Finance Bill 2005: Committee Stage (Resumed).
SECTION 34.
Debate resumed on amendment No. 40:
In page 61, paragraph(b), to delete lines 37 to 42 and substitute the following:
"(iii) by substituting the following for subparagraph (iv):
‘(iv) in relation to the minimum amount of money to be expended on the production of the qualifying film—
(I) directly by the qualifying company on the employment, by the company, of eligible individuals, in so far as those individuals exercise their employment in the State in the production of the qualifying film, and
(II) directly or indirectly by the qualifying company, on the provision of certain goods, services and facilities, as set out in regulations made under subsection (2E),',".
—(Minister for Finance).
Amendment agreed to.
I move amendment No. 41:
In page 63, lines 29 to 36, to delete paragraph (d) and substitute the following:
"(d) in subsection (2E)—
(i) in paragraph (k), by deleting ’and’, and
(ii) by inserting the following after paragraph (l):
‘(m) governing the approval of financial arrangements in accordance with subsection (2C)(ba), and
(n) governing the employment of eligible individuals, as referred to in subsection (2A)(g)(iv), and the circumstances in which expenditure by a qualifying company would be regarded as expenditure on the employment of those individuals in the production of a qualifying film.’,”.
Amendment agreed to.
Section 34, as amended, agreed to.
NEW SECTION.
I move amendment No. 42:
In page 63, before section 35, to insert the following new section:
"35.—Section 1013 of the Principal Act is amended in subsection (2C)(e) by inserting the following after Clause (II):
‘(III) Clause (II) shall not apply where the specified deduction under section 354(3) is available in respect of a building or structure which is in use for the purposes of the operation of "qualifying tourism facilities" which is within the definition of paragraph (b) of “qualifying tourism facilities” under section 353(1).’.”.
This amendment arose from discussions with a colleague who raised a concern about a tourist facility project. I am interested in the Minister's response.
The amendment which relates to section 35 seeks to make amendments to the anti-avoidance provisions relating to limited partnerships in section 1013 of the Taxes Consolidation Act 1997. Where section 1013 applies, a person who is a "limited partner" as defined in the section may be granted relief in respect of a loss sustained in a partnership trade, interest paid by reason of participation in such a trade and a capital allowance arising by reason of participation in such a trade. The limited partner may be granted relief in respect of these matters only against his or her income from the partnership trade and only to the extent that the aggregate amount of relief does not exceed the amount of his or her contribution to the trade at the end of the year involved. Where section 1013 did not apply, limited partners were able to offset losses, interest and capital allowances from the partnership against salary and other non-partnership income.
Is the Minister speaking to the section or my amendment?
I am speaking to the amendment. The definition of "limited partner" applies not only to a person who is a partner in a limited partnership established under the Limited Partnership Act 1907 but also to passive partners in general partnerships who have limited involvement in the management of the trade or whose liabilities for debts and obligations incurred for the purposes of the trade are limited in some way.
The amendment seeks to unravel some of the anti-avoidance provisions in section 1013 introduced in the Finance Act 2000 which targeted abuse of the double rent allowance provisions under the seaside resort scheme. The Finance Act 2000 applied to the restrictions in section 1013 in various circumstances. In the case of passive partners claiming double rent allowance under the seaside resort scheme, transitional arrangements were put in place in 2000 which deferred the effect of the restrictions in section 1013 until the current year, namely, 2005. Accordingly, passive partners had no restrictions on the use of losses arising in all years up to and including 2004, even where those losses may have been created or increased by the double rent deduction. Likewise, claims for interest relief and any capital allowances involved would not have been restricted in those years.
The amendment effectively seeks to reintroduce the benefits of sideways set-off of the double rent allowance provisions to most passive partners under the seaside resort scheme other than those in partnerships involved in the operation of accommodation facilities. This would allow passive partners and partnerships involved in the operation of facilities such as pubs, restaurants, car parks and amusement arcades, etc. the benefit of such a set-off.
I am not disposed to reintroducing such a set-off, despite the merits of a particular project. I am advised that the restrictions against set-off cannot be removed for particular projects as to do so would lead to claims of discrimination from other projects. To reintroduce a set-off for such a class of projects as suggested by the Deputy would have significant costs for the Exchequer and send the wrong signals to those who contemplate getting involved in avoidance transactions. Even then, other classes of projects such as those in the accommodation sector in the 15 seaside resort scheme areas could claim they were being discriminated against.
In addition, it appears ventures which depend solely on the benefits of the double rent deduction may not have been set up for purely commercial reasons. These ventures have had the benefit of the effect of the double rent deduction since, at least, 1999, and earlier in some cases. While section 1013 restricts the sideways use of the double rent deduction against other income, any loss created in 2005 and later years is subject to the capital contribution limit available against profits from the trade, if and when these arise. Therefore, I am unable to accept the amendment.
I accept the Minister's view. As I understand it, the amendment arose from a specific aquarium project which had merit as tourism infrastructure. It would have been separate from much of what was supported. Obviously, if the effect of the amendment would be to widen the scope for abuse and if it could not be confined to a particular project, I must accept the Minister's judgment.
I support the Minister's view on the amendment because there has been a degree of abuse. Will the consultant study commissioned by him provide for a detailed examination of the various impacts, positive and negative, of a number of tax schemes? The seaside resort scheme, in particular, has obviously had good effects in some areas. However, in others there have been problems with over-development. Will the study also examine the use of partnerships for the purposes of seeking seaside holiday resort scheme relief by, for example, groups of highly paid individuals — probably tribunal lawyers and doctors — who have gained an extraordinary amount of tax relief under various schemes? Will it provide such detail in order that we get a sense of who have been the beneficiaries of tax breaks?
I refer the Deputy to the Principal Features of the Budget which indicates what the review of tax incentives and exemptions involves. It states:
The Department of Finance and the Office of the Revenue Commissioners will undertake in 2005 a detailed review of certain tax incentive schemes and tax exemptions. This review will evaluate their impact and operation, including their economic and social benefits for the different locations and sectors involved and to the wider community. In addition the review will examine the degree to which these schemes allow high income individuals to reduce their tax liability.
As well as examining relevant international approaches, the review will include a consultation process seeking submissions on measures that could be introduced to limit the extent to which the use of such incentives by high-earners reduces their tax bill. The review will also involve external consultancy work on the evaluation of the following incentive schemes: urban renewal; rural renewal; town renewal; living-over-the-shop; multi-storey car parks; park and ride; student accommodation; third level buildings; hotels and holiday cottages; nursing homes; private hospitals; sports clinics; and childcare facilities.
The review will also incorporate an examination of data due to be available in late 2005 on certain exempt income, that is, woodlands, stallions and greyhounds, as well as data already available on other exemptions, for example, for artists. The termination dates for various schemes laid down remain unchanged.
It is an evaluation of the benefits of the schemes. We will not highlight each individual contribution to schemes or those who have availed of those options. The purpose is to evaluate the schemes and ascertain what lessons we can learn as to the role tax relief schemes and tax incentives should play in the taxation system, what is the cost benefit, etc. That is the approach. Arising from the review we will then decide what our policy response should be.
I am glad the Minister mentioned the words "cost benefit". I have asked numerous questions of him and his predecessor to identify the cost of the schemes. If the review is to be worthwhile, it will need to include a detailed cost benefit analysis of each scheme. Obviously, the Minister, his officials and the Revenue Commissioners were sufficiently concerned——
On a point of order, this matter is irrelevant to the section.
The Minister is moving to close off what has clearly been excessively aggressive tax planning on the use——
The Minister is responding to an amendment tabled by Deputy Bruton.
The Minister has quoted from his speech in the Dáil which is not relevant to the amendment. The Deputy is now taking him down a cul-de-sac.
I am allowing a discussion on this matter because it is covered. However, I will not allow repetition of points made yesterday.
I want to ask the Minister a question on the section. I support the brief he read on section 35 and the restriction on section 1013 of the Taxes Consolidation Act. What was the cost to the Exchequer of the excessively aggressive use of these schemes? Obviously, the Minister is moving to limit the schemes, which I welcome because some individuals were making excessively aggressive use of them through the mechanism of partnerships. This is what the note states and I am entitled to ask about it.
The amendment proposes to extend the scheme.
I am not supporting the amendment. I am supporting what the Minister has said and I am asking him to expand.
Are we not dealing with Deputy Bruton's amendment?
Are we not dealing with the section in the context of the amendment?
We are dealing with Deputy Bruton's amendment.
The amendment proposes to open up the scheme, against which the Minister is standing firm.
I support what the Minister has said and I am asking him for some information.
The Deputy is, unusually, supporting the Minister on this matter. I ask her to make the point without repetition.
In the context of the note on section 35 overall, does the Minister have a figure and-or a comment to make on the cost to the State of the clearly excessively aggressive use of this relief by certain individuals in a partnership context? If he has moved to close it off, he or his officials must have been concerned about it.
As I understand it, the holiday resort scheme was introduced by the rainbow coalition.
I am not aware this information was available then or now. We are engaged in an evaluation to determine the balance of benefits. Many benefits have derived from these schemes. The rainbow coalition must have had some objective reason for designating the 15 holiday resorts.
Can we now have a comment ten years later?
I did not interrupt the Deputy.
I ask the Deputy to allow the Minister to speak.
This Minister is undertaking a comprehensive review of all the schemes now. I am the first Minister to do so in a comprehensive way.
The information the Deputy seeks today will become available when the review is complete at which point we will have a far more comprehensive holistic view of all these matters. We will see the benefits that have derived from the schemes and how we can strike the balance between ensuring, as far as we can through our fiscal policies, those who have the benefit of income direct investments towards priorities identified by the Government, thus deriving a community as well as obviously a personal benefit, which is in the nature of tax incentive schemes. As I keep hearing from all parties in the House, nobody has an objection in principle to the schemes, the concept of which is legitimate. We simply want to review them. We need to allow the review to proceed and take it from there.
Deputy Bruton — rightly on the basis of representations he received, of which I am also aware — tabled an amendment with a view to assisting a project which has been well received and has considerable merit but which, unfortunately, has run into difficulty. I have explained that, unfortunately, because of the wider implications it would have for other issues and the potential discriminatory effect it could have in respect of those who have benefited from such schemes, including ones conceived during the time of the rainbow coalition, which I supported and continue to support as having been a good idea at the time, we are not in a position to accept the amendment. The Deputy accepts the point and I believe we should move on.
Amendment, by leave, withdrawn.
SECTION 35.
Question proposed: "That section 35 stand part of the Bill."
I wish to repeat the question. As Labour Party spokesperson on finance, I am entitled to ask the Minister questions and expect that he might reasonably attempt to address the matters raised. On section 35, did issues come to his attention which led him or his officials to decide to close down what, on the basis of the note he read, appeared to be abuses of the limited partnership structure for individuals who received double rent allowances? Will he indicate the extent of the tax losses that led him to introduce section 35 to restrict the relief? That is a reasonable question. I have not made any comment on the matter.
I have been a long-standing member of this committee and understand the decision was taken in 2000 and becomes effective now, five years later.
I am asking a question. We are not in the Short Strand and are entitled to ask questions.
I ask the Deputy to refrain from such comments.
The amendment related to——
We have disposed of the amendment.
Obviously, we do not have the costs relating to section 35, which is one of the reasons we are holding the review. Following amendments in the Finance Acts of 2003 and 2004, we are now asking questions through the format of the tax forms allowing us to collate the information far more easily than otherwise would have been the case. It is pointless continuing to ask whether I have the figure today as everyone knows I do not have it. I am undertaking a comprehensive review to allow an informed discussion on the merits, benefits and other issues that arise from all such schemes to determine what lessons can be learned for the future and what roles such schemes will play in the future and in what areas they will play them. I cannot be more specific.
I am ruling on this topic.
I have asked a legitimate question.
The Deputy got the answer and comparisons available.
I have not got the answer. In advance of his study the Minister correctly moved to close down what appeared to be an area of abuse. I am asking him to explain it and what was the cost to the State. That is a reasonable question.
The Minister has indicated that the cost is not available.
I do not have that detail, as I have explained.
Why then did the Minister decide to close down the scheme? Something must have brought it to his attention or that of his officials that this was an area which was subject to abuse. As a consequence, he decided to close it down.
Is the Deputy opposed to closing it down?
I support the Minister's position but I want some information. This is supposed to be a friendly exchange.
I am ruling on this topic, as Chairman. We have discussed the review of the tax incentive scheme on at least four occasions. The review is ongoing. The information will come on stream.
We are not entitled to ask legitimate questions. I am not getting any answer.
The Deputy has the information available today. We have discussed this topic four times. One of the standard rules under Standing Orders is that on Committee Stage we do not involve ourselves in repetition. We have done so four times since we commenced the debate on Committee Stage on the review of the tax incentives. We will not discuss that issue again.
I have to restate my question. I am asking a separate one. I am sorry. Deputy Bruton is indicating.
No one objects to closing loopholes. However, it seems reasonable to ask whether the Revenue Commissioners recommended this and whether a specific incident triggered it. Have there been studies in this field identifying abuses? This is not the only scheme. The next section involves closing another series of loopholes. Perhaps the Minister will give an overview of the origins of these loopholes.
Perhaps the Minister will let us have his briefing note.
I understand that in the past seven years in practically every budget the Minister for Finance has closed off one loophole or another in the interests of the finances of the State. I understand one of the reasons for the current review which involves my part of the country is that a scheme which has proved very beneficial to my area ends in July next year. I make no moan about the fact that I have made representations to have it extended because it is beneficial. I do not believe there is anything specific about any scheme. There has been a combination of events over a number of years. Loopholes are being closed off and some of the schemes are coming to an end. In many cases the review is about whether they should be extended.
The Minister has explained that a review is taking place and that he has not yet taken a decision. Many of the investigations are based on the fact that questions were being asked. Some schemes have served their purpose. The economy is buoyant and in the past seven years has gone from strength to strength. The German economy has grown by only 0.9% which is frightening for a large economy of 90 million people. Ireland is a leader as a result of the good procedures and disciplines implemented by the Department of Finance.
The seaside resort scheme was mentioned. My constituency participated in it. It was a success and we had to seek extensions from time to time. That was when the country was on its knees when twice as much was being borrowed than we had ever borrowed. Between 1983 and 1987 the national debt was doubled. That is just a reminder.
It seems the question is legitimate in the sense that in regard to section 35 the explanatory memorandum states the section amends the definition of "limited partnership" in section 10(13) to clarify the position. We have all been around long enough to know that when an amendment is introduced to clarify a position, it means there is a perception that there is abuse taking place. The question is whether abuses have been identified and, specifically, what they were. That is a reasonable question.
This was an anti-avoidance provision. What we are trying to do is tighten it to the extent that no one can get around it. The anti-avoidance provision was introduced in the Finance Bill 2000 for a reason. The Revenue Commissioners have asked that it be tightened.
The section amends section 1013 of the Taxes Consolidation Act 1997 which already provides that a person who is a limited partner as defined in the section may be granted relief in respect of a loss sustained in the partnership trade, interest paid by reason of participation in such a trade, and a capital allowance arising by reason of participation in such a trade. It may be granted only against a person's income from the trade or only to the extent that the aggregate amount of relief does not exceed the amount of the person's contribution to the trade at the end of the year involved.
In the past such limited partners were able to offset losses, interest and capital allowances from the partnership against salary and other non-partnership income. Limited partner, as defined, applies not only to a person who is a partner in a limited partnership established under the Limited Partnership Act 1907 but also to passive partners and general partnerships who have limited involvement in the management of the trade or whose liabilities for debts and obligations incurred for the purposes of the trade are limited in some way.
This section amends the definition of "limited partner" in section 1013 to clarify that individuals in partnerships or similar arrangements which are registered under or governed by the laws of any territory outside the State come within that definition where such individuals are not involved in the day-to-day management or conduct of the trade involved. The amendment and the consequent restriction on the granting of relevant reliefs contained in section 1013 will apply in respect of claims for relief made for the tax year 2005 and subsequent years.
Obviously, the Minister does not have details of specific instances. What is his view of an initiative taken by the British Chancellor of the Exchequer to have a catch-all anti-avoidance measure whereby there is an obligation on financial advisers to notify Revenue where an avoidance initiative is being taken to see whether it constitutes reasonable use of the tax law? This initiative changes the onus of responsibility regarding legitimate and illegitimate avoidance. Has the Minister studied this UK approach? Does he see merit in it or does he believe it would be unduly restrictive in an Irish context?
I have not studied the approach adopted by the Chancellor of the Exchequer in Britain. In this Finance Bill we have been discussing widening the ambit of certain aiding and abetting provisions. I have met tax advisers and other professional bodies which have made submissions asking us to ensure it does not result in tax advisers walking away from the situation because it has such a wide ambit and they are not prepared to take unnecessary risks where they believe there might be legal consequences and there is not adequate case law or sufficient clarity. It is the right of the Government to bring forward amending legislation in any area in this field. However, tax advisers and other professional bodies want clarity. They want to know what are the parameters, what they can and cannot do in order that they know exactly where they stand.
I have not studied the initiative to which the Deputy refers. However, our aim is to create a compliance culture throughout the system. Taxpayers, tax advisers, Revenue and everyone else need clarity on these matters in order that people will know what is contemplated by this section and what is its scope. The purpose of Committee Stage discussion is to create a record from which they can discern what was the parliamentary intention. Perhaps we sometimes throw more heat than light on the problem.
My understanding is that this is to curb the whole industry of picking over each year's Finance Bill to see whether there any holes through would a coach and four could be driven. It puts an obligation on financial advisers to notify Revenue of what is being done and gives Revenue an opportunity to determine whether it is in keeping with what was the parliamentary intention. It is an interesting change of onus of responsibility. I am not sufficiently expert to know the implications. The Minister might obtain the necessary information from the United Kingdom and we could subsequently, perhaps by way of parliamentary question, assess his views on the approach adopted.
I am advised that we have a general anti-avoidance section, but that the United Kingdom does not. It decided to go for reporting instead, but it is early days yet to decide whether that initiative will work out and be effective. The measure was enacted in 2004 and is quite controversial. One of the issues arising in this context relates to the question of solicitors who give tax advice and whether confidentiality between solicitor and client is protected. If we place a general duty of reporting on a professional relationship which is in its nature confidential under law, how will the interface work? This is the type of issue that is starting to arise.
Whether it is a reporting requirement or a general anti-avoidance provision, as in our case, the purpose is efficacy and clarity so that everyone knows the parameters. Unfortunately, sometimes despite everybody's best efforts, a fundamental disagreement can arise and as a result case law develops and lawyers become involved. The section aims to ensure that we do not head for the courts on all issues. We are keeping abreast of how the UK initiative works out, but I understand it is currently meeting some controversy.
Question put and agreed to.
NEW SECTION.
I move amendment No. 43:
In page 64, before section 36, to insert the following new section:
36.—"Schedule 26A to the Principal Act is amended in Part 3 by substituting ‘2 years,' for ‘3 years,' in subparagraph (c) of paragraph 3.”.
