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SELECT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate -
Tuesday, 19 Nov 2002

Vol. 1 No. 1

Draft Double Taxation Relief Orders.

Chairman

The Minister of State will be remaining to consider the double taxation conventions and I welcome officials from the Office of the Revenue Commissioners and the Department of Finance. I invite the Minister of State to make his opening statements on both draft orders. Members have been circulated with copies of the draft orders and briefing material from the Revenue Commissioners and the Department of Finance and I suggest we follow the same format as we have already done. The Minister of State will make a statement followed by a question and answer session. Is that agreed?

The usual arrangement is that the spokesmen for the main parties are permitted a comment. In this instance, where these are technical matters, I have no trouble with being confined to questions but I would not like that to be established as a precedent as to how the committee would handle its affairs. Our own party will want to have the opportunity to speak on matters as of right.

Chairman

Yes, I agree with the Deputy and in future we will agree a speaking rota and time allocation for the various spokespersons because that is traditionally the way it has been done. As this is a technical matter, we have not done so today, but that would normally be the case. I invite the Minister of State to make his statement.

On 21 June 2002, the Irish Government signed an agreement with Croatia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains. On 12 March 2002, the Government signed a convention with Slovenia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains. Draft Government orders confirming and giving force of law in Ireland to the agreements were laid before Dáil Éireann on 5 November 2002 in accordance with the provisions of section 8(2)(vi) of the Taxes Consolidation Act, 1997. A resolution by Dáil Éireann approving the draft orders is required before the Government can make the orders.

The proposal that Dáil Éireann approve the orders has been referred to the Select Committee on Finance and Public Service which shall, not later than 21 November 2002, send a message to the Dáil in the manner prescribed by Standing Order 85. Such a message shall, in accordance with the Standing Order 84, be deemed to be a report of the select committee.

Both of these agreements were negotiated by the Irish Revenue Commissioners with their counterparts in the Croatian and Slovenian ministries of finance. The negotiations for the Croatian agreement were completed in Zagreb in April 2001, while the negotiations for the Slovenian agreement were completed in Ljubljana in July 2000. Both agreements are comprehensive in scope and generally follow the OECD model convention - they apply to income and capital gains imposed by each country. The main purpose of the agreements is to avoid taxation in both countries of the same income or capital gains. This is achieved by either allocating exclusive taxing rights to one or other country or, where both countries retain taxing rights, by requiring the country where the taxpayer is resident to grant credit against his tax for the tax paid in the other country. The agreements also reduce the amount of source taxation of certain types of income, in particular dividends, interest and royalties. The Croatian agreement provides exemption at source for interest payments and for reduced source taxation of dividends and royalties. In the case of Slovenia, the source taxation of interest, dividend and royalty payments are substantially reduced. These provisions significantly reduce fiscal barriers to investment flows between each country.

Other important articles in the agreement include the non-discrimination provisions which protect nationals of each country from discriminatory tax provisions in the other and the exchange of information provisions which are necessary to counter tax evasion. The agreements are expected to have a positive impact on trade and investment within Ireland and the countries concerned. While Ireland's trade with Croatia is modest, it is an emerging economy anxious to promote investment and economic development and it presents investment opportunities for business in Ireland. Provisional trade figures show that Ireland's exports to Croatia in 2001 totalled €27.9 million. There are also a number of Irish companies completing consultancy contracts in Croatia. Ireland's exports to Slovenia for the first six months of 2002 show an increase of 11% on the same period in 2001 and, although Slovenia is not a large market, Enterprise Ireland saw a marked increase in interest from Irish companies in 2000. Key opportunities have been identified in various sectors including IT software, pharmaceuticals, healthcare, consultancy and furniture.

All the main Departments have been consulted and none has expressed any dissatisfaction with the terms of the agreement so I ask the committee to approve the orders.

Chairman

I thank the Minister of State. I ask Deputies for their comments and questions.

I welcome this bilateral agreement. I have had the privilege of visiting Slovenia on a number of occasions and it is a country of immense potential. I know Croatia, which is a little behind, will in time become a member of the EU. It is right, therefore, that we anticipate this in providing double taxation agreements to facilitate investment both from Slovenia and Croatia to Ireland and vice versa.

If a Slovenian company has a subsidiary in Ireland and has an employee shareholding arrangement and issues dividends to Irish workers, will they be taxed at source in Slovenia at whatever rate is provided for in the agreement and then taxed again in Ireland? Am I to understand that the get-out the Minister is offering is that the Slovenian authorities will provide a credit? In practical terms this is cumbersome for an individual who might have a small shareholding because they would have to apply to the foreign country looking for a credit. Perhaps the Minister, at EU level, could arrange for back-to-back agreements whereby, where this was occurring, there would be no deduction at source and no need to credit. There could be some sort of clearing house arrangement which would not interfere with the terms of this agreement - which I am sure is put together for good reasons - but which would facilitate people of the nature I have described - employees of non-national companies - being able to have shareholdings and get dividends without much cumbersome procedures. I know that increasingly there are non-national companies which have Irish employees working for them. While I have no intention of holding up this double taxation agreement on that account, I ask the Minister of State to see if initiatives are possible, perhaps at EU level, for such back-to-back clearing house arrangements between member states.

Having regard to the Minister of State's speaking note on these regulations and the practice of such previous agreements with other jurisdictions, can he give an assurance that there is no need for concern that such arrangements offer an opportunity for the avoidance of tax through the use of tax exile status? Is there also a possibility that such agreements may also facilitate the establishment of shelf companies in those jurisdictions? In that context, do I recall correctly that such examples were highlighted in the very recent past, with echoes in the House? The way this is presented is fine and, like the previous speaker, I have no wish to put a spanner in the works, but there is an absolute requirement on us, as members of this committee, to establish to our absolute certainty that in avoiding double taxation we are not also facilitating tax avoidance. Is there a current review of the relevant previous agreements, how they have been conducted and, where abuses have been highlighted, what measures can be taken to close off those channels for tax avoidance, either by wealthy individuals or big business?

Deputy Bruton referred to the cumbersome nature of tax credits. These are bilateral agreements with each of the countries concerned. The Government has been conscious of the implications of entering into any EU-wide agreement, having regard to our wish to remain masters of our own tax regime in Ireland. On the other hand, we also wish to avoid the cumbersome aspects which have been referred to in this debate. I am not aware of any current moves in that regard. I expect the level of activity in the initial stages will be minimal but, if pressure builds up, the situation can be reviewed.

Deputy Ó Caoláin referred to the facility to avoid tax. The model in that regard is the OECD model tax convention, which has been reviewed on a regular basis. We already have tax treaties with 40 countries and, following the two which are now being added, there are others in the pipeline. Following recent disclosures, the Department of Finance and the OECD are very conscious of safeguards. The beneficial owners provision affords an opportunity for Revenue to investigate shelf companies to ascertain the real beneficiaries. Having regard to the benefits in terms of equitable treatment of individuals, I do not see any downside to these agreements. There is nothing to stop a person attempting to set up a shelf company outside the arrangements with the 40 countries which are already included. The present move will not facilitate people to avoid paying their fair share of taxes.

Arising from the ongoing review mentioned by the Minister of State in relation to the existing agreements with 40 countries, any identified instances of abuse of opportunities and the knowledge gained from experience, have any measures been introduced into the new agreements to cut off such opportunities?

The incidence of abuse is minute in the overall context of transactions. The OECD and the countries involved are anxious to cut off abuse when they find it. On the basis of experience, existing bilateral agreements have been modified to deal with such contingencies and to close off opportunities for avoidance.

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