much prefer a scheme similar to the pilot rural renewal scheme that was introduced west of the Shannon two years ago. While quite a number of the towns that have been approved by local authorities in Cork require a kick-start, what is happening is that capital is moving to towns which have been designated from towns which are equally disadvantaged. The scheme would have been more successful if we had grasped the nettle and designated regions rather than specific towns as disadvantaged. For example, Kanturk has been approved but towns such as Newmarket and Mill Street, which are equally deserving of a financial fillip to lift their economies, have not.
That was the attraction of the scheme put in place in the upper Shannon region, which involved blanket approval for an area which was determined to be in need of a kick-start. The impact of the new scheme, which involves the cherrypicking of particular towns, has been over-hyped. It will not do anything for the local economy in general but it will do something for those who already have money and property. They will be in a position to capitalise on these tax driven incentives and because it is such a hit and miss scheme it will not lift all boats in the regions. There was an unusual development at local authority level. The nature of the beast is that if one is a public representative at local authority or national level, one talks up one's local area. Every councillor in Cork argued that theirs was the worst town in the county and when theirs was not included, there was outrage.
I will table an amendment on Report Stage to clarify the EU derived restrictions on the occupations of beneficiaries of capital allowances for commercial and industrial buildings under the urban, rural and small towns scheme.
As it is now 6 o'clock I am required to put the following question in accordance with an order of the Dáil of 24 February: "That the amendments set down by the Minister for Finance to Part 1 and not disposed of are hereby made to the Bill; and, in respect of each of the sections undisposed of in the said Part, that the section or, as appropriate, the section, as amended, is hereby agreed to".