Amendment No. 43 inserts a new section 36 into the Finance Bill and modifies Part 3 of Schedule 26A to the Taxes Consolidation Act 1997. This Schedule is concerned with "eligible charities", the term used for the purposes of the donations relief contained in section 848A of that Act. Members of this committee will be aware that, subject to certain restrictions, donations made to eligible charities by individuals and companies are tax deductible in the case of individuals at their marginal rate of tax. Currently, one of the conditions necessary to become an eligible charity is that the body must have been granted tax exemption as a charitable body by the Revenue at least three years previously. I propose to reduce that waiting period to two years.
Some years ago my predecessor brought together all the various donations reliefs which had existed up until then into a single provision. Educational institutions, eligible charities, bodies promoting education in the arts and other named bodies are all now included in this single relief. In doing this, however, he also introduced for the first time tax relief for donations by individuals to such charities.
This is an extremely generous relief. The latest information available to the Revenue Commissioners indicates that the cost to the Exchequer in 2003 alone from donations from the PAYE sector came to more than €21 million. Data from the self-assessed sector is only coming through so I am not in a position to give any final figures. However, the cost of this relief is expected to grow as approved bodies become more professional in their fund-raising activities.
The three-year rule which currently applies gives a newly established body an opportunity to establish a credible track record before donations to it become tax deductible. This rule is important in giving the public a measure of confidence that donations made to a body are used for the right reasons, namely genuine charitable purposes, and not for fraudulent or other criminal purposes such as the financing of terrorist activities.
Under the current arrangements, the Revenue Commissioners scrutinise all applications prior to granting the tax exemption to applicant bodies. A review after 18 months to two years is then conducted to establish whether the activities of the body accord with its stated objective. This would entail an examination of accounts and other financial information.
The proposed reduction from three to two years will not compromise that examination by the Revenue and I am satisfied it will not give rise to any loss of control in the sector. In any event, the body must make specific application to Revenue to be authorised as an eligible charity for the purposes of the donations relief.
I am reluctant to go any further than this in the current circumstances as I am aware that my colleague, the Minister for Community, Rural and Gaeltacht Affairs, Deputy Ó Cuív, will shortly bring to Cabinet a series of legislative proposals concerning the establishment of a charities regulatory regime such as exists in many other countries. A public consultation process on that proposal has already been concluded. Further tax changes regarding charities at this time would be premature, given the work currently being done by Minister Ó Cuív and his Department. I commend this amendment to the committee.
The Minister's speaking note has been helpful. I have no objection to reducing the waiting period to two years, provided Revenue is able to do the necessary checks. Will the Minister give his view on the experience to date of the relief? The charities' tax reform group has written to the committee and indicated that it feels it is timely to reduce the €250 ceiling. The group has also canvassed the idea of some tax status for assets donated to charities.
I have also heard the concern expressed that administrative data is difficult for charities where donations are from the self-employed. When donations come from PAYE earners, there is a fairly simple form to be completed and the charity gets the refund. Apparently, Revenue does not have a similarly simple scheme to make it easy for the charities to deal with refunds resulting from donations from the self-employed. The situation appears to be particularly difficult where there is a mixture of self-employed and PAYE income.
Will the Minister, as part of his general review, give the charities tax reform group an opportunity to meet some of the consultants doing the work on tax relief so that the group's views on desirable changes to promote donations and volunteerism in the community can be assessed objectively? Bearing in mind the Minister considers it is premature to concede further concessions, will he ensure the group is consulted and gets the opportunity to meet appropriate advisers?
Tax relief for charitable donations was introduced by the Labour Party under Deputy Ruairi Quinn. The Labour Party supports relief and is glad this Government has followed on with it. However, there are problems. I have worked a lot with charities and NGOs in my professional life outside of politics. The lack of charities legislation is a serious problem with regard to the activities of charities. In the absence of legislation, the quality of accounting information and accountability varies enormously. Many charities are registered companies and, therefore, comply with companies legislation. John O'Shea, director of GOAL, had an excellent letter on this subject in The Irish Times this morning. He pointed out that GOAL is subject to regular review under company law, but also by its various donor bodies such as UN organisations, etc. The lack of charities legislation creates a feeling that there is little regulation of the sector, which is damaging to the sector as a whole.
It can be awkward for some charities to get the tax credits and refunds. Perhaps it would be useful for the Minister to consider setting up a sort of permanent consultation process between the charity organisations and the Revenue Commissioners. Many charities pay significant amounts of VAT while on the other side of the account they get quite an amount of public funding. The charities tax reform group has been seeking some kind of VAT refund system, which I well understand would be difficult to implement. However, they have an important point. In the context of their status and the work they do here and abroad, it should be possible to have an overview. For instance, people were extraordinarily generous in the aftermath of the Asian disaster. However, we still do not know to what extent the Government will arrange for a corresponding tax credit. When I questioned the Taoiseach, he promised a donation from the Government from the overseas development aid budget equivalent to what was obtained from the rerelease of the original Live Aid record. A significant number of such issues arise regularly and I wish to know whether the Minister will agree to do this. From his experience as Minister for Foreign Affairs he is aware of the regular meetings between the NGOs dealing with Third World issues and the Department of Foreign Affairs. A similar forum involving the Department of Finance and the Revenue Commissioners might also be useful.
The Minister's predecessor, Mr. McCreevy, told me he had been very impressed by what he had seen on visits to America, which gave him the motivation to open the gates very wide in offering tax relief for charitable donations. Have any studies been carried out? In America, while foundations operate in a controlled way and give enormous amounts to charities, this is subject to considerable regulation. We have not provided any framework in this area because most Irish charities and NGOs are so good and attract a high level of public confidence. Would the Minister be minded to provide such a framework?
With regard to what Deputy Bruton had to say, Revenue and the Department of Finance continually receive proposals for schemes giving further benefits to the charities sector. Significant relief is available to charities under the existing donations scheme, from which appeals, including the tsunami appeal, will benefit. We met representatives of the charities before the introduction of the Finance Bill as we do on a request basis all the time. Whenever they wish to see our officials, they do so.
Before introducing this scheme, I understand we looked at the US model, as Deputy Burton mentioned, and our scheme is far simpler. Further amendments have been tabled on this matter. Given that charities legislation is due to come before the Cabinet in the first instance and then the Oireachtas and that we are at the end of a detailed consultation process, it would be premature for me to do more than I am suggesting in this amendment at this time. Some of the issues regarded by the charities as still being on the agenda will need to be dealt with under the legislation to be sponsored by the Minister for Community, Rural and Gaeltacht Affairs, Deputy Ó Cuív. It is a matter for Government as to whether it accedes to these requests.
Applying donations relief more extensively by reducing, for example, the de minimis rule from €250 to €100 would involve significant further revenue losses. These are policy decisions which can be considered on an ongoing basis. However, I do not support them in the context of this Bill because considerable work is under way to modernise the statutory regulatory framework for charities under the auspices of the Minister for Community, Rural and Gaeltacht Affairs, Deputy Ó Cuív, following a very detailed, long and, perhaps for some, frustrating process.
The amendment seeks to ensure that when bona fide charities are established, they would not be required to wait for three years to become eligible for this relief, which would obviously handicap their ability to raise funds quickly. A charity may be established for a very good purpose and I was of the view that the period during which there would be an inability to access this relief for three years was unduly long. We all must ensure we are not so enthusiastic in our efforts to help that we allow the charities structure to be used in bad faith as a means of defrauding Revenue or the public. The two year period which is within the parameters operated by Revenue for the purposes of satisfying itself as to the bona fides of a charity is reasonable and represents a move in the direction of helping charities without compromising the basic safeguards necessary to ensure these issues are not abused by those without conscience who simply want to abuse people's generosity.
In answer to another question from Deputy Bruton, the arrangements for allowing tax relief for donations depend on whether the donor is a PAYE taxpayer, a self-assessed individual or a company. For a PAYE taxpayer relief is given on a grossed-up basis to the approved body rather than by way of a separate claim for tax relief by the donor. For example, if an individual who pays income tax at the 42% rate gives a donation of €580 to an approved body, it will be deemed to have received €1,000 less tax of €420. The approved body or charity would, therefore, be able to claim a refund of €420 from Revenue at the end of the tax year. Similarly, if a standard rate taxpayer makes a payment of €800 to an approved body, it can claim a refund of €200 from Revenue at the end of the tax year. An individual paying tax on a self-assessment basis who makes a donation claims the relief and no grossing up arrangement applies. Similarly, companies can claim deductions for donations as if they were trading expenses.
Amendment agreed to.
SECTION 36.
Amendments Nos. 44 to 47, inclusive, are related and may be discussed together.
On a point of order, I apologise for being late again. However, I need to try to cover other matters in the House. What happened to amendment No. 39 in my name?
Unfortunately, the amendment was not moved by anybody and was not discussed. The Deputy may resubmit it on Report Stage.
Can we retrospectively address it now?
No, we have passed the section which was dealt with last night.
I move amendment No. 44:
In page 64, line 44, before "not" to insert "notwithstanding paragraph (c),”.
Section 36 of the Bill, as published, amends section 817 of the Taxes Consolidation Act 1997. It is an anti-avoidance measure to counter schemes intended to transform profits of private companies which should be chargeable to income tax when distributed to shareholders into capital gains which are taxed at a lower rate. As a result of information brought to my attention by the Revenue Commissioners, section 36 sets out a series of provisions to counter three further schemes of this kind which were not properly addressed in the original legislation.
Amendments Nos. 44 and 45 correct minor drafting omissions in the section. Their purpose is to make the proper linkages between the newly inserted provision and the original legislation.
Amendment No. 46 inserts, via section 36, a new subparagraph (iv) into subsection (1)(ca) of section 817. This newly inserted subparagraph addresses a further possible scheme which has come to my attention since the Bill was published. Such a scheme would give rise to payment of the lower capital gains tax rates on funds taken out of a company instead of at income tax rates. It would do so by using an artificial trust structure to make payments in a way that would get around the usual treatment of distribution income.
Amendment No. 47 inserts a new commencement date for section 36. Previously the date was set for 3 February, the date of publication of the Bill. Since this new provision can only apply prospectively, I propose the entire section 36 to apply from 1 March 2005, the date of the commencement of Committee Stage. This is because some correction of the interaction of the Finance Bill changes with the existing section is also required.
These provisions are welcome. Does the Minister envisage any danger that there will be some abuse because people will be alerted that the date has been pushed back by a month? Given his previous comments the Minister may not have information on this point, however, how widespread does Revenue believe was the abuse where companies used these artificial mechanisms of connected persons or trust structures et al to avoid tax?
Can the Minister explain how the abuse came to light in Revenue and whether further areas of abuse might be related to it? Even in the space of a month he has uncovered a further area. Does the Minister consider it is a widespread area of abuse that will require further scrutiny by the committee and the Revenue Commissioners?
I welcome this U-turn by the Government because when Mr. McCreevy was Minister for Finance, he denied time and again that any schemes were in use that transferred income from income to capital to avail of the 20% capital gains tax and the other similar rates. He boasted repeatedly that lowering the rate of capital gains tax had increased the amount of taxation collected. It is evident that the amount of capital gains tax has risen enormously, partly related to levels of activity in the economy. However, there has been a significant amount of business carried out by tax advisers for the express purpose of converting what for the PAYE sector is ordinary income, therefore meriting tax at 42%, into capital gains tax, thereby reducing the taxpayer's rate of tax to 20%.
I welcome the amendment and the Government conversion and U-turn on this point. I support the notion of lower, flatter tax rates. A regime, such as that in which the former Minister, Mr. McCreevy, specialised, which allows a wide open gate where wealthy people can engage expensive tax-planning services, thereby reducing their liability from 42% to 20%, is extremely unfair.
I noted the Minister's move with regard to trusts. I have raised a number of parliamentary questions recently on the issue. Trust activity in Ireland and the serious amount of assets in trust are a very significant but hidden area of our tax structure. Does the amendment here relate to a specific trust or to a number of cases?
The critical information we require is what has prompted the Minister to introduce this amendment, welcome as it is. Has the Minister got information that suggests there is widespread abuse? This would be the view of many on this committee. Will the Minister indicate what other measures he intends to take to address the relationship that may exist between people involved in companies and the trustees of same and the access they enjoy to financial advisers who assist them to avoid the payment of their due tax liability? Will he indicate what led to the introduction of this amendment and explain the extent of the problem?
I am advised by the Revenue Commissioners that there is no evidence of any systematic move of chargeable amounts from income tax into capital gains tax. Therefore, that is not the reason for this amendment. A limited number of schemes have been tried by tax advisers since the 1980s to see if can they do this, but every time the Revenue Commissioners identify such attempts they bring forward provisions to ensure it does not happen.
When we came into office capital gains tax receipts were approximately €156 million. They were approximately €1,523 million last year. Nobody can say that is because there is leakage from income tax into capital gains tax. That is not the reason. The reason there is more tax is rates are lower and there are more transactions and greater activity. The suggestion that there is a systematic move of chargeable amounts from income tax into capital gains tax is not supported by the Revenue Commissioners.
When limited numbers of individual avoidance arrangements are identified, they are dealt with by the Revenue. The amendment here is an effort to be pre-emptive. It has been suggested in some media circles that it might be possible to do this, therefore, we are pre-empting the possibility of people finding a good idea somewhere else and using it.
With regard to the change in dates, up to now we said the provisions of this section would take effect from the date of publication of the Bill. Therefore, nobody would act on that basis. With the change in date we are simply making sure that the provisions apply from the first date of Committee Stage for the reasons I already gave. We do not expect the change to have opened the door for anybody.
The Minister's officials may have a record of queries I raised on a number of occasions with the former Minister for Finance, Mr. McCreevy. I asked him about schemes where individuals with very high income in any one year convert, as they are entitled to, their activities into a company. By closing down the company there would be a capital receipt at the end of the process so that while they would pay themselves salaries as directors or shareholders on the closure of the company the resulting surplus would be a capital surplus and therefore subject to capital gains tax. Individuals, for example in the entertainment business, with an income of approximately €1 million could convert a large part of their income into a capital gain. Many accountants around town sell such schemes. Is this amendment likely to address this issue? I raised this matter in successive years with the Minister's predecessor.
I am advised that the Revenue Commissioners keep that matter under close scrutiny and they have no evidence of widespread use of that tactic to circumscribe the rules.
Amendment agreed to.
I move amendment No. 45:
In page 65, to delete lines 9 and 10 and substitute the following:
"(iii) notwithstanding paragraph (c), not to have been significantly reduced where the”.
Amendment agreed to.
I move amendment No. 46:
In page 65, line 17, after "company" to insert the following:
", and
(iv) not to have been significantly reduced where—
(I) it would not have been so reduced if the shareholder were to be treated as beneficially entitled to any shares to which he or she could, at any time, become so entitled by the exercise of a discretion by trustees,
(II) the acquisition of those shares by the trustees was directly or indirectly related to a disposal, including a prior or subsequent disposal, of such shares by the shareholder, and
(III) the shares were acquired by the trustees with the direct or indirect financial assistance of a company or companies, which is or are controlled by the shareholder or by the shareholder and persons connected with the shareholder".
Amendment agreed to.
I move amendment No. 47:
In page 65, subsection (2), line 20, to delete "3 February" and substitute "1 March".
Amendment agreed to.
Section 36, as amended, agreed to.
SECTION 37.
I move amendment No. 48:
In page 65, lines 27 to 29, to delete all words from and including "and" in line 27 down to and including "Court" in line 29.
The text of the Bill as drafted refers to funds of minors and wards of court as we understood this gave the coverage required. However, a small proportion of court funds are held for other beneficiaries and the amendment addresses this matter.
Amendment agreed to.
Section 37, as amended, agreed to.
NEW SECTION.
I move amendment No. 49:
In page 66, before section 38, to insert the following new section:
38.—(1) Section 29(3) of the Principal Act is amended—
(a) in paragraph (c) by substituting ‘agency,’ for ‘agency.’, and
(b) by inserting the following after paragraph (c):
‘(d) assets situated outside the State of an overseas life assurance company (within the meaning of section 706(1)), being assets which were held in connection with the life business (within the meaning of section 706(1)) carried on by the company, which at or before the time the chargeable gains accrued were used or held by or for the purposes of that company’s branch or agency in the State.’.
(2) This section applies as respects accounting periods ending on or after 1 March 2005.".
This new section proposes to deal with an issue that has been brought to my attention regarding the unequal tax treatment that may arise for certain overseas life assurance companies doing business in Ireland, compared with Irish assurance companies doing business here. The issue concerns business that was contracted for before the introduction of the new gross roll-up regime for life policies, which was introduced in January 2001. Under the tax regime for such businesses, life assurance companies are taxed on their income and capital gains minus their expenses.
This amendment concerns the capital gains tax rules that apply to overseas life assurance companies. These are companies with their head office outside the State which carry on a life assurance business through a branch or agency in the State. In common with any other non-resident company carrying on a trade through a branch or agency in the State, gains are chargeable on an overseas life company in respect of disposals of assets situated in the State, and are not chargeable in respect of disposals of assets situated outside the State.
However, if the value of the overseas life assurance company's Irish assets is less than the value of its Irish branch liabilities, a special rule kicks in to increase the tax on the chargeable gain by a proportionate amount. This proportion is based on the relationship between the branch liabilities to shareholders and its assets that are within the charge to Irish capital gains tax. For example, an overseas company with Irish branch liabilities that are twice the value of its Irish assets will have its chargeable gain doubled. The Revenue Commissioners have informed me that a small number of overseas life assurance companies doing business in the State are adversely affect by the rule because they use assets outside the State to protect against their liabilities arising under life policies taken out through their Irish branches. In one case, the Irish chargeable gain is multiplied threefold because Irish liabilities are three times the value of Irish assets.
Irish policyholders who have policies with such companies are at a disadvantage compared with Irish policyholders who have policies with Irish companies. In the case of the overseas companies, the gain is increased by a multiplier, which can result in a lower return to the policyholder. It is particularly the case if the level of gains on non-Irish assets is less than the additional amount charged to tax because of the multiplier.
I propose to rectify the problem by providing that capital gains on all the assets of an overseas life assurance company that are held in connection with the company's Irish branch are brought into the charge to tax here, even where such assets are located outside the State. This will bring extra gains into the charge, but the gains will be real gains and it will lessen the need for the special rule. This will result in these overseas companies being treated in broadly the same way as Irish companies in this regard.
It sounds a bit of a mystery. Does taxing all assets disposed of regardless of where they are located not fall foul of the double taxation agreements we have with other states? Based on what the Minister has described, how do we get away with a special tax in the first place? How can we have an arbitrary tax as described, which can be double or treble depending on the asset structure? It seems a rather strange feature.
I suggest we go into private session.
The select committee went into private session at 12.16 p.m. and resumed in public session at 12.18 p.m.
Amendment agreed to.
SECTION 38.
Question proposed: "That section 38 stand part of the Bill."
The Minister seems to be introducing a new tax rather than closing a loophole. It suggests that new chargeable events arise at the end of an investment period of a policy and a transfer to another fund. What is the origin of this suggestion? It seems to be a new tax to apply to people with life assurance policies, which should not pass without comment. I ask the Minister to explain.
It is to avoid a company continually rolling over a policy without it ever becoming chargeable to tax. Section 38 amends Chapter 5 of Part 26 of the Taxes Consolidation Act 1997, which deals with the taxation of policyholders of life assurance companies in respect of ''new basis business'', which is the regime introduced in the Finance Act 2000. The new system is a gross roll-up regime where no tax is charged on investment proceeds during the term of the investment but an exit tax applies at a rate of 23% on the net investment proceeds paid to a policyholder at the end of the investment period. This regime provides for when a chargeable event occurs, provides a method for calculating and taxing gains, which may arise from the chargeable event, and provides for the return and collection of tax due.
The section adds two new chargeable events in section 730C of the Taxes Consolidation Act 1997 and provides for the calculation of the gain and the collection of the tax in respect of these events. The events are the ending of an investment period, as defined, or, if there is no such investment period, any transfer of investment moneys from one fund to another that happens five years or more after the start of the policy, where the transfer is at the discretion of the policyholder.
The purpose of this section is to counteract the deferral of exit tax on certain life insurance investments. A new type of investment product is now on the market under which investors can defer exit tax indefinitely. They may do this by switching moneys between funds at the end of a relatively short investment period of, for example, five to seven years. This allows the investor to enjoy the benefits of a long-term investment without having to tie up his or her funds for too long in one investment product. While I have no difficulty with investors making reasonable choices regarding the switching of investments, it was not the intention of the legislation introducing the gross roll-up regime that this should happen in a manner in which, because an investment is built into a life insurance policy, it becomes possible to defer any taxation indefinitely. It would involve a considerable cash flow loss to the Exchequer if left unchecked. The changes proposed in the section are designed to ensure tax will be paid at the end of each investment period, which was always the intention of the legislation.
Since the publication of the Bill my officials have had discussions with representatives of the life assurance industry about the impact of the detailed provisions of the section. Arising from these discussions, I will table amendments to the section on Report Stage, which will simplify the provisions while achieving the intended effect.
The Minister referred to "the end of period as defined". Who defines this period? The Minister is suggesting that an individual should have five years after which tax is paid. Is that correct? However, it is allowed to continue to the end of the period. Is it the case that if it is a ten-year life assurance policy, the policyholder is safe for the ten years?
We are going to simplify it as a result of talking to the industry. We will take a seven-year period. After every seven years we will make a decision on liability for tax. It would not be possible for this to be indefinite.
Does this section distinguish between policyholders who are resident for tax purposes and policyholders who are non-resident or who during the period may become non-resident? What happens in those cases?
Non-residents can make a declaration whereby they are not chargeable on this tax.
That is what I wanted to ask. It is my impression that quite a flourishing industry exists with high net worth individuals becoming non-resident at certain points of time to take advantage of our tax system. What happens to people who have become non-resident by the time the exit taxes arise? Do we lose their tax?
There is a huge business in the IFSC selling life assurance products to non-residents. On Report Stage we will table amendments so as not to affect such business involving a genuine non-resident.
I am talking about Irish people. Someone planning on selling a business may have a tax adviser who suggests a strategy of becoming a non-resident for a period of time by buying a house in Marbella. What is the implication of this change for those people?
As I understand it, the rules define people as either residents or non-residents. Genuine non-residents can get a declaration allowing tax not to be chargeable. The residence rule is a separate issue. The issue here relates to investment products that sought to circumvent the gross roll-up regime by deferring indefinitely an exit of the capital from the investment product. It was never the intention of that regime that people could defer indefinitely. A Report Stage amendment will simplify the matter by making seven years the defined period. We will ensure genuine non-resident business in the IFSC will not be affected by the change. The other issue the Deputy raised relates to rules for non-residency, which is a separate question and does not derive from this change.
However, certain high net worth individuals could gain from this provision as well as getting other advantages from becoming non-resident. By becoming non-resident does a policyholder avoid the exit tax? While I understand the area is very complicated, I would appreciate some information.
That is correct. The tax does not apply to a non-resident.
While I am not in the tax avoidance business, this seems potentially quite an attractive loophole.
A policyholder must be a genuine non-resident for the full period of the product.
I do not know whether "genuine non-resident" is a concept that would hold up in law.
If, as has happened in recent years, losses were sustained at the end of the seven-year period are they carried forward into the next seven-year period or does a policyholder sacrifice the losses sustained at the roll-up date?
We will consider that matter before Report Stage. We have not yet finalised our consideration.
It would seem unfair to cut off genuinely incurred losses in a fund.
We will be able to have a more comprehensive discussion on Report Stage.
This point may have been addressed in my absence and if so I apologise for being repetitious. In the past overseas financial institutions set up in the jurisdiction, attracted new business and then for whatever reason withdrew their presence. However, business they already had went with them. What are the implications for Irish investors in life products with companies which were originally accessible here but have now transferred to the base of their parent?
I do not see any problem on the basis of whether a viable business is located here or elsewhere. It is a business matter. A policyholder is not put at risk by having a product with such a company. Regardless of whether it has a branch or agency here, the policy is a valid contractual relationship between the policyholder and the life assurance company.
Would the relocation of a company have no implications for a policyholder who may have invested when the company was located here?
Question put and agreed to.
Section 39 agreed to.
SECTION 40.
Amendments Nos. 50 to 53, inclusive, are related and may be discussed together.
I move amendment No. 50:
In page 68, to delete line 8 and substitute the following:
40.—The Principal Act is amended—
(a) in the definition of ‘collective investment undertaking’ in section 172A(1)(a)—
(i) by deleting ‘or' in subparagraph (ii),
(ii) by inserting ‘or' after ‘Finance Act, 2000),' in subparagraph (iii), and
(iii) by inserting the following after subparagraph (iii):
‘(iv) a common contractual fund within the meaning of section 739I (inserted by the Finance Act 2005),',
(b) in the definition of ‘investment undertaking’ in section 246(1)—
(i) by deleting ‘or' in paragraph (b),
(ii) by substituting ‘section 739B, or' for ‘section 739B;' in paragraph (c),
and
(iii) by inserting the following after paragraph (c):
‘(d) a common contractual fund within the meaning given to it in section 739I (inserted by the Finance Act 2005);’,”.
Amendments Nos. 50 to 53 are technical amendments, which provide for the tax treatment of an investment, called a common contractual fund. A common contractual fund, CCF, is a type of investment fund structure based on a contractual relationship between the participating investors. The purpose of the fund is to allow for the pooling of assets in order to achieve lower costs and investment efficiencies. A limited type of CCF, as defined under EU usage regulations, has been available in Ireland since 2003. The Department of Enterprise, Trade and Employment is expected to bring forward legislation later this year to provide for a general form of CCF which will allow more flexibility than the current limited arrangement in terms of investment policy and borrowings, for example.
Section 40 of the Bill as initiated sets out the proposed taxation regime that will apply to all types of common contractual funds, both existing and proposed. The core provision of the taxation regime is that all CCFs will be tax-transparent provided the unit holders are institutional investors rather than individuals and that certain reporting requirements are met. Tax transparency means the CCF is not taxable in its own right but the profits, meaning the incomes and gains that the CCF makes, are treated as accruing to the unit holders in proportion to the value of the units they own, as if such profits did not pass through the CCF.
One advantage of tax transparency is that foreign-resident investors who pool their assets in the Irish common contractual fund will continue to enjoy any tax treaty benefits to which they were entitled prior to the pooling under their home country tax treaties with third countries. Such benefits may include, for example, low withholding tax rates on dividend and interest income. The Irish funds industry considers tax transparency to be a major feature in the development of the common contractual fund as an investment vehicle.
The amendments I propose deal with two technical issues that have been brought to my attention since the publication of the Bill. First, they extend certain withholding tax exemptions currently available to other collective investment vehicles to common contractual funds. This will put the CCFs on a par with the other types of investment. Second, they clarify some of the wording in the new section in order to remove possible ambiguities in regard to the scope of the new section. This will copperfasten the applicability of the new provisions to pension funds.
Amendment agreed to.
I move amendment No. 51:
In page 69, line 7, before "and" to insert" ‘relevant profits', ‘unit' " .
Amendment agreed to.
I move amendment No. 52:
In page 69, line 42, after "is" to insert "an asset of a pension fund or".
Amendment agreed to.
I move amendment No. 53:
In page 69, line 45, to delete "such a person" and substitute "a person other than an individual.".
Amendment agreed to.
Question proposed: "That section 40, as amended, stand part of the Bill."
I may bring forward a minor amendment to this section on Report Stage.
Question put and agreed to.
SECTION 41.
Question proposed: "That section 41 stand part of the Bill."
This section proposes a relaxation in regard to the offsetting of capital allowances for companies within a group. Will the Minister explain the thinking behind this?
This section makes a number of changes to the tax regime dealing with the leasing of plant and machinery. In general, taxable income from a trade of leasing is calculated by comparing gross leasing receipts with capital allowances on the leased assets. Where the leased assets have a long life and the lease is over a long period, capital allowances on the assets in the early years of the lease are likely to exceed the lease receipts. If the surplus capital allowances were allowed to shelter non-leasing income of the lessor, it would be possible to defer tax liability, which would impose a significant cash flow loss on the Exchequer. To avoid such a loss, a provision was introduced in 1984 to treat leasing activities as a separate trade and to ring-fence any losses arising from capital allowances from leasing so they can only be offset against income from leasing.
The first of the changes provided in this section serves to ensure that the ring fence of which I have spoken operates as intended. When the 12.5% corporation tax rate for trading income was introduced, a rate of 25% was also established for non-trading income. To ensure that income taxable at the 25% rate could not be sheltered by losses arising in an activity that was subject to the 12.5% rate, a specific measure was introduced which allowed losses from a 12.5% activity to be offset against income from 12.5% activity. However, the provision did not specifically exclude losses from a leasing activity from being offset against non-leasing income. That provision is being amended to make it clear that the 12.5% losses to be allowed against 12.5% incomes do not include losses arising from a leasing activity.
The second change eases the leasing ring fence in one respect. As I have already said, a loss incurred by a company from a trade of leasing may only be offset against income of the company from that trade. Some lessors of what are known in the industry as "big-ticket assets" such as aircraft may put each lease into a separate company for commercial reasons. Where they do, it is currently not possible for a leasing loss in one such company to be offset against leasing income of another leasing company in the same group. The measure contained in this section will allow such an off-set as, in effect, all the leasing activities of the group from such leases are akin to a single trade of leasing of the lessor. This will facilitate the competitiveness of the leasing sector.
Does the Minister anticipate that the major beneficiaries of this provision will be the banks in the sense that most banking companies have significant leasing business? It is often the banks which are the owners of the assets in the leasing arrangements of which the Minister has spoken. The low rate of corporation tax introduced by Labour and Fine Gael in government meant the old Section 24 went out of business.
In regard to the Minister's reference to "big-ticket assets", I asked his predecessor about this issue on a number of occasions and raised it on the Adjournment. For example, a group of Irish investors bought the yacht Christina Onassis for the purpose of attaining extensive tax breaks. Will there be more instances of this type of scenario?
No, it is question of quarantining the losses from leasing activities so that they do not feed back into the profits of lessors such as the banks. The provisions ensure this activity operates as originally envisaged. The only easing relates to the circumstances of a group, in the aircraft industry, for example, in which the same leasing company is separated for commercial reasons. In such instances, a loss in one may be offset against a gain in another. However, in regard to general leasing provisions, this section ensures losses are quarantined within the categories I have outlined and cannot be fed back into the profits of, for example, the banking industry.
Consider the case of an airline company that wants to invest in airplanes and sets up a separate company within the group to deal with the arrangements. Will this provision facilitate such a company in availing of more tax-effective mechanisms in regard to the leasing arrangements?
No. In the example Deputy Burton has given, if a certain number of aircraft are leased, the company will be able to offset the losses one against the other whether it operates as a single company or sets up separate companies for each aircraft transaction. There should be no difference in this regard and this provision serves to remove that difference.
Question put and agreed to.
SECTION 42.
I move amendment No. 54:
In page 71, between lines 28 and 29, to insert the following subsection:
"(2) This section applies as respects any payment on or after the date of the passing of this Act.".
This amendment changes the commencement date for section 42 of the Act. That section amends the obligation on a bank to apply encashment tax to certain foreign interest and dividend payments obtained by a bank on behalf of a customer. Encashment tax is a withholding tax applied to such interest and dividends. Tax is withheld at the standard rate of income tax and is paid over to Revenue. The section provides that in future, encashment tax will not need to be applied to such payments by a bank if the bank's only function in the matter is the clearing of a cheque or arranging for the clearing of a cheque. The encashment tax will continue to apply where a bank acts on behalf of a customer as a collecting agent. The amendments modify the commencement date for the new rules. If the Bill was to be enacted as drafted, the abolition of encashment tax in the case of such transactions would apply from 1 January 2005. This would be unsatisfactory, as it would give rise to uncertainty regarding the status of tax deducted before the passing of the Act. In these circumstances, it is proposed to commence the section from the date of the passing of the Act.
Amendment agreed to.
Section 42, as amended, agreed to.
SECTION 43.
Question proposed: "That section 43 stand part of the Bill."
I welcome the section, which seems to make matters equitable for those who invest in PRSAs. Does the Minister have up-to-date information on the uptake of PRSAs? I understand that the uptake has been disappointing compared with what was expected. Does the Minister have any plans to promote greater uptake?
Most people regard the realisation of the special saving investment accounts as a possible opportunity to expand pension provision. The Minister will be aware that approximately 50% of workers made have no pension provisions. These are predominantly lower income people. However, the SSIAs seem to have had a broader uptake than pensions. The Minister may have an opportunity to pump-prime the provision of pensions particularly among lower income groups by converting the SSIAs into pensions. What is the Minister's view of the development of PRSAs against the background of the realisation of these saving accounts? Has he considered other concessions or improvements in the terms on which people invest into these schemes? One obvious problem is that relief is available at a taxpayer's marginal rate, which means that those on very high income can get a concession of 47%, including PRSI and levy, whereas those on modest income get 20% relief and those outside the tax net obviously get no tax relief. There are issues of the equity of our provision for people's long-term pension cover. Is the Minister giving consideration to this area?
One would have hoped that the uptake of PRSAs would have been greater than is the case. It is a matter for the Department of Social and Family Affairs to work on that issue. Many people have asked what will happen when the SSIAs mature. The Government is monitoring the situation and I do not want to speculate on the matter until the Government reaches conclusions in its considerations of the matter. People have been prudent enough to have saved their own money in SSIAs and I do not believe they will all splurge it and go wild. People do not save up money and then decide to have a party. People who party usually have a party all the time——
They will hold on to most of the money and still have the party.
—— and then find out they cannot pay the bills.
The Minister has not dealt with the question.
I have not; I was just coming to an end. I was trying to find a way of getting a soft landing to a pretty unsubtle metaphor. Certain policy issues may or may not arise. We are monitoring the situation and will need to determine how we can continue with the one really significant benefit of the scheme, for which credit is due to the previous Minister, and that is to try to inculcate a savings culture again.
The issue of pension provision is growing and has reached crisis proportions in some European countries. We have begun to address the matter at an appropriate time in our demographic cycle. Establishing the pension fund is part of the longer-term strategic planning. We will need to give consideration to how we can encourage people of all incomes to take on the responsibility and be conscious of providing for their pensions.
I want to again ask the Minister about the SSIAs. The recent reports from the pension boards indicate that a pretty disastrous deficit on pension provision is looming. A number of company pension funds, particularly those involving defined benefit schemes, are now seriously under funded. Defined benefit schemes are now disappearing. I welcome the section and I accept what the Minister says. When the SSIAs mature I accept it is people's money and it is up to them to decide what to do with it. However, given that we have a massive pensions black hole looming, would it not be advisable to give thought to addressing particularly those who have little or no pension cover?
Legions of women left paid employment for family duties. Up to 1973 many women were obliged to do so on marriage. The Minister's predecessor introduced extraordinarily generous arrangements for the pensions of the self-employed. With my support the former Minister for Social Welfare, Deputy Woods, introduced very generous arrangements for social welfare at a time when I was the Minister of State in that Department. These entitled self-employed people paying social welfare contributions to get an old age pension on a contributory basis. A self-employed person paying contributions to social welfare giving a guaranteed contributory social welfare pension represents the best value in town.
However, significant numbers of people, particularly women because of the social and employment structure here, have not made contributions. I ask the Minister to seriously consider opening some possibilities for those women to become contributors in their own right or to create a pension saving fund, which would benefit them. SIPTU has done considerable work in this area and produced an interesting report some time ago. I do not know whether the Minister or his officials have had an opportunity to consider it. It is well worth using the opportunity of the maturing SSIAs to create some additional attractions.
The PRSAs have failed badly. When discussing tax breaks we spoke about incentivising economic behaviour. PRSAs do not offer any interesting incentive and are difficult for many people to access. I encourage the Minister to consider the matter further. The Minister should give some consideration to another parallel area. He knows that people over 65 years can reclaim DIRT, but people with a disability who are under 65 years of age pay DIRT and there is no reclaim mechanism available to them. The cost of living for people with a permanent disability is higher than for those without a disability. The Minister should look at the sectors of society that face such disadvantage. With imagination, we could introduce interesting and advantageous benefits. I urge him to do this.
The national pension reserve fund has been discussed and an amendment will arise later in this section. Implementation of that fund was one of the most progressive moves of any recent Government and it is the envy of many companies in Europe. I remember that at the time it was introduced I was finance spokesperson in the Seanad and there was adverse comment from some of the Opposition. That fund has turned out to be one of the most progressive innovations of the Government. I was at a conference in London some months ago where the Government was complimented by practically every one of the 30 states represented on its progressive approach. Deputy Ned O'Keeffe was with me at that meeting.
The same can be said with regard to the introduction of the SSIAs. I remember the attitude when they were introduced was that they were to suit the wealthy and those who could afford them. The outcome has been that 46% of the people with SSIAs are from the lower income group. Both proposals were progressive and I am glad to see the Minister is not rushing into further decisions with regard to the future of the SSIAs. When the pension fund was implemented there was direct opposition to funding going into it rather than into roads or something else. We know that the decision was very important for the future interest of pensions here.
What is the Deputy talking about? That is a load of rubbish.
I would love to read the record back to some of the Opposition spokespersons.
I defend what I said. It is costing us €500 million a year.
Question put and agreed to.
SECTION 44.
Amendment No. 55 has been ruled out of order and the Deputy has been notified.
Amendment No. 55 not moved.
With regard to the ruling on amendment No. 55, in view of the oration from the Deputy on my left would the Chairman not agree that it would be appropriate if there was an ethical basis to the investments in the national pension reserve fund? The fund holds significant shares in tobacco companies and in companies such as Halliburton that are linked to the armaments industry. I do not know whether Deputy Finneran has finished his oration, but perhaps he should include that information the next time he addresses the issue.
We would not have the fund at all if Deputies Burton or Bruton had their way at the time.
The amendment has been ruled out of order. As the Deputy knows, the national pension reserve fund body appears before this committee.
We would not have the €10 billion or €11 billion we have today invested if the Labour Party had its way.
We might have a few more hospitals, trains, child care facilities and many other things.
Questions about the investment strategy of the national pension reserve fund can be put to the body when it presents itself at this committee. Deputy Burton knows this amendment is outside the scope of the Finance Bill.
Old age pensioners are left on trolleys day in day out.
Deputy Burton is exaggerating all day.
The Deputy knows the amendment is outside the scope of the Finance Bill. There will be an opportunity for the Deputy to discuss this issue when the pension reserve fund body comes before the committee.
There is an excellent hospital in Roscommon funded by this Government.
I move amendment No. 56:
In page 75, line 30, to delete "section — " and substitute the following:
"section, section 76A and paragraph 4 of Schedule 17A — ".
This is a technical drafting amendment which extends some of the interpretation rules in sections 76B and 76A and paragraph 4 of Schedule 17A.
Amendment agreed to.
Amendments Nos. 57 to 60, inclusive, are related and will be discussed together.
I move amendment No. 57:
In page 75, line 44, to delete "generally accepted accounting practice" and substitute the following:
"relevant accounting standards (with the meaning of Schedule 17A)".
These are technical amendments. Section 76B provides that where, under the new accounting rules, an unrealised gain or loss on a financial instrument that is calculated by reference to movements in the fair value of the instrument is included for accounting purposes in the company's profits or loss, it will also be taken into account in computing the company's taxable trading profit.
For this purpose, the section describes the new accounting rules in the opening lines of subsection (2) as "generally accepted accounting practice". While strictly that description is sufficient, the position would be more clear if the expression "relevant account standards" were to be used. That expression is defined in Schedule 17A as meaning "international financing reporting standards" or Irish standards that are equivalent to such standards. This takes account of new Irish GAAP standards that are equivalent to international standards.
As both sets of standards are the rules under which unrealised gains or losses are accounted for, the reference in subsection (2) to "generally accepted accounting standards" is being changed to "relevant accounting standards" by amendment No. 57.
Amendments Nos. 58, 59 and 60 are technical amendments to ensure that the unrealised gains and losses that are to be included in the profit and loss account for an accounting period on the basis of fair values of a financial instrument are those for the accounting period concerned.
Gains and losses calculated on a fair value basis on certain other assets, referred to as "available for sale assets", are not included in accounting profits each year but are accumulated in reserves until they are sold and then taken into the profit and loss account. In effect, gains and losses on such assets will be taxed on a realisations basis.
Amendment No. 58 clarifies that section 76B deals only with movements in fair value in an accounting period that are included in profits and losses in that accounting period. Amendments Nos. 59 and 60 are consequential.
Amendment agreed to.
I move amendment No. 58:
In page 75, to delete lines 46 and 47 and substitute the following:
"(a) calculated on the basis of fair values of the asset or the liability in an accounting period, and”.
Amendment agreed to.
I move amendment No. 59:
In page 75, line 49, to delete "an" and substitute "the".
Amendment agreed to.
I move amendment No. 60:
In page 75, line 50, after "account" to insert "on that basis".
Amendment agreed to.
Sitting suspended at 1 p.m. and resumed at 2.30 p.m.
I move amendment No. 61:
In page 77, to delete lines 24 to 28 and substitute the following:
"which consists, directly or indirectly, of shares in the company, or a connected company (within the meaning of section 10), or a right to receive such shares, except to the extent—
(i) of expenditure incurred by the company on the acquisition of the shares at a price which does not exceed the price which would have been payable, if the shares were acquired by way of a bargain made at arm's length, or
(ii) where the shares are shares in a connected company, of any payment by the company to the connected company for the issue or transfer by that company of the shares, being a payment which does not exceed the amount which would have been payable in a transaction between independent persons acting at arm's length.',".
This amendment is concerned with the tax deductibility of share based payments given by a company. Under Irish GAAP practice, shares given, for example, to employees do not appear as an expense in the profit and loss account of the company and do not qualify for a deduction in computing profits. Under the IFRS, companies which issue shares to their employees will be obliged to show them as an expense in earning profits for accounting purposes. Section 44 1(c) (i) is designed to clarify that any such amounts will not be tax deductible. This maintains the status quo. Italso has the effect of denying deductibility in cases where deduction is currently given. This would often arise for an Irish subsidiary of a multinational company that pays its parent company to issue shares to the Irish subsidiary’s employees. Such a payment is tax deductible and a deduction would also be currently given where a company purchases shares on the open market to give it to its employees as part of their remuneration. The amendment ensures that the status quo is maintained in the cases of payments.
Amendment agreed to.
I move amendment No. 62:
In page 77, lines 35 and 36, to delete "(within the meaning of section 766)".
This amendment concerns the clarification in subsection 1 (c) (ii) of section 44 that expenditure on research and development will continue to be deductible as a trading expense notwithstanding how it is treated for accounting purposes under international financing reporting standards.
Amendment agreed to.
I move amendment No. 63:
In page 78, between lines 9 and 10, to insert the following:
"(d) in section 110, by adding the following after subsection (5):
‘(6) (a) Subject to paragraph (b), section 76A shall have effect in relation to a qualifying company as it would if, in section 4 the following were substituted for the definition of generally accepted accounting practice:
" 'generally accepted accounting practice' means Irish generally accepted accounting practice as it applied for a period of account ending on 31 December 2004.".
(b) A qualifying company may, as respect any accounting period, by notice in writing given to the inspector by the specified return date (within the meaning of section 950) for the accounting period, elect that this subsection shall not apply as respects that or any subsequent accounting period; and any election under this paragraph shall be irrevocable.
(c) Schedule 17A shall apply with any necessary modifications to a company which makes an election under paragraph(b).’,”.
This amendment makes special provision for securitisation entities in relation to the general move to international financial reporting standards to ensure the continuation of a tax neutral treatment of such entities.
Amendment agreed to.
I move amendment No. 64:
In page 82, line 35, to delete "section" and substitute "paragraph".
This is a technical amendment to correct a drafting error.
Amendment agreed to.
I move amendment No. 65:
In page 83, to delete lines 30 to 52, to delete page 84 and in page 85, to delete lines 1 to 44 and substitute the following:
"Transitional Measures (gains and losses in financial instruments)
4. (1) In this paragraph—
‘changeover day', in relation to a company, means the last day of the accounting period immediately preceding the first accounting period of the company in respect of which profits or gains for the purposes of Case I or II of Schedule D of the company are computed in accordance with relevant accounting standards which are, or include, relevant accounting standards in relation to profits or gains or losses on financial assets and financial liabilities;
‘deductible amount', in relation to a company, means the aggregate of—
(a) so much of any amount of loss accruing on or before the changeover day on a financial asset or financial liability of the company, being a loss which had not been realised on or before that day and which would have been taken into account in computing profits or gains for the purposes of Case I or II of Schedule D of the company if it had accrued in an accounting period commencing after the changeover day, as, apart from this paragraph, would not be so taken into account for any accounting period of the company, and
(b) so much of any amount of profits or gains, accruing and not realised in a period or periods (in this clause referred to as the first-mentioned period or periods) ending on or before the changeover day on a financial asset or financial liability of the company, which falls to be taken into account in computing the profits or gains for the purposes of Case I or II of Schedule D of the company for an accounting period or periods commencing before the changeover day as would, apart from this paragraph, be taken into account twice in computing profits or gains for the purposes of Case I or II of Schedule D of the company, by virtue of a profit, gain or loss, accruing in a period which includes the first-mentioned period or periods, being taken into account in computing profits or gains for the purposes of Case I or II of Schedule D of the company for an accounting period commencing after the changeover day;
‘taxable amount', in relation to a company, means the aggregate of—
(a) so much of any amount of profits or gains accruing on or before the changeover day on a financial asset or financial liability of the company, being profits or gains which had not been realised on or before that day and which would have been taken into account in computing the profits or gains for the purposes of Case I or II of Schedule D of the company if they had accrued in an accounting period commencing after the changeover day, as apart from this paragraph, would not be so taken into account for any accounting period of the company, and
(b) so much of any amount of loss, accruing and not realised in a period or periods (in this clause referred to as the first-mentioned period or periods) ending on or before the changeover day on a financial asset or financial liability of the company, which falls to be taken into account in computing the profits or gains for the purposes of Case I or II of Schedule D of the company for an accounting period or periods commencing before the changeover day as would, apart from this paragraph, be taken into account twice in computing profits or gains for the purposes of Case I or II of Schedule D of the company, by virtue of a profit, gain or loss, accruing in a period which includes the first-mentioned period or periods, being taken into account in computing profits or gains for the purposes of Case I or II of Schedule D of the company for an accounting period commencing after the changeover day.
(2) (a) An amount equal to the excess of the taxable amount in relation to a company over the deductible amount in relation to the company shall be treated as a trading receipt of the company for the first accounting period of the company commencing after the changeover day.
(b) Notwithstanding clause (a), an amount which is treated under clause (a) as a trading receipt for an accounting period shall not be taken into account in computing the profits or gains for the purposes of Case I or II of Schedule D of the company for that accounting period but instead, subject to clause (c)—
(i) one-fifth of the amount shall be so taken into account for that accounting period, and
(ii) a further one-fifth shall be so taken into account for each succeeding accounting period until the whole amount has been accounted for.
(c) Where any accounting period referred to in subclause (i) or (ii) of clause (b) is the last accounting period in which a company carried on a trade or profession then such fraction, of the amount referred to in those subclauses, shall be taken into account for that accounting period as is required to ensure that the whole of that amount is accounted for.
(3) (a) An amount equal to the excess of the deductible amount in relation to a company over the taxable amount in relation to the company shall be treated as a deductible trading expense of the trade carried on by the company for the first accounting period of the company commencing after the changeover day.
(b) Notwithstanding clause (a), an amount which is treated under clause (a) as a deductible trading expense for an accounting period shall not be taken into account in computing the profits or gains for the purposes of Case I or II of Schedule D of the company for that accounting period but instead, subject to clause (c)—
(i) one-fifth of the amount shall be so taken into account for that accounting period, and
(ii) a further one-fifth shall be so taken into account in each succeeding accounting period until the whole amount has been accounted for.
(c) Where any accounting period referred to in subclause (i) or (ii) of clause (b) is the last accounting period in which a company carried on a trade or profession then such fraction, of the amount referred to in those subclauses, shall be taken into account for that accounting period as is required to ensure that the whole of that amount is accounted for.
(4) (a) Subparagraph (5) applies to a loss incurred by a company on the disposal at any relevant time of any financial asset or financial liability where, within a period beginning 4 weeks before and ending 4 weeks after that disposal, the company acquired a financial asset or financial liability of the same class providing substantially the same access to economic benefits and exposure to risk as would have been provided by the reacquisition of the asset or liability disposed of.
(b) In this paragraph ‘relevant time’ means a time after 1 January 2005 which is in a period of 6 months ending on the changeover day.
(5) A loss to which this subparagraph applies, which would otherwise be taken into account in computing profits or gains or losses of a company for the purposes of Case I or II of Schedule D for an accounting period, shall not be so taken into account but instead—
(a) one-fifth of the loss shall be so taken into account for that accounting period,
(b) a further one-fifth shall be so taken into account for each succeeding accounting period until the whole amount has been accounted for, and
(c) Notwithstanding clauses (a) and (b), where any accounting period referred to in those clauses is the last accounting period in which a company carried on a trade or profession then such fraction, of the amount referred to in those clauses, shall be taken into account for that accounting period as is required to ensure that the whole of that amount is accounted for.
(6) As respects the first accounting period of a company in respect of which profits or gains for the purposes of Case I or II of Schedule D of the company are computed in accordance with relevant accounting standards, which are, or include, relevant accounting standards in relation to profits or gains or losses on financial assets or liabilities, section 958 shall have effect as if—
(a) in subsection (4D)(b) the following were substituted for ‘no amount were included in the chargeable person’s profits for the chargeable period in respect of chargeable gains on the disposal by the person of assets in the part of the chargeable period which is after the date by which the first instalment for the chargeable period is payable in accordance with subsection (2A)’:
‘no amount were included in the chargeable person's profits for the chargeable period in respect of—
(I) chargeable gains on the disposal by the person of assets in the part of the chargeable period which is after the date by which, or
(II) profits or gains or losses accruing, and not realised, in the chargeable period on financial assets or financial liabilities as are attributable to changes in value of those assets or liabilities in the part of the chargeable period which is after the end of the month immediately preceding the month in which,
the first instalment for the chargeable period is payable in accordance with subsection (2A)',
and
(b) in subsection (4E)(b) the following were substituted for ‘no amount were included in the chargeable person’s profits for the chargeable period in respect of chargeable gains on the disposal by the person of assets in the part of the chargeable period which is after the date by which preliminary tax for the chargeable period is payable in accordance with subsection (2B)’:
‘no amount were included in the chargeable person's profits for the chargeable period in respect of—
(i) chargeable gains on the disposal by the person of assets in the part of the chargeable period which is after the date by which, or
(ii) profits or gains or losses accruing, and not realised, in the chargeable period on financial assets or financial liabilities as are attributable to changes in value of those assets or liabilities in the part of the chargeable period which is after the end of the month immediately preceding the month in which, preliminary tax for the chargeable period is payable in accordance with subsection (2B)'."
This amendment replaces paragraph 4 of the new Schedule 17A that is being inserted into the Tax Consolidation Act 1997. Schedule 17A contains transitional rules to be applied.
This amendment replaces paragraph 4 of the new Schedule 17A which is being inserted into the Taxes Consolidation Act 1997. Schedule 17A contains transitional rules to be applied where a company begins to calculate its taxes or profits using IFRS or equivalent Irish GAAP standards. The purpose of the transitional rules is to ensure there is no double counting of income or expenses for tax purposes and that no amounts fall out of the tax system by reason of the move to the new accounting standards. Paragraph 4 of the Schedule is concerned with gains and losses on financial instruments. There are two aspects to this amendment. The first is a technical issue to ensure the paragraph works as intended while the second deals with preliminary tax.
Amendment agreed to.
Section 44, as amended, agreed to.
Sections 45 and 46 agreed to.
SECTION 47.
Amendments Nos. 66 and 67 form a composite proposal and may be discussed together by agreement.
I move amendment No. 66:
In page 87, line 46, to delete "(a)” and substitute “(i)”.
Amendments Nos. 66 and 67 are minor drafting amendments.
Amendment agreed to.
I move amendment No. 67:
In page 88, line 13, to delete "(b)” and substitute “(ii)”.
Amendment agreed to.
I move amendment No. 68:
In page 88, line 16, after "controls" to insert "not less than".
This is another minor drafting amendment.
Amendment agreed to.
Question proposed: "That section 47, as amended, stand part of the Bill."
What is the situation in regard to the use of patent income as a tax avoidance mechanism? Has it come to the attention of the Minister's officials that patent income is arranged by certain companies and individuals for the purpose of effectively wiping out most of their liability for income taxation?
We are studying the exemption of patent income as part of our overall review.
Question put and agreed to.
NEW SECTION.
I move amendment No. 69:
In page 88, before section 48, to insert the following new section:
48.—(1) Section 410 of the Principal Act is amended—
(a) in subsection (4) by substituting ‘a relevant member state’ for ‘the State’,
and
(b) by substituting the following for subsection (5):
‘(5) This section shall apply to any payments which—
(a) for the purposes of corporation tax, are charges on income of the company making them or would be so if they were not deductible in computing profits or any description of profits or if section 243(7) did not apply to them, and
(b) where the company receiving the payments is not resident in the State, are taken into account in computing income of that company chargeable to tax in a relevant member state,
but shall not apply to payments received by a company on any investments if a profit on the sale of those investments would be treated as a trading receipt of that company.'.
(2) This section applies as respects accounting periods ending on or after 1 March 2005.".
The new section aims to deal with an issue brought to my attention regarding certain payments between companies that are members of a group. Under the Taxes Consolidation Act 1997, certain payments such as interest paid to non-residents and dividends paid by Irish-resident companies must be paid after deducting withholding tax. This is in order to facilitate the collection of tax on the payments. Where the recipient is charged tax in respect of any income concerned, credit is given against that tax for any tax withheld on the payments. The tax code also contains a number of exemptions from such withholding taxes. This amendment concerns the extension of one such exemption.
Section 410 of the Taxes Consolidation Act 1997 provides that certain payments between companies that are members of a group may be made without deduction of tax provided certain conditions are met. One of these conditions is that both the paying and receiving companies must be resident in the State. It has been put to me that the requirement that the receiving company must be resident in the State may discriminate against a recipient company which is resident in another member state.
In the circumstances, I propose to amend section 410 of the Act to provide that all payments that are made between companies which are members of a group may be made without deducting withholding tax if two conditions are met. First, both the paying and receiving companies must be resident in a relevant member state as defined in the section. This definition covers both EU member states and countries outside the EU which are in the European economic area and with which Ireland has a double taxation treaty. Second, the payment must be taken into account in computing income subject to tax in such a relevant member state.
I am surprised at the inclusion of these types of amendments. A similar change was made to section 45 in regard to the tax law concerning lending by a business in the State. Has our tax law not been screened for such instances of non-compliance in terms of EU membership? It seems a long time after joining the EU we are still discovering issues such as these.
We have only seen the completion of the internal Single Market in recent years. These changes concern EU developments which come to our attention at intervals and may relate to such matters as judgments in the European Court of Justice.
Amendment agreed to.
SECTION 48.
Amendments Nos. 70 and 71 are related technical amendments which may be discussed together by agreement.
I move amendment No. 70:
In page 89, lines 5 and 6, to delete " ‘a loss" and substitute "a ‘loss".
Amendments Nos. 70 and 71 relate to minor drafting errors.
Amendment agreed to.
I move amendment No. 71:
In page 89, line 7, to delete "period" and substitute "period,".
Amendment agreed to.
Amendments Nos. 72 and 73 are related and may be discussed together by agreement.
I move amendment No. 72:
In page 89, between lines 23 and 24, to insert the following:
"(c) For the purposes of this section references to an ‘excess of charges on income paid for the purpose of the sale of goods’, where they are in the course of the trade in an accounting period, shall be so much of an amount, being the amount by which the charges on income paid by a company for the purpose of the sale of goods in the course of the trade in that period exceed the income from the sale of goods in the course of the trade in that period, as does not exceed the excess referred to in section 420(6) as computed for the company for that period.”.
Amendments Nos. 72 and 73 are technical amendments. Section 48, dealing with manufacturing relief, amends section 448 of the Taxes Consolidation Act 1997, which deals with the calculation of manufacturing relief. This relief is a reduction from a company's corporation tax which is available to companies in respect of income from the sale of goods manufactured in the State and its purpose is to achieve an effective corporation tax rate of 10% on manufacturing income. It does this by reducing tax charges at the standard rate of corporation tax, 12.5%, on income from manufacturing by a fraction that results in an effective 10% rate. A company with income from various sources is only entitled to the relief in respect of income from the sale of goods it manufactures. Section 448 sets out the rules for calculating the amount of corporation tax for which manufacturing relief is available.
The purpose of section 48 of the Bill as initiated is to ensure the correct amount of relief is given to companies in all cases. Problems have arisen with the calculation of the relief following the introduction of the new regime for ring-fenced charges and losses introduced in 2001, which allowed charges and losses incurred in activities that can benefit from the standard rate of corporation tax only to be offset against trading income taxable at the standard rate. The existing computation does not allow for such charges and losses to be properly taken into account in the calculation of the manufacturing relief figure.
Section 48 rectifies the problems in regard to the calculation of the relief and provides that charges and losses are properly taken into account. The section as initiated also provides that group relief for losses are properly accounted for but, due to an oversight, did not take group relief for charges into account. These amendments correct that position.
I was not aware a 10% rate was still applicable but rather understood we had moved to a single, uniform rate. Will the Minister explain his references to ensuring the continuation of the 10% rate?
There is a run-off period on the 10% rate up to 2005 for IFSC companies and until 2010 for non-IFSC companies.
Amendment agreed to.
I move amendment No. 73:
In page 89, paragraph (b), to delete all words from and including “and” in line 51 down to and including “or” in line 55 and in page 90, to delete lines 1 and 2 and substitute the following:
"the relevant accounting period,
(ii) the amount of any loss from the sale of goods incurred by the company in the relevant accounting period, and
(iii) the amount of any excess of charges on income paid for the purpose of the sale of goods or the amount of any loss from the sale of goods, incurred by a surrendering company and allowed under section 420A.".
Amendment agreed to.
Section 48, as amended, agreed to.
Sections 49 and 50 agreed to.
NEW SECTIONS.
I move amendment No. 74:
In page 90, before section 51, but in Chapter 6, to insert the following new section:
51.—Section 67 of the Finance Act 2003 is amended in subsection (2) by inserting the following paragraph after paragraph (a):
‘(aa) as respects a disposal which arises as a result of a compulsory acquisition,’.”.
I should make a declaration of interest in that I am part-owner of land that has been compulsorily acquired. The provision of this amendment will not affect me in this regard but I include my declaration for the record. This issue has been raised by a number of colleagues who represent agricultural constituencies.
They feel that where a compulsory acquisition of land for a road or similar is involved, the old roll-over relief should be available to people so that they can reinvest in similar assets and continue farming as before should they opt to do so without incurring full capital gains tax liability. This has been debated at length by organisations like the IFA. I would like to hear the Minister's view on the matter. The previous Minister said that having reduced the rate he believed that roll-over relief, indexation or some of the usual provisions that existed to make the tax more efficient and equitable were no longer required. It seems strange to deny roll-over relief in cases where the State initiated the decision to disrupt the business of the person involved. I am sure the Minister has had as many representations on the matter as I have had.
My predecessor announced in the budget for 2003 that no roll-over relief would be allowed for any purpose on gains arising from disposals on or after 4 December 2002. This was enacted, subject to some transitional provisions, in the Finance Act 2003. The amendment seeks to reinstate roll-over relief where the disposal arises as a result of a compulsory purchase order. This issue was raised in the Second Stage debate by Deputy Crawford who said farmers were particularly disadvantaged by the abolition of roll-over relief as they now have to pay capital gains tax on their land when it is compulsorily purchased. Deputy Crawford appealed for special treatment for such farmers.
The typical compulsory purchase order at present is for the purposes of road building. The Government is committed to improving transport infrastructure in this country, which includes extending and upgrading our road network. Of necessity, this means obtaining land, including farmland, for this purpose. However, this does not mean that the farmers are at a disadvantage; they receive a very fair price for the land that is compulsorily purchased. As regards taxation of that disposal, there is no reason that land that has been compulsorily purchased should be treated any differently from land that has been offered for sale. At a time when it is the taxation policy of the Government to have a wide tax base and low direct tax rates, it is not appropriate to introduce reliefs for select groups, which will result in a narrowing of the tax base.
The current rate of capital gains tax is only 20% compared to 40% prior to the 1998 budget. Roll-over relief was more important to the taxpayer when capital gains tax rates were high — they were as high as 60% in the 1980s. Reinstating the relief would result in gains being rolled over time and again and, effectively, the gain not being realised at all. It is appropriate to tax gains when they are realised. Abolishing roll-over relief allows this to happen and brings capital gains tax into line with other taxes. The decision to abolish roll-over relief is consistent with Government taxation policy of a wide tax base and low tax rates. The abolition of roll-over and other reliefs is the price that must be paid in order to achieve this wide tax base. The upsurge in capital gains tax receipts over the past eight years since the rate was lowered to 20% is just one indicator of the success of the Government's taxation policy. I cannot accept the amendment on this basis.
During my Budget Statement, in an effort to meet the concerns of the farming community, I exempted them from stamp duty where land was being swapped for consolidation purposes, which might occur, for example, as a result of compulsory purchase orders being imposed on farmers who need to reorganise their land to maintain their farming business. Some farmers have seen their land holding change, giving rise to the difficulty of stock traversing roadways. Even where culverts or tunnels are built, it causes serious inconvenience and can mean farmers need to reorganise their business. As I represent a rural constituency, I recognise such an event is a major inconvenience. The wider taxation principles that apply in this case dictate the outcome.
I would like to clarify how the tax applies in this case. If following a CPO a farmer decides to purchase replacement acreage, what is the capital gains tax liability in such a case? I presume a disturbance element, an existing use value element and some sort of premium apply. Is capital gains tax applied to all three of them? Even if the disturbance is a compensation for loss of some sort the tax is still applied, which seems to be a source of frustration.
I ask the Minister to clarify the stamp duty relief in cases of consolidation. In cases envisaged by my amendment a farmer is buying one piece of land to replace land that had been compulsorily acquired. Is that purchase exempt from stamp duty or does the exemption only apply——
It applies in the case of exchanges between two farmers for consolidation purposes. It cannot be an independent replacement.
It would be rare that a farmer would have the opportunity to avail of such stamp duty exemption in the context of a road going through his land and him having to find other acreage. While I am sure what the Minister says is welcome, it does not deal with the issue of compulsory purchase orders.
It was not designed to deal with the issue the Deputy has raised. However, we sought to address certain other issues they had. We could not give them a specific exemption along the lines of the Deputy's amendment. Other people who are not landowners might have houses——
Will the Minister clarify what is being taxed?
Tax applies to all three aspects: the premium, the base value and the disturbance.
It is the one price. The realisable gain arises from——
While I accept indexation no longer applies, it is not all gain and some cost element applies.
Any gains arising from the amount received for disposal of land is chargeable for tax.
In cases where someone suffers a real disturbance with an associated cost and the State pays to cover the cost, that is compensation for an expense incurred elsewhere and not a gain. Does it not breach principles of fair taxation to effectively tax people in this way?
No, the capital gains code has always been on the basis of the difference between the acquisition price and disposal price. Where compensation is received for land that is compulsorily acquired, any gains arising from the amount paid for the acquisition of land are chargeable for tax. In other words if a sum is paid by an authority for the compulsory acquisition of land, irrespective of its components, for example, disturbance, injurious affection etc, that total sum will be the amount to be assessed for tax.
While I know the Minister is explaining that is the case, does he believe this is equitable in cases of a genuine disturbance that has incurred cost to the person who receives payment? Is it fair to treat it as a taxable gain?
Treating it that way is consistent with the operation of the capital gains tax code for everyone else. It is a question of whether we establish a special regime affecting the compulsory purchase of agricultural land as opposed to capital gains tax in respect of every other person subject to the tax. I do not believe it is possible to make that case. The CGT due on the disposal of land under CPO is calculated in the same way as of any other disposal of land. Consideration for the disposal will be the sum received for the land. Given the current low rate of CGT, it is necessary to have the CGT base as broad as possible.
Where people make the argument to narrow the base in particular circumstances, when tax rates are so low having gone from 60% in the 1980s to 40% up to 1997 to 20% now, we either have a regime of reducing tax rates and charging 20% on the difference between the base acquisition price and the selling price, or we narrow the base and increase the rate. Government policy is that low rates and the same rule for all is the best approach.
The budget provision regarding the exemption on stamp duty is welcomed by the farming community. In the past we had exchanges of land for farming purposes. Such exchanges have now become necessary on account of road developments. We do not need to explain here the difficulties regarding movement of stock. Where farmers find it necessary and useful to exchange land as a result of road developments the provision for the elimination of stamp duty is very welcome and much appreciated by the farming community.
Money received as a result of compulsory purchase of land is very different to other capital gains. More often than not in such cases the seller does not want to part with his property but is forced to do so by the compulsory purchase order. On that basis a strong case can be made for those gains to be treated differently. The number of cases involved across the country where land is taken for road developments, or in a minority of cases for public housing, is quite small. It is interesting that when compulsory purchase orders were introduced, it was on the basis that the lands purchased would be used for public housing projects. They were not to be used otherwise, but they are.
Let us, for example, consider the new Kilcock-Kinnegad road which is a PPP. Farmers involved have said to me that the road is a commercial development because it is a PPP and some people have taken part in that partnership to make a profit. The people most inconvenienced by the project are the landowners who are compelled to sell their property for a road that will of course be for public use, but will also make money and be a commercial concern for those involved in the partnership. The landowners sought to become shareholders in the company that would make money from the project and thereby benefit, but that was ruled out. Nonetheless the compulsory purchase orders were made, the farmers were paid at a particular rate and they must pay tax on the money received. The Minister has pointed out that capital gains tax has been reduced to 20%. However, if, for example, a farmer gets €100,000 for land compulsorily purchased and must return €20,000 in tax, that is a significant amount with which he will not be too happy.
The amount of land being purchased by compulsory purchase orders has risen to an extraordinary amount and exceeds the amount of land that normally comes on the market for sale on an annual basis. More land is purchased on a compulsory basis than the combined land of all the farms sold in the country. Farmers whose land is purchased by compulsory order are therefore put in a difficult situation whereby if they want to continue farming and replace the land taken from them they have difficulty acquiring land. They have had an asset removed that they did not want to lose and face a significant disadvantage in trying to farm the remainder of their land. In many cases the land is divided through the middle.
I am sure the Minister will have some involvement in the Kilbeggan-Athlone project. Farms on that route have been divided, but bridges or underpasses sought by the farmers to serve their land were ruled out. The Minister knows it is impossible for farmers to operate when their farms have been divided. The farmers will get some compensation for injury and inconvenience which I know the Minister will probably tell me is not taxed. That is only right.
The question of compulsory purchase and the tax treatment of that money warrants a close examination by the Minister. There is a strong case for it not to be taxed. Recently I saw a reference in the Minister's local newspaper to a meeting regarding landowners on the Kinnegad-Athlone route. Strong language issued from people in terms of the expected reaction of landowners. I suspect people will end up going to jail over the matter which is not something we should have to consider in this regard.
I urge the Minister to reconsider the issue. Is there some way he can get round the capital acquisitions tax? I understand his argument that it is a level playing pitch for everybody but I disagree because people who receive compulsory purchase orders with which they do not want to comply are forced to sell their land. That is not the same situation as where people who sell land, a field or a property by choice and should be treated differently. I hope the Minister reconsiders the matter.
Looking at the compulsory purchase issue from an urban point of view, where new roads are built the CPO process is relatively generous. The revised agreement is generous with regard to land values. In addition, if a major road is constructed near one's property, the chances of rezoning and highly enhanced values, particularly in the greater Dublin area, are strong.
There are large agricultural areas in parts of north county Dublin. Recently, the local authorities in Meath and Fingal produced a study with regard to the possibility of reopening the spur railway line to Dunboyne. In 1963 Todd Andrews sold the railway line when he closed that railway. That land will have to be reacquired from the landowners and will, I presume, cost a king's ransom. It is proposed to pay for the land through CPOs. The report indicates also that landowners along the railway line will be allowed significant high-density development on their land thereby providing significant enhancement.
I appreciate what Deputy McGrath said about particular difficulties, but there is another side to the coin in the greater Dublin area and areas adjacent to it where there is extraordinary enhancement for landowners, with little return to the community. This is one of the reasons we have so much scattered development in the greater Dublin area with few schools or facilities and poor road infrastructure. There is an argument for equity for everybody, for the community as well as the landowner. Let us not forget that landowners, particularly in the greater Dublin area benefit from compulsory purchase orders and get tremendous enhancement from the building of developments, for instance the railway line, should it ever be re-opened after Fianna Fáil short-sightedly sold it off. Landowners should pay tax on what they gain from the sale of land under a CPO.
The sins of our fathers. The main recommendation of the Commission on Taxation in 1982 was that we should try to lower the rates and widen the base of the taxation system. That has been the subject of ongoing debate. While people agree with the recommendation, problems arise when we come to implement it. I do not accept that building national roadways is a commercial venture. All property owners hold property under our Constitution, subject to the common good. One does not have an absolute right to private property here, it is subject to the common good. If the common good dictates that land must be compulsorily acquired, in order to improve the national infrastructure, one is entitled under the Constitution to adequate and fair compensation. The courts laid out the principles and the Government and the farm representatives entered into negotiations in 2001. Everybody accepted that a good deal had been struck and it was sold by all parties as being a fair and honourable deal all round. The idea that landowners would take shares in road development is bringing farm diversification to a new level.
Deputy McGrath is simply relaying to the committee arguments being made by his constituents, but the facts are as I have set them out. The facts to not support the idea that CPOs were primarily exclusively for public housing. The bogland in my area was purchased from all the small farmers by compulsory purchase order. Not a house was built on it, but they were very glad to get a job in Bord na Móna. If that land had not been acquired by compulsory purchase order, we would probably put County Leitrim in the ha'penny place. Thanks to Fianna Fáil and Mr. Tod Andrews, whose visionary leadership of Bord na Móna ensured that thousands of Offaly people made a living and that is probably one of the reasons that it is a great Fianna Fail stronghold today. Mr. Andrews did some good things in his time. If I may divert, when Tod Andrews was requested by the great and the good of a community to keep the local railway station open——
No, it was in County Clare, and the local priest, solicitor, publican and strong farmer came to see him. When they arrived in his office he asked them to put their rail tickets on the counter. They had travelled by car to save the railway station.
Because the line had been run down.
That ended the argument. I recall being asked by a chamber of commerce in my constituency why Iarnród Éireann was withdrawing a certain service. It considered that it was a necessity to the area and that businesses would implode overnight if we did not keep the service going but when I checked out how many businesses in the town were using this service, only two newsagents were using the freight service. We see instances of hypocrisy all over the place.
: Does that include the reopening of Dunboyne spurs——
No, what it means is that——
Is reopening the Clonsilla to Dunboyne spur hypocrisy?
I am really diverting now, but on a point about Tod Andrews——
I think the voters in County Meath might be interested in hearing that.
I was not talking about that. I was talking about people who said one thing about the importance of infrastructure — rail infrastructure in this case — but who did not use it.
That is a ridiculous argument.
I am not making the argument,
A Deputy
: The services were run down deliberately and that is why the line was closed.
The Deputy was not here earlier. We are trying to have a bit of humour. Obviously "left wingers" need to acquire some humour. People will take more to the Deputy if he smiles now and again and takes himself with a bit of levity. The Deputy should not be so serious all the time. He will bore people to death.
To get back to the point, on the question of a special deal for farmers whose lands were being acquired by CPOs, it would have to be extended to all property owners who are subject to CPOs. There could not be a special regime for landowners. The Deputy made the point that farmers are upset and quite rightly everybody would be upset if they had to pay back money after a CPO on a realisable gain of 20%. The argument I am making is that if we were not in Government, it would be 40%, which was the rate before we took office.
It does stand up. These are facts. Prior to 1997, if there was a CPO one would pay back €40,000 on a €100,000.
That is not true, factually. Before the former Minister for Finance, Mr. McCreevy brought in the flat rate, he abolished the relief which existed for small gains. Somebody who makes a very small capital gain pays 20% tax, which is more capital gains tax than they paid when there were exemptions for small gains.
In any event, the Labour Party has been calling on us to implement the Commission on Taxation recommendations for the past 25 years. They called for a lower rate on a wide base and that is what we have. We have had a good discussion. I know it reflects the points of view of many people on the ground and Deputies on all sides have made representations on it. Extending the special regime would mean it would have to be extended all over and that would undermine the tax base.
I am sorry for those little diversions, I committed myself to being serious all day, but I relaxed for a few minutes.
The Minister's anecdotes help to get through the Finance Bill a little quicker. If property is compulsorily taken from some person who does not want to part with it, no amount of compensation pays, irrespective of the tax rate.
I will ask the Deputy a question in return. If I did not like the property being taken from me, I seek an exemption. Does the Deputy think any person would take a compulsory acquisition order, even if it was to their advantage to offload it, on the basis that they would get far more money out of it that way? Would people not say that they did not want to lose the property so that they will look for the exemption? One cannot use that as a criterion.
Only where there are CPOs——
There are instances where people are delighted that the property has been subject to a CPO. Many people are praying for a CPO.
I am not too familiar with the cases in urban areas.
There are some people who cannot get a site on their land. It might be near a national secondary route and when a parallel national primary route is planned and it might take three or four acres from the edge of their holding they are delighted because obviously it is a gain they would not otherwise get from putting four cattle to the acre on it for the next 50 years.
I do not see the development coming with it. What Deputy Burton is suggesting is that there will be development along the railway line. However, rural County Westmeath is different. Where there is a big road going through, there will not necessarily be a housing development or even development of one site off it. Developers get their money and move on.
Another question arises. If the Minister does not have the answer now, perhaps he will come back to us later. I understand the capital acquisitions tax gathered last year amounted to approximately €2.5 billion.
How much of that related to compulsorily purchased property? I imagine it is quite a small amount. Before the Bill is completed, perhaps the Minister would re-examine the possibility of granting a waiver in such cases. As somebody from a rural area through which a big road is to be built, I am sure the Minister would agree there is a strong case for a waiver. We are talking about different situations here. It is a sore point with farmers who do not want to sell their land, no matter what they are paid, that some of the compensation is being clawed back. I know what the Minister said earlier. Perhaps he is dug into his position, but perhaps when he goes back and talks to some of the farmers near Horseleap and other places, he will be persuaded.
Another interesting point arises, which the Minister has probably read about in his local newspaper, regarding the prices being paid for new land in County Meath, which was zoned for agriculture and which will now be used for a new prison. Will the same level of payment not now have to be paid for agricultural land that is being compulsorily purchased for a roadway? It is a development needed for the public good.
Tell them we will give the same price for it for a prison.
Will it be at the same rate per acre?
This is a thorny issue, but I understand the Minister may have the information being sought. Many people will not pay capital gains tax on CPO proceeds, given that they will qualify for retirement relief if they are over 55 years of age. That point has been missed in this debate. It is important that the Department dig out that information. People who did not reinvest their CPO proceeds were never eligible for roll-over relief in any event. Only a certain proportion of people involved in CPO are liable to pay capital gains tax. It would be helpful if that information could be obtained because then we would know the type of figures we are talking about.
I had to come to the aid of persons in the Minister's profession not too long ago who were levying capital gains tax on somebody over 55 and did not know about the opportunity for exemption.
We would help people by putting the full facts before them.
There is a down side. If the total investment is more than something like €300,000 in the person's lifetime and he sells another bit of land in ten years time that brings him over the threshold. They reopen the issue in relation to the whole amount, not just the amount that brought him over the exemption limit.
Amendment No. 74 related specifically to roll-over relief. How stands the amendment?
I propose that the amendment be made.
Question put: "That the new section be there inserted."
In accordance with the order of the Dáil on 24 February, taking of the division is postponed until 5 p.m. or until the completion of proceedings on the matters to be dealt with within this session.
I move amendment No. 75:
In page 90, before section 51, but in Chapter 6, to insert the following new section:
51.—Section 556 of the Taxes Consolidation Act 1997 is amended by—
(a) the deletion in subsection (2) of the words ‘or specified in subsection (6A), as the case may be’,
(b) the deletion in subsection (6)(a) and (b) of the words ‘up to and including the year of assessment 2003’, and
(c) the deletion of subsection (6A).”.
This deals with the issue of indexation. The Minister's approach to indexation seems inconsistent. He accepts indexation is justifiable in the case of capital acquisitions tax but not in the case of capital gains tax. In the long term, if we fail to index the capital value of assets on which a gain is assessed, we will effectively tax people on paper gains. This also has an impact on the type of investment people choose. Clearly it favours speculative gains, short-term gains, rather than long-term holding of assets which is arguably much more consistent with the long-term development needs of the economy.
I understand the Minister's view that there is a case for low rates, but it should not be regardless of anything else. Some sense must be brought to bear on this. At the moment inflation rates are relatively low. However, they have been high in the past and they could be high in the future. In some areas they will almost inevitably become high. We should have a sound principled basis to our tax code. Just as I believe indexation should be a feature of the income tax code, when dealing with capital gains the Minister ought to be consistent and also allow the indexation of the asset value, as used to be done prior to 2003.
Deputy Bruton's amendment seems to overturn my predecessor's decision to end capital gains tax indexation relief from the tax year 2002. That decision was announced in the 2003 Budget Statement and enacted in the Finance Act 2003. There was a long and thorough debate on this subject on Committee Stage in 2003. Former Minister McCreevy made clear the reasons for his decision. Those reasons are as valid today as they were two years ago.
Indexation relief had a cogent basis in the 1970s and 1980s when inflation and capital gains tax rates were high. At the time these factors were a major deterrent for people considering disposal of assets. Now, there is no reason to retain indexation relief in the capital gains tax system where the tax rate has been lowered to 20% and inflation is consistently low. Abolition of indexation relief with regard to capital gains is in line with international practice as most countries do not allow indexation relief. This includes our near neighbours in the UK who abolished indexation relief in 1998.
It has been the consistent taxation policy of this Government to have a wide tax base and low direct tax rates. Abolition of indexation relief is in line with that policy. Regarding capital gains tax, the rate is now 20% and streamlining measures, including abolition of indexation relief, have broadened the base. In the eight years since the rate was lowered to 20% there has been an upsurge in activity. Revenue collected under the CGT code in 1996 yielded €106 million. By 2000 the yield had climbed to €773 million, and last year the yield had climbed further to €1.5 billion.
Although there are a number of reasons for this increased yield, widening of the tax base through the abolition of indexation and other reliefs has been a significant contributory factor. It proves the success of the Government's taxation policy.
The Minister must bear in mind that capital gains are generally a long-term issue. Someone invests in a business and builds it up over a period of 20 years. Inflation at 3% over 20 years is close to 100% over 20 years. Effectively, the Minister intends to tax someone who has invested in a business on that sort of long-term perspective on the paper increase in the value, not the real increase — there will be a very substantial capital tax on the paper value. By contrast someone playing the stock market over the same 20 year period, churning over paper assets, buying and selling, will not be subjected to this sort of tax. This favours the speculative player in the market as opposed to the long-term investor trying to create an asset of lasting value in the economy. I see the point that when rates are low this can be dismissed. This issue must be considered in the context of a longer perspective than the annual consideration which the Minister suggests. People make decisions and build their businesses over many years and it is proper that paper increases in the value of those businesses should not be regarded as real gains on which taxes must be borne upon their sale.
What has been worth far more to people trying to build up their business over that period is the corporation tax rate on manufacturing, which has been reduced from 50% to 12.5% in a short period of time. This is more important than the anticipation of a notional gain in terms of the possible sale of a business in 20 or 30 years. One can always make an argument in isolation but it is necessary to consider the mix of taxes and the need to reward risk and incentive and encourage business activity. The full remit of incentives that exists to build up businesses constitutes a business-friendly environment of low tax rates which greatly enhances the ability to reinvest and add value. The business community enjoys a deal as good as anything available elsewhere.
What level of inflation would trigger the Minister to decide this was no longer appropriate?
That would only arise in consequence of the pursuance of the type of incoherent policy that only a rainbow coalition could devise.
It is only a few months since the Minister was sweating about the direction of the inflation rate before international trends came to his rescue.
The rate is now only 2.2%. I would not wish any of that type of turmoil and incoherence on Deputy Bruton. I have more confidence in him than do many others.
The Minister should recall 1977 when an incoming Fianna Fáil Government decided it was going to abolish all types of taxes. It took us almost a decade to recover from the consequences of that profligate approach to public finances.
It bankrupted the country.
A film called "Finding Neverland" was nominated for an Academy award last week. That sort of territory would move me.
The film "Million Dollar Baby" might be more apt.
Peter Pan and Neverland are suitable subjects for Fianna Fáil.
Deputy Burton should not dampen the attempted humour.
Amendment put and declared lost.
Sections 51 and 52 agreed to.
SECTION 53.
Question proposed: "That section 53 stand part of the Bill."
Before we deal with section 53, I am advised that the lead-in words to amendment No. 73 are incorrect. I will bring forward an amendment on Report Stage to rectify this.
Question put and agreed to.
Under the Dáil guillotine motion, the agreed timeframe for discussion of those sections up to section 53 was to expire at 5 p.m. We have now arrived at that section and must take the postponed vote on amendment No. 74.
Question put: "That the new section be there inserted."
The Committee divided: Tá, 2; Níl, 7.
Tá
- Bruton, Richard.
- McGrath, Paul.
Níl
- Cowen, Brian.
- Cregan, John.
- Finneran, Michael.
- Fleming, Seán.
- McGuinness, John.
- Nolan, M. J.
- O’Keeffe, Ned.
Question declared lost.
Amendment declared lost.
Sections 54 to 56, inclusive, agreed to.
SECTION 57.
I move amendment No. 76:
In page 94, line 36, to delete "2003" and substitute "2004".
The Deputy's amendment is correct. The amendment is agreed. The citation for the Registration of Clubs Acts was amended by the Intoxicating Liquor Act 2004, and should now read "the Registration of Clubs Acts 1904 to 2004".
The Deputy is not here for this breakthrough.
The Deputy is most upset when she is outside.
Amendment agreed to.
Section 57, as amended, agreed to.
Section 58 agreed to.
Amendments Nos. 77 and 78 have been ruled out of order.
Amendments Nos. 77 and 78 not moved.
SECTION 59.
Question proposed: "That section 59 stand part of the Bill."
As my amendments have been ruled out of order I would like to give the Minister the opportunity to outline the status of provision on biofuel inserted in last year's Finance Act since the European Commission ruled it as a state aid. What urgency is being made in terms of giving effect to the provision? It seems to be lagging behind by comparison with other areas of state aid. I would like the Minister's views on that and an update on the general situation.
Following meetings between the Department of Finance, the Department of Communications, Marine and Natural Resources and the European Commission and subsequent clarifications requested by the Commission, a formal application was submitted in January. I understand a decision from the Commission is imminent. Assuming approval is granted, the necessary commencement order will be signed and the Department of Communications, Marine and Natural Resources will set in train the formal process of inviting proposals for the approved scheme.
Can the Minister put a timescale on it? If the Commission made a positive decision by the end of March, would the provisions come into effect by the end of April or May?
I cannot speak directly for the Minister for Communications, Marine and Natural Resources, but it is an issue on which he has been anxious to proceed. The Deputy may take it that as soon as we get formal approval confirming we have a regime in line with EU state aid rules, the Minister will move on it and seek applications for suitable projects. It is a priority for him as soon as he gets the green light from the Commission.
That is fair enough. We will wait and see.
Question put and agreed to.
Sections 60 to 91, inclusive, agreed to.
SECTION 92.
Question proposed: "That section 92 stand part of the Bill."
My question relates to the general issue regarding money-making activities, particularly of paramilitary organisations, such as the laundering of diesel. The Minister is probably aware that some tankers travel the country in the livery of well-known oil companies. Will he comment on this? I support the strengthening of the provisions. However, while the differential exists, significant amounts of money can be made by paramilitary organisations through diesel laundering. There is significant trade back and forward, not just between the North and the Republic, but also to the UK. Does the Minister intend to review the issue and, perhaps, give the agricultural subsidy in another form to farmers and the agricultural community?
Tobacco products also yield large sums for paramilitary organisations and it is often obvious on the streets in our towns that people are selling contraband cigarettes. In the context of recent political events, does the Minister intend to take tougher action to close down these opportunities, in particular for paramilitaries, to make tens of millions?
The issues here concern activity in fairly refined areas of taxation. We may have different views with regard to the onus and incidence of taxation, but we are concerned about legitimate farmers and business people who work hard. We must try to strike a balance on how to tax them. Will the Minister comment on what he feels his Department can do to close down the opportunities under the current regime for paramilitaries to continue to make large amounts of money? These activities are the basis for the continued undermining of the peace process. These paramilitary gangs have large amounts of money. We know also that some political parties have more cash at their disposal than all the other parties put together in the Dáil. What can be done to make these activities more difficult? I am sure the Minister knows of the recent episode where a tanker in the livery of one of the major oil companies crashed and the driver ran away. The tanker turned out to belong to a paramilitary outfit that was transporting fuel around the country.
These are matters to which the security forces and the Garda give a high priority and they are doing all they can with the available resources to curtail them. They have the required resources to deal with the criminal activity. However, as long as there are different regimes on both sides of the Border, we will have those who exploit by illegal means profit taking in this area. Diesel laundering does not just involve agricultural diesel but also central heating oil. Removing the subsidy on agricultural diesel would not deal with both.
The Criminal Assets Bureau has had notable success with following the money trail here and dealing with the situation. The authorities have not just stopped individual vehicles or watched groups of people involved and tried to apprehend them and bring them before the courts, but have also got on the money trail and followed it rather than simply trying to locate trucks involved. That sort of approach is starting to yield results for the Garda and we must wait and see how the investigations in hand proceed. There is no complacency on anybody's part. It is a major issue and the Garda and the CAB are doing all they can.
The CAB has been a tremendous success and is being looked at by other jurisdictions to see in what way it can be replicated and modified to suit their circumstances. A similar operation to the CAB was established in the North in the past 12 months which we hope will co-operate closely with us to do all it can to break down the gangs that seem to have a foothold in this illicit trade.
There has also been laundering of marked gas oil. Physical markers, dyes and chemicals are added to mineral oil to identify it as having been delivered for use at a reduced rate of mineral oil tax for non-auto use. The operation of the typical illicit oil laundry involves various techniques being used to attempt to remove these physical markers from the marked gas oil.
In 2004 four laundries were seized and 40 other incidents of laundered oil were detected. This detection resulted in the seizure of 367,770 litres of laundered fuel. Proceedings are under way in a number of these cases, including in some instances the prosecution of the landowners concerned. A number of these prosecutions involved filling stations and oil distributors found to be dealing in laundered oil. This issue now has the full attention of the Garda, which has our full support. We will assist in whatever way we can to ensure this matter is dealt with as comprehensively and as effectively as possible.
Would the Minister consider reducing some of the differentials, particularly in the case of the agricultural community? Perhaps an alternative way could be found to recompense people for losses. In some jurisdictions if one is involved in buying illegal products from paramilitary sources one's assets are seized. Seizure of assets from businesses using products from paramilitary sources might constitute a more severe penalty as it may help to dry up the market. Unfortunately there are businesses willing to take a chance and use products from paramilitary sources.
Do other jurisdictions in Europe have a similar colouring code to differentiate between motor fuel, heating oil and agricultural fuel. Is it the same regime throughout Europe?
I am advised that it is the same regime throughout Europe.
Are there similar incidents of this problem in other countries?
I cannot answer the Deputy's question accurately. Obviously there are similar opportunities in other parts of Europe for criminal gangs to watch out for these differentials and attempt to sell fuel without attracting the usual taxes. I do not know the extent or effect of this, but I will seek information from those who deal with this matter on a regular basis. On the issue Deputy Burton raised, I will certainly ask the Department of Justice, Equality and Law Reform on the consistency with constitutional rights. An extension of CAB powers may help to create a disincentive for people to think they can engage in such illicit transactions without serious penalties.
Question put and agreed to.
NEW SECTIONS.
I move amendment No. 79:
In page 177, before section 93, but in Part 2, to insert the following new section:
"93.—The Minister shall introduce a VAT refund mechanism for at least that part of the unrecoverable VAT liability of Irish charities funded form public fundraising.".
I ask the Minister to give positive consideration to this amendment. He is aware of the ongoing debate on the inability of charitable and volunteer organisations to recover VAT on services and goods necessary for the services they provide. Very often these services are not provided by the State. The variety of organisations affected by the unnecessary imposition range from organisations dealing directly with young people, community services, services for the elderly and organisations working in the developing world.
There were two instances last year, both involving charity recordings, that show the ridiculous nature of the current situation. The more obvious of these is the treatment of the Band Aid single in Ireland. In the United Kingdom the Chancellor of the Exchequer gave a direct VAT refund. In Ireland there was a direct cash sum in lieu of a VAT refund. This came from the development aid budget. This seems to be self-defeating. On a local level, Today FM made a charity record of cover versions by Irish artists called Even Better Than The Real Thing. As is the case with most charity records, everything was done voluntarily. This includes the work of the artists and record companies and the pressing of the record. The only cost resulting was a request for a VAT payment. This mechanism seems to be in place in other jurisdictions without much difficulty. I challenge the Minister to think positively about introducing such a mechanism and easing the unnecessary burden on people involved in Irish charities.
The Deputy knows a very generous tax relief scheme, donations relief, is available to charities. This totals €21 million each year. This Government was the first government to use the tax code as a means of augmenting the fundraising efforts of charities and other approved bodies.
Ruarí Quinn brought it in in 1996.
We brought in a scheme in 2001.
To be historically correct, Deputy Ruairí Quinn introduced that means. Deputy Ruarí Quinn brought in the first scheme to give tax refunds to charities on the occasion of the anniversary of the famine. It was for donations made to charities working in the third world.
Deputy Quinn introduced a scheme in relation to overseas charities.
That was the first scheme of relief brought in.
The first scheme of relief providing for an opportunity for PAYE taxpayers for paying relief for donations——
The Minister is completely wrong. The Minister should check the history of this.
I suggest the Minister's history is wrong.
The Revenue Commissioners would not know what they are talking about, would they Deputy Burton?
The Revenue Commissioners have a very good memory of the scheme introduced by Deputy Quinn. It was the first——
Let the Minister finish and explain.
It is open to any individual to write a book of fiction at any time and publish it. The first scheme to provide for PAYE people to make a donation and obtain tax relief for it was in 2001. That scheme, introduced by the then Minister for Finance, Mr. McCreevy totalled €21 million that would otherwise have gone to the Exchequer. I must get the figure for Deputy Quinn's scheme. I am sure it would not be a similar amount, perhaps €1 million or €500,000.
Charities and non-profit-making organisations are exempt from VAT under the sixth VAT directive with which Irish law must comply. As such they do not charge VAT on their services and cannot recover VAT on goods and services they purchase. Essentially, only VAT registered businesses that charge VAT are able to recover VAT. Section 20(3) of the VAT Act 1972 empowers me to make orders providing for a refund of tax. These orders have been used in a limited way to provide for refunds of VAT on certain aids and appliances for the disabled and on medical equipment donated voluntarily to hospitals. The orders are focused and are designed to target particular sectors.
I am aware that the charitable and voluntary sector believes the European Commission is of the view that there are no legal difficulties with the introduction of refund orders. However, my understanding is that the Commission's view is that there is nothing in EU VAT law to prevent national governments paying charities a subsidy to compensate them for the irrecoverable VAT they have incurred, provided that state aid rules are observed. In this regard the Exchequer provides funding for many charitable and non-profit-making organisations. In its pre-budget submission, the Irish charities tax reform group indicated that of the €18 million VAT it believes its organisations pay, almost half of this is funded, directly or indirectly, by the Exchequer. The tax code provides exemption for charities from income tax, corporation tax, capital gains tax, deposit interest retention tax, capital acquisitions tax, stamp duty, probate tax and dividend withholding tax. Charities also benefit significantly from the uniform scheme of tax relief on donations, introduced under the Finance Act 2001 and which, for the first time, allowed tax relief on personal donations to domestic charities and approved bodies. The relief is very generous and is set at the marginal tax rate which, for an individual donor, could be as high as 42%.
While it is not possible to provide the costs of the scheme in respect of charities separate from other approved bodies, the latest information from the Revenue Commissioners indicates that the cost to the Exchequer in 2003 from donations from the PAYE sector came to more than €21 million for the overall scheme. I would be concerned at the potential cost to the Exchequer resulting from the introduction of a system of grants for charitable organisations equivalent to a VAT refund. This would result in the Exchequer funding the full VAT cost of €18 million, as estimated by the Irish charities tax reform group. It is likely that this is an under estimate, as there may be many charities registered with the Revenue Commissioners that are not covered by the Irish charities tax reform group. Aside from the legal obstacles to the introduction of refund orders for registered charities, such a system would undoubtedly lead to other bodies, such as schools and hospitals seeking registration as charities in order to benefit from such a system of refund orders. These are, in most cases, already receiving considerable Exchequer funding. Furthermore, it would be difficult to provide VAT relief to charities, while refusing similar relief to sporting organisations or other bodies within the community and voluntary sector. A refund arrangement for all of these sectors would add significantly to Exchequer costs. Even if funds were available for grant aiding charities and other voluntary groups, I am not sure the most appropriate use of the funds would be to relieve them of the VAT paid on inputs as opposed to grant aiding their activities using other criteria. Therefore I am not in a position to accept the amendment.
I am disappointed to hear that. The Minister's argument is circular. It includes many issues that are not directly relevant to the amendment. The mechanism for offering tax relief for donations is the subject of another amendment and it should not be confused with a rebate on VAT.
Social services are more often provided by charitable organisations in Ireland than by the State, to a greater extent than is the case in most other European countries. The Minister, by refusing to accept this amendment, is saying that a youth club that hires a painter to paint a hall will be bound to pay VAT on that service; a charity involved in the acquisition of medical equipment will be bound to pay VAT on that equipment; and a group caring for the elderly that buys a minibus will be bound to pay VAT on that purchase. Where is the logic in that, in terms of overall Government policy? We are getting social services on the cheap, so why do we make it harder for voluntary organisations? That is the effect of what the Minister is saying.
I am making the argument in terms of schools, arts groups or sporting organisations but specifically in terms of charities. I am glad the Minister has not chosen to hide behind the fig leaf of waiting for a charities Bill, which has been awaited for more than 25 years.
That will come up in the supplementaries.
The Minister has done his good deed for the day. He accepted that other amendment.
I can only give on the big ticket issues.
On all these grounds the Minister's argument is hollow and disappointing. We heard the same arguments from his predecessor. There was a hope that the Minister, on his introduction to this office, was seen to be closer to these values. However, in rejecting this amendment and in articulating a philosophy about this type of change, apart from the Department, the Minister is not differing from what we have seen previously.
I reject that assertion. I will let my record, as Minister for Health and Children, on aids and appliances and on refund orders to voluntary organisations, speak for itself. Many people talk about this but do not do much about it when given the opportunity. I have done much more than those who talk about it.
Amendment put and declared lost.
I move amendment No. 80:
In page 117, before section 93, but in Part 2, to insert the following new section:
"93.—Section 848A of the Principal Act is amended—
(a) in subsection (1)(a) by substituting the following for the definition of ‘relevant donation’:
‘"relevant donation" means a donation which satisfies the requirements of subsection (3) and takes the form of—
(a) the payment by a person (in this section referred to as the “donor”) of a sum or sums of money amounting to at least €100, or
(b) the donation of any non cash asset by a person (in this section referred to as the “donor”) with a market value at the date of the donation of at least €100, to an approved body which is made—
(i) where the donor is a company, in an accounting period, and
(ii) where the donor is an individual, in a year of assessment.',
(b) by inserting after the definition of ‘approved body’ the following definition:
‘"market value" has the meaning assigned to it by subsection (3A);',
(c) by amending the definition of ‘appropriate certificate’ as follows:
(i) substituting in subparagraph (ii) ‘year of assessment' for ‘year of assessment, and',
(ii) substituting in subparagraph (iii) ‘of the donor, and' for ‘of the donor;',
(iii) inserting after subparagraph (iii) the following subparagraph:
‘(iv) in the case of a non cash donation a statement specifying a description and the market value of the donated asset.',
(d) by inserting the following subsection after subsection (3):
‘(3A) (a) For the purpose of this section, the market value of any non cash asset (in this subsection referred to as “the property”) shall, subject to paragraph (d) be estimated to be the price which in the opinion of the Revenue Commissioners the property would fetch if sold in the open market on the valuation date in such manner and subject to such conditions as might reasonably be calculated to obtain for the vendor the best price for the property.
(b) The market value of the property shall be ascertained by the Revenue Commissioners in such manner and by such means as they think fit, and they may authorise a person to inspect the property and report to them the value of the property for the purpose of this section, and the person having custody or possession of the property shall permit the person so authorised to inspect the property at such reasonable times as the Revenue Commissioners consider necessary.
(c) Where the Revenue Commissioners require a valuation to be made by a person authorised by them, the cost of such valuation shall be defrayed by the Revenue Commissioners.
(d) Where the property is acquired at auction by the person making the gift, the market value of the property shall, for the purposes of this section, be deemed to include the auctioneer’s fees in connection with the auction together with—
(i) any amount chargeable under the Value-Added Tax Act 1972, by the auctioneer to the purchaser of the property in respect of those fees and in respect of which the purchaser is not entitled to any deduction or refund under that Act or any other enactment relating to value-added tax, or
(ii) in the case of an auction in a country other than the State, the amount chargeable to the purchaser of the property in respect of a tax chargeable under the law of that country which corresponds to value-added tax in the State and in relation to which the purchaser is not entitled to any deduction or refund.',
(e) in section 547 by the insertion of a new subsection (5) as follows:
‘(5) This section shall not apply in respect of gifts of assets which are "relevant donations" for the purposes of section 848A.',
(f) by the insertion of a new section 547A as follows:
‘547A.—Notwithstanding any other provision of the Capital Gains Tax Acts where a person disposes of an asset which is treated as a "relevant donation" for the purposes of section 848A, the consideration for the disposal shall be deemed to be of such amount as would secure that on the disposal neither a gain nor a loss would accrue to the person making the disposal.'.".
As we received a preview of the Minister's reply on the amendment I ask that he not refer to the part of the script that deals with the impending charities Bill.
Let all sides be consistent.
This amendment, in the same format, was submitted on Committee Stage of last year's Finance Bill. It was proposed by the Irish charities tax reform group. I understand the Minister has had contact with that group. I am anxious to know what is his opinion on this matter.
The amendment relates to the making of cash and non-cash donations and how such donations should be treated for VAT, capital gains tax and likely PAYE tax relief. It also makes an essential argument for reducing the current figure of €250 to €100. The Minister may argue about difficulties in administration and the need to provide for a sum easy to manage. As I understand it, the sum of €100 is being suggested, not to allow persons making the donations to avail of tax relief but to ensure the entire donation goes directly to the charity. The argument can also be made that the smaller the sum allowable the more incentive there is for individual citizens or taxpayers to make donations to charities. Such a provision would result in an increase in donations to charities. I ask that the Minister consider this detailed amendment favourably.
The amendment sets out a number of propositions. The first is to reduce the minimum qualifying donation to approved bodies from the current amount of €250 to €100. Second, it seeks to allow income tax or corporation tax relief for the donation of non-cash items to such bodies. Third, it provides that the donor of the non-cash item be exempt from capital gains tax and that the recipient be treated for capital gains tax purposes as having acquired the item at the price paid by the donor. This means that on subsequent disposal the full gain accrues to the approved body.
The approved bodies in question are eligible charities and other bodies including, first and second level schools and third level institutions, including universities. On the reduction in the de minimis limit, Deputies will be aware that in 2001 my predecessor introduced a new uniform scheme of tax relief for donations to approved bodies which as well as introducing new relief for donations to domestic charities and educational institutions merged almost all the existing reliefs under the umbrella of a single scheme. The scheme was widely welcomed by the charitable sector.
I am not prepared to reduce the minimum amount at this time for the following reasons: First, the relief provided for is already generous being at the taxpayer's marginal tax rate. This could, for an individual donor, be as high as42%. A reduction in the minimum donation would have the effect of increasing the numbers of donations qualifying for relief and would therefore be costly to the Exchequer. Second, donations for any year can be on an cumulative basis so that a monthly donation of little more than €20 can qualify for relief.
While I understand the desire of those concerned to have the lower limit reduced still further, I am not aware the €250 limit has had a negative impact on the level of donations generally. The latest information available to the Revenue Commissioners indicates that the cost to the Exchequer in 2003 from donations from the PAYE sector amounted to in excess of €21 million. Data from the self-assessed sector is only coming through and I am not in a position to give final figures in that regard. I believe the Exchequer is responding generously to the voluntary sector and, as such, no further increases are called for at this time.
On the proposal to allow the donation of non-cash items, under existing law donations must be in the form of money in order to attract relief. The amendment also contains provisions for the Revenue Commissioners to be responsible not only for the valuation of the items being donated but also for the costs involved in obtaining such valuations. This issue has been raised more than once in the past. I am concerned there could be difficulties in providing relief where, for example, the value of an unusual item is in dispute. I am not satisfied that Deputy Boyle's proposals on valuation will solve them. In addition, the means whereby the relief is currently given in the case of a PAYE donor presupposes that the individual is making the donation from income on which he or she has paid income tax to the value of the relief being claimed. While there is some prospect this is so when the donation is in money form such a link may be broken where non-cash items are involved.
The difficulties associated with the donation of non-cash items are not restricted solely to valuation. There is also potential for abuse in the case of donations of shares in private companies where share values could be manipulated to enhance relief for the donor. The third element of the amendment effectively proposes to exempt the donor from capital gains tax while treating the recipient as if he or she had acquired the asset at the same price as the donor. The effect of this proposal is that the donor obtains income tax relief at the market value of the asset whereas he or she is treated for capital gains tax purposes as having disposed of the asset at the original price paid even if it is considerably below current market value.
A capital gains tax exemption for the donor already exists in relation to the donation of non-cash items to charities under section 611 of the Taxes Consolidation Act 1997. This exemption has existed since capital gains tax came into being in 1974. Charities are, of course, exempt from capital gains tax under section 609 of that Act. Charities are also exempt from income or corporation tax and capital gains tax only if the funds are used for charitable purposes. These exemptions do not apply to all other approved under the donations scheme. There is, therefore, a clear distinction in tax law between charities and these other bodies. Simply because the Oireachtas has decided to allow income tax or corporation tax relief for donations to a variety of bodies including charities does not mean it must also give the capital gains tax exemption for the donation of non-cash items to those same bodies. Charities are a special case even among approved bodies and are justified on their own merits. I am not satisfied there is sufficient justification to extend this beneficial capital gains tax treatment across the board for donors making donations to all approved bodies.
In summary, it is my view that the difficulties associated with this set of proposals outweigh the benefits and I am for the reasons outlined not prepared to accept the amendment.
The Minister has given the same response as that given by his predecessor to the amendment submitted last year.
I am disappointed. The arguments made by groups such as the Irish charities tax reform group are worthwhile hearing. I put forward those arguments in the amendment submitted last year.
A situation which has arisen in Cork city may provide an example of how the non-cash element could be dealt with in the future. A landowner has offered to donate 200 acres of riverside land to the State or local body with the proviso that it be kept as open space but the local authorities have earmarked it for road development and are insisting the land be purchased through compulsory purchase orders which in turn appears to me to be a waste of State resources. As the State is not involved in any likely hand-over of land the example may not be directly applicable. However, there is nothing to stop the transaction being done through An Taisce, an approved body with status in its own right. A large amount or a building could be given in similar circumstances.
I am not satisfied the current tax situation allows for that type of donation without significant tax applications. If the Minister is not prepared to accept this amendment I would like some commitment from him that it is an area he will examine separately with a view to making proposals on it. This is an area fraught with difficulty and it is preventing that type of philanthropism occurring on a greater scale than might otherwise occur.
I would be anxious to consider submissions from any philanthropists who want to do things for the common good. If specific issues arise, we can consider them. The reply I have given outlines the current position on the proposal.
Amendment put and declared lost.
I move amendment No. 81:
In page 117, before section 93, but in Part 3, to insert the following new section:
93.—The Minister may make regulations providing relief in respect of VAT for registered charities provided that such charities comply with such requirements including requirements as to accountability and financial transparency as may be prescribed.".
I recommend to the Minister this amendment which deals with relief for charities in terms of VAT. I accept the Minister's argument that there are severe difficulties for the tax code in terms of ensuring that VAT relief for charities, if introduced, is ring fenced so as to benefit genuine charities carrying on important charitable activities. I accept the Minister and his officials have encountered difficult technical problems in trying to introduce such a relief while ensuring it is ring fenced. The Labour Party resolution in this respect refers only to the Minister making regulations which would introduce relief. That could be done in a number of ways.
Deputy Quinn, when Minister for Finance, introduced a special scheme of tax relief. The tax relief in that instance was, rightly, collectable by charities rather than by individuals who made the donation. The object was to ensure that where a person makes a donation to Trócaire, Concern, Goal and so on from his or her after-tax income, the charity concerned would get the gross amount and could claim back the tax. The amendment introduced by former Minister for Finance, Deputy Quinn, was in the context of commemorating the famine and of increasing the amount of charitable donations made in the aftermath of the genocide in Rwanda.
I have had many discussions with the Revenue Commissioners on this issue. At the time the scheme was introduced, there was a great deal of fear that it might lead to potential abuses. It was felt that because of a lack of ring-fencing it could spill out into other areas and would not benefit what most of us would recognise as being the type of charitable organisation we might wish to benefit. While I accept what the Minister is saying, his predecessor, Mr. McCreevy, in 2001 introduced a wide provision for tax relief which allowed individuals who made charitable donations to claim tax relief on donations made. The benefit to the charity is that this encourages philanthropy by individuals, but it also allows the individual to write-off the amount from their taxable income. The scheme introduced by former Minister for Finance, Deputy Quinn, sought to give the benefit of the tax to the charity, thereby increasing its income.
I can understand the Minister's concern on this issue. There is a great deal of concern about it because we do not yet know what will be the cost of that scheme particularly as regards donations made by corporate entities because that information, as I understand from replies received to parliamentary questions, is not yet available from the Revenue Commissioners. When I raised this issue last year I was informed that approximately 2,500 to 3,500 bodies in this country qualify as charitable organisations and approved bodies under former Minister for Finance, Mr. McCreevy's scheme. I can understand there is trepidation within the ranks of the Revenue Commissioners and the Department of Finance in terms of what will be the ultimate cost of that scheme and who may benefit. However, the fact that there are problems with the scheme does not mean the Minister should not recognise the burden of some charitable organisations in terms of VAT and tax payments in that regard.
The fact that problems exist should not deter the Department of Finance from seeking to devise imaginative schemes which would address the issue. The type of charities about which I am speaking are the Society of St. Vincent de Paul and others. I urge the Minister to perhaps introduce a pilot scheme for Trócaire, Concern, Goal and some of the large Third World charities. Irish charities like the Society of St. Vincent de Paul, St. John of God's and those charities dealing with disability issues should be included in a pilot scheme which would allow them to be recompensed. We could then proceed from the pilot scheme to a wider use of the provision. I accept the concern expressed by the Minister and his officials given that we do not yet know the cost, in relation to the business sector, of the more wide ranging provision of relief introduced by former Minister for Finance, Mr. McCreevy.
The amendment asks that the Minister consider making regulations and, perhaps, introducing a pilot scheme to provide some relief from VAT by way of refund for charities for whom VAT is a particularly onerous part of their cost structures. I do not want this relief to be available to a local golf club registered as an approved body. None of us want that; we want it to be available to particular organisations. We do not, for example, want it to be available to exclusive charities in terms of their remit. The provision could also be applicable to charities that produced transparent financial statements so that we know where money is going and on what it is being spent.
The Minister has expressed concern and some trepidation in terms of what his predecessor's open-ended amendment introduced in the Finance Act 2001 will cost. However, it has already cost the Revenue €21 million in terms of PAYE taxpayers. The other side of the equation is that if a charities Act were in place we would at least be aware of where donations made by PAYE taxpayers are going. The vast majority of the charitable sector in Ireland does fantastic work and deserves the support of the Oireachtas.
I raised with the Taoiseach the question of the VAT refund for Band Aid. The Taoiseach, on the Order of Business, promised me that would be done. I accepted his promise. However, what was actually done was that money was shifted from the ODA allocation to provide an allocation for those organising Band Aid. That was merely shifting money from the starving to the desperate and provided no net additionality. I was disappointed with what happened. The Taoiseach's reply to the matter on the Order of Business was good but the outcome was disappointing and was not, as Deputy Boyle said, similar to the situation in the UK whereby the Live Aid record resulted in a genuine VAT remission refund to charities.
There was no VAT refund but we paid the equivalent. The record of this Government, regardless of criticism, in terms of ODA far outstrips that of any of its predecessors. We chose to make an allocation from existing moneys rather than doubling up on the cost of VAT refunds. No matter from where the money comes, somebody will always have a problem with it.
On the pilot scheme issue, a problem arises when one starts picking and choosing. There are 6,453 registered bodies——
That is a huge increase in numbers.
——established for charitable purposes and thereby exempt from tax. Providing all of them with a VAT refund raises serious issues. The Irish charities tax reform group is seeking to broaden the definition of charities. We would then have to provide other charities with a VAT refund. The question then arises as to whether the EU will allow matters to be dealt with in that way and by how much refund orders can be extended. It is a minefield.
While the concern expressed is understandable from a charitable organisation's point of view — many groups such as those who buy equipment for hospitals or who provide care for the elderly have approached me to have their organisations exempted from VAT — providing a consistent system across the board is administratively difficult. We have tried to assist such groups through the donation relief provision and overseas development aid. The Government is involved and is not unmindful of the quality and value system that informs this type of activity. However, the Government cannot deal with all requests in the manner required. It has responded in an imaginative and extensive way.
It has been mentioned that tax relief for the PAYE sector will amount to €21 million for a full year. That is indicative of the level of funds paid into charities. People have identified to which charity they wish to donate and that is their business. The Government's intervention, in terms of devising that simplified scheme, has greatly enhanced the availability of access to donations for many charities in the country. There is no question about that.
The Government is not dismissive of the issue but it can only assist in ways which do not undermine and complicate an already complex code. We must, as parliamentarians, explain that to the people. That is not meant as a rebuff. The Government must find the most effective means of showing solidarity and commitment to this area and it has done so in a way which has met with an unprecedented response to the benefit of charities. There has never been a State interface with the voluntary sector because, by its nature, it is non-governmental and has never been part of a government support system or government facilitated fiscal response. While Deputies are merely reflecting concerns or ideas floating around and with which people are coming forward in good faith in trying to further enhance how the State can assist, it is clear from the issues that arise and from the contributions from Deputies sponsoring the amendments in terms of their recognition of how difficult an area this is to deal with, that every time one tries to make a move on the VAT refund side one is walking into difficulty. The situation is invidious in that regardless of what one does one cannot cater for the 6,453 organisations involved.
We should look at the issue as a whole and not get into the false argument of who is more committed to this area than the other. We have, as a Parliament, responded in a way that has met with unanimous approval from all concerned. While as time goes on people will come up with other changes that could be made, the fact is that we cannot advance in the manner in which we did initially, whether in 1996 or 2001. I will not get into an argument in that regard as both were good initiatives. We cannot do everything we are asked for good administrative reasons and not because we do not wish to assist those working in this area for whom we have admiration and respect.
Amendment, by leave, withdrawn.
Section 93 agreed to.
NEW SECTION.
I move amendment No. 82:
In page 117, before section 94, to insert the following new section:
94.—Section 8 of the Principal Act (as amended) is hereby amended by deleting all occurrences of ‘€25,500' and substituting ‘€75,500'.".
A threshold exists in terms of a turnover for business whereby if one does not exceed that turnover one is not required to be part of the VAT return system. To my knowledge, that does not involve a substantial loss of revenue to the State because a business in that category cannot claim back VAT. The threshold has not been changed for a long time and now appears anomalously low. There are many small service businesses for which a great deal of detailed administration could be avoided if they were not required to make VAT returns. The likely loss to the State is, as I said earlier, small.
I do not know what would be the most appropriate figure to which the threshold should be increased. Perhaps the Minister has data from the Revenue Commissioners that would indicate what would be the most appropriate figure in that regard. I have tabled the figure €75,500 as an indicative figure. The time has come to change these thresholds which have remained the same for some time. The VAT structure involves a great deal of bureaucratic administration and should not be required for small businesses of that type.
The €25,500 threshold has been in place for some time. Wages have in the meantime moved on substantially. Persons whose turnover was previously below €25,500 would now be earning more than that and hence would be required to register for VAT. It should of course be borne in mind that these people are not availing of a reduction in tax but rather that VAT payments result in an increase in cost to the person purchasing the service. Those concerned pay tax returns based on their own income and that would not be affected.
A particular category of persons now exists who may be buying in services at a level above the threshold. It is important the threshold is increased. While the figure of €75,500 is too high or may be too costly it may be possible to increase it to €35,000 or €40,000.
I cannot accept Deputy Bruton's amendment which provides that the VAT registration thresholds for traders in services be increased from €25,500 to €75,000. The Deputy will appreciate that EU VAT law, with which Irish law must comply, determines the rules in respect of any change in VAT registration thresholds. This means that it is possible to increase the thresholds but only in line with maintaining their real value. The existing thresholds have been in operation since 1994.
Increasing the services threshold from €25,500 to €75,000 as proposed would not be possible under current VAT rules and would be costly to the Exchequer — in the region of €163 million in a full year — and would remove 21,300 businesses from the VAT net. I consider that the current threshold sets a balance between the necessity for registration and the revenue yield involved.
Higher registration thresholds would cause competitive distortions between registered and unregistered businesses. Registered businesses who are obliged to charge VAT on their services would be competing unfairly with unregistered businesses of a slightly smaller size, an issue that always arises when fixing a threshold. It should also be remembered that Ireland has the third highest registration thresholds in the EU. Some member states have no registration thresholds and require all firms to register irrespective of turnover.
The existence of the registration thresholds allows for certain small businesses to remain outside the VAT net and also helps small new businesses to develop. The existence of thresholds also avoids the administrative difficulties and cost for the Exchequer of including a wide range of small businesses in the VAT system. Registration thresholds are not intended as a means of keeping small businesses permanently outside the VAT system. It is likely that most businesses, assuming they are reasonably successful, will enter the VAT system at some stage.
These thresholds are always an issue. The services threshold is usually half the goods threshold when it comes to this area of taxation, with the figure for services being €25,500 and that for goods €51,000. If I was to increase the services threshold to €34,500 and that for goods to €60,000, it would represent a considerable amount of money, another €28 million in a full year. That sort of money is a budgetary matter rather than a matter for an amendment to the Finance Bill.
There is a case to be made about the 1994 threshold and how it could be increased but it must also be maintained within the EU guidelines. The Deputy inserted €75,000 as an indicative figure for the purpose of discussion and everyone agrees that is out of the question. If there was a lower yield loss, one could consider it as a Finance Bill amendment but that sort of money is significant. It is an issue we should reflect upon in the context of future budgets.
I accept the Minister's difficulty. Perhaps a step could be taken in this direction by indexing it by some part of the amount the Minister considers would be acceptable for a Finance Bill amendment so that at least the principle of retaining its value and not pulling people into the administrative compliance cost could be established. As time goes on the Minister might feel in subsequent years that he could modify it further.
I do not see why the service figure must be half of that for registering for goods and services. If anything, they should be on a par. The Minister might not have to increase the €51,000 threshold. If it was going to be expensive to move from the €25,000 to €35,000, the half way mark of €30,000 might be achievable.
There is always a higher turnover of goods than services and that is why the threshold is higher. That relationship has existed for as long as any of us can remember. A trader in goods will quickly reach a high turnover in respect of his purchases of goods for onward sale. A trader in the services sector does not generally have the same outlay. I have been checking this in the last few days and I saw the cost figures this morning and had to put the brakes on. I will come back on Report Stage to see if I can do anything.
Amendment, by leave, withdrawn.
Section 94 agreed to.
SECTION 95.
Amendments Nos. 84 and 85 are consequential to amendment No. 83 and amendment No. 86 is related. Therefore, amendments Nos. 83 to 86, inclusive, will be discussed together.
I move amendment No. 83:
In page 118, to delete line 7 and substitute the following:
"95.—(1) Section 4 of the Principal Act is amended—
(a) in subsection (3)(a), by substituting ‘Subject to paragraphs (aa) and (b)’ for ‘Subject to paragraph (b)’,
(b) by inserting the following after paragraph (a) of subsection (3):
‘(aa) Where a person having an interest in immovable goods to which this section applies surrenders possession of those goods or of any part thereof in such circumstances that the surrender does not constitute a supply of the goods for the purposes of subsection (2), the provisions of paragraph (a) shall not apply when this paragraph and paragraph (ab) take effect pursuant to section 95(2) of the Finance Act 2005.
(ab) Subject to paragraph (b), where a person having an interest in immovable goods to which this section applies surrenders possession of those goods or any part thereof in such circumstances that the surrender does not constitute a supply of the goods for the purposes of subsection (2), that person shall be liable for an amount, in this paragraph referred to as a deductibility adjustment, which shall be payable as if it were tax due by that person in accordance with section 19 for the taxable period in which the surrender occurred, and that deductibility adjustment shall be calculated in accordance with the following formula:
T x (Y-N)
Y
where—
T is the amount of tax which the person who surrenders possession of the goods was entitled to deduct in accordance with section 12 in respect of that person's acquisition of the interest in and development of the goods the possession of which is being surrendered;
Y is 20 or, if the interest when it was acquired by the person who surrenders possession of the goods was for a period of less than 20 years, the number of full years in that interest, and
N is the number of full years since that person acquired the interest in the immovable goods being surrendered or, if the goods were developed since that interest was acquired, the number of full years since the most recent development:
but if that N is greater than that Y, such deductibility adjustment shall be deemed to be nil.'.".
I will initially refer to amendments Nos. 83, 84 and 85 which amend section 4 of the VAT Act which deals with property transactions.
The first amendment inserts two new subsections 3(aa) and 3(ab) into section 4 to provide for a change in the rules regarding the VAT treatment of certain property transactions. This is an anti-avoidance provision. The purpose of the provision is to counteract schemes which seek to avoid VAT on the sale of newly constructed or developed properties.
The operation of the schemes involves the diversion of newly constructed or developed properties into exempt short-term letting prior to the sale. At present, on such diversion the developer only accounts for an amount of VAT equivalent to the input VAT originally deducted. The developer then claims that the sale of the property following the short-term letting is exempt from VAT, thereby attempting to avoid paying VAT on the profit margin. The usage of such schemes serves to undermine the VAT base and represents a threat to the Exchequer receipts. Accordingly, I propose the introduction of this measure to stamp out these avoidance schemes.
The new subsection 4(3)(aa) provides for the termination of the existing rule when the new provision comes into force. The new subsection 4(3)(ab) provides for a new rule where a property on which deductibility has been claimed is diverted into exempt short term letting. In such circumstances a clawback of deductibility will arise when the letting commences. The amount of the clawback will equal the amount of VAT deductibility claimed less one twentieth for each year of taxable use prior to the diversion. This measure ensures that these properties cannot be sold without VAT being accounted for on the full sale value.
There is a consequential amendment to section 12 to ensure that the tax which arises on the sale of the property does not amount to double taxation. Both measures will be commenced by ministerial order.
The third change to section 4 is an amendment to subsection 4(8). The purpose of this amendment is to ensure that a surrender or assignment of a lease is treated as a supply of goods by the recipient of the lease. This amendment is needed to ensure that the provision is consistent within the terms of the EU derogation on which it is based.
It also provides that the person who makes the surrender or assignment continues to be entitled to deductibility in the normal way but must issue a document to the recipient indicating the taxable value and the amount of tax due on the transaction. The reason for this requirement is that once the transaction is treated as a supply by the recipient, the person who makes the surrender or assignment is no longer obliged to issue a full VAT invoice.
The last change provides for the commencement order to the anti-avoidance paragraph.
Section 86 introduces a number of amendments to section 12 of the VAT Act which deals with the right to deduction of VAT.
Was this a well targeted relief which effectively took homes from the VAT net without exempting them from the 13.5% and was it a vehicle by which the costs to first-time buyers could be reduced? Should we place conditions on such a vehicle rather than eliminating it completely?
I do not think developers had first-time buyers in mind in terms of recipients of the benefit.
This closes a loophole. Was it used on a widespread basis or were there only a small number of examples?
There are around 26 examples of this.
Did developers buy the sites separately and then contract to build houses on them?
I knew what it was when they spoke to me about it.
Could the Minister tell us about the equation?
The select committee went into private session at 5 p.m. and resumed in public session at 5.05 p.m.
I suggest we suspend until 6 p.m.
Can we work through until 6 p.m.?
We can but, perhaps, we might be able to conclude all the business between 6 p.m. and 8 p.m. this evening.
If the Minister can make it.
I hope so. We will resume at 6 p.m. with the intention——
Did the Minister make a specific commitment?
I did that while the Deputy was away.
I was out talking to my legal adviser.
Sitting suspended at 5.06 p.m. and resumed at 6 p.m.
Amendment agreed to.
I move amendment No. 84:
In page 119, between lines 23 and 24, to insert the following:
"(c) (i) A surrender or assignment of immovable goods referred to in paragraph (a) shall be treated as a supply of goods made by the person to whom the goods are supplied.
(ii) Upon the surrender or assignment of immovable goods referred to in subparagraph (i), the person who makes the surrender or assignment shall issue a document to the person to whom the surrender or assignment is made indicating the value of the interest being surrendered or assigned and the amount of tax chargeable on that surrender or assignment.
(iii) For the purposes of section 12, that section shall apply as if this paragraph had not been enacted.".
Amendment agreed to.
I move amendment No. 85:
In page 119, between lines 48 and 49, to insert the following subsection:
"(2) Paragraphs (a) and (b) of subsection (1) shall take effect as on and from such day as the Minister for Finance may, by order, appoint.”.
Amendment agreed to.
Section 95, as amended, agreed to.
SECTION 96.
Question proposed: "That section 96 stand part of the Bill."
A point has been made to me by the tourism industry and it was also raised by Deputy Deenihan. In other jurisdictions, business spending may be offset against VAT on tourism. For instance, a conference being held in other jurisdictions would be VAT-free. Is the Minister aware of this concession which appears to be generally available? The concern is that Ireland is uncompetitive in respect of tendering for these large-scale business conferences. I am aware the Minister has not been given notice of this query but perhaps he will respond now or later if he regards it as an issue that could be considered on Report Stage.
I received representations from tourism interests in this regard before the budget. It has been suggested that VAT deductibility be allowed for this sector, more specifically in the corporate meetings, launches, conferences or incentives area. I am sympathetic towards these requests but I am restricted from granting the relief by Exchequer constraints and by the fact that VAT is a harmonised tax which must be applied in accordance with the EU sixth VAT directive.
As a way of minimising the Exchequer impact, tourism interests have suggested that VAT credit be restricted to the specific events I have outlined and to corporate participants in such events who reside outside Ireland. However, I am not certain that this can be done. First, it would be seen as discriminating against Irish-based organisers of and delegates to these events. Second, it would inevitably lead to calls to extend the relief to all business-related travel and subsistence. In this regard, Ireland has vigorously defended its existing right to block deductibility entitlement for expenditure on food, drink and accommodation in the business arena because of Exchequer implications. Finally, leaving aside principled objections, Revenue has advised that it would be very difficult to design a scheme which could distinguish between conference-related and other business expenditure. For these reasons, unfortunately, I cannot propose to address this problem in the Finance Bill. However, my officials will continue to examine this issue to see if a more satisfactory solution can be found which would be acceptable to all concerned.
The Minister made the point it was a harmonised tax but it would appear that some of our competitors, who I presume are EU member states, have got around their restrictions of the harmonised tax. There may be comparatives to explore.
They give deductibility for all business expenditure, as the Deputy stated, whereas we do not. We have a different tax model and VAT makes a greater contribution, percentage-wise perhaps, than some of the models to which the Deputy refers. There are advantages in our low corporate tax system and there is a price to be paid elsewhere. We want to ensure we are not at an uncompetitive advantage if that is the only issue.
Sometimes the argument is made that this is the issue when there may be other issues. The issue of VAT may not be the reason a sector is not getting the business but this is the case sometimes made by business to the Department. I suggest we work further to see if a way can be found to get around it. The suggested ideas thus far are not compatible with the requirements of harmonisation as required under the directive.
Question put and agreed to.
Sections 97 and 98 agreed to.
NEW SECTION.
This is a new section which has already been discussed with amendment No. 83. Acceptance of this amendment involves the deletion of section 99.
I move amendment No. 86:
In page 120, before section 99, to insert the following new section:
99.—(1) Section 12 of the Principal Act is amended—
(a) in subsection (1)(a)—
(i) by substituting the following for subparagraph (iii c) (including the proviso to that subparagraph):
‘(iii c) the tax chargeable during the period, being tax for which the taxable person is liable by virtue of section 4(8), in respect of a supply to that person of immovable goods,’,
and
(ii) by deleting subparagraph (iii d),
and
(b) by inserting the following after subsection (4)—
‘(5) At the time when a person disposes of an interest in immovable goods the possession of which that person had previously surrendered in circumstances where the person had paid a deductibility adjustment in accordance with section 4(3)(ab), that person is entitled to increase the amount of tax deductible for the taxable period within which the disposal is made, by an amount calculated in accordance with the following formula:
T x (Y-N)
Y
where—
T is the amount of tax which the person who previously surrendered possession of the goods was entitled to deduct in accordance with this section, prior to that surrender of possession, in respect of that person's acquisition of the interest in and the development of those goods,
Y is 20 or, if the interest when it was acquired by the person who surrendered possession of the goods was for a period of less than 20 years, the number of full years in that interest when it was so acquired, and
N is the number of full years since that person acquired the interest in the immovable goods being disposed of or, if the goods were developed since that interest was acquired, but before the deductibility adjustment in accordance with section 4(3)(ab) was payable, the number of full years since that development:
but if that N is greater than that Y, such amount shall be deemed to be nil.'.
(2) Paragraph (b) of subsection (1) shall take effect as on and from such a day as the Minister for Finance may, by order, appoint.”.
Amendment agreed to.
Section 99 deleted.
Section 100 agreed to.
SECTION 101.
Question proposed: "That section 101 stand part of the Bill."
The section states that where electricity and other utilities are provided to non-VAT registered persons, VAT is due at the time the statement of account issues to the customer. Does this provision impose an unreasonable burden? I understood queries were raised about the impact of having to pay VAT in advance. Has the Minister received representations on the provision?
The section makes three amendments to section 19 of the VAT Act which deals with the periods when tax is due and payable. The first amendment to subsection (1) is a technical amendment. The second amendment to subsection (1) provides that in the case of continuous supplies of utilities, namely, gas, electricity and telecommunications, to non-business and other unregistered customers, the tax is due when the utility company issues the bill to the customer, provided that it issues a bill at least once every three months. The effect of the amendment is that utility companies will be able to account for VAT on the supplies to both their business and non-business customers on the same basis. In addition, it serves to simplify the application of VAT to any of the three services in question in the case of a change in the VAT rate.
The final amendment to this section ensures that utility companies covered by the new rule in paragraph (bb) will account for VAT on the basis of the time of the issue of the bill to their non-business customers, even in respect of advance payments made by those customers. The new rule specifies that the tax is due when the bill issues. The old rule was that the tax was due at the time of supply.
Will people be expected to pay VAT separately from the payment of their bill?
No, the amendments clarify when VAT is due and payable.
Question put and agreed to.
Sections 102 to 107, inclusive, agreed to.
SECTION 108.
I move amendment No. 87:
In page 123, to delete lines 9 to 11 and substitute the following:
"108.—The Sixth Schedule (inserted by the Finance Act 1992) to the Principal Act is amended—
(a) in paragraph (iv)—
(i) by inserting ‘(other than bread as defined in subparagraph (d), of paragraph (xii) of the Second Schedule)’ after ‘the supply of food’,
(ii) by substituting in subparagraph (a) ‘heated, enabling’ for ‘heated for the purpose of enabling’,
(iii) by substituting in subparagraph (b) ‘heated after cooking, enabling’ for ‘heated after cooking for the purpose of enabling’,
(iv) by deleting in subparagraph (c) ‘for the purpose of’, and
(v) by substituting ‘at the time it is provided to the customer' for ‘at the time of supply',
and
(b) with effect from 1 July 2005, by substituting the following for paragraph (xiii):”.
The purpose of the amendment is to ensure that the sale of food and drink purchased at a take-away outlet, supermarket, garage or other outlet which has been heated and is above the ambient air temperature when provided to the customer remains liable to VAT at the reduced rate of 13.5%. The Sixth Schedule of the VAT Act lists goods and services liable at the reduced rate of VAT of 13%. The amendment deals with food and drink purchased hot for consumption, whether at a take-away outlet, supermarket, garage or other outlet.
Amendment agreed to.
Section 108, as amended, agreed to.
Sections 109 and 110 agreed to.
NEW SECTION.
I have circulated a list of two additional amendments which did not feature on the list circulated yesterday.
I move amendment No. 87a:
In page 123, before section 111, to insert the following:
111.—(1) Section 40 of the Principal Act is amended by substituting the following for subsection (2):
‘(2) Where the consideration, or any part of the consideration, for a conveyance on sale of any property, consists of any security not being a marketable security, the conveyance shall be charged with ad valorem duty as a conveyance on sale of that property for a consideration equal to the value of that property on the date of execution of the conveyance.
(3) For the purposes of subsection (2) "property" includes any estate or interest in property.'.
(2) This section applies as respects instruments executed on or after 2 March 2005.".
The reason for the late circulation of the amendment was that I was required to get Cabinet clearance to proceed with it. The purpose of the amendment is to amend section 40 of the Stamp Duties Consolidation Act 1999, which provides for the calculation of ad valorem stamp duty where the consideration given for a conveyance on sale of any property consists of stock or securities. Where a non-marketable security is the consideration given for a conveyance on sale of any property, section 40 provides that the conveyance on sale is to be charged with ad valorem stamp duty “in respect of the amount due on the day of the date of the conveyance for principal and interest on that security”. This provision, which dates back as far as the Stamp Duty Act of 1891, has always been interpreted on the basis that “an amount due” at any time does not necessarily mean “an amount payable” at that time.
The purpose of this amendment is to counter a purported attempt at avoidance of stamp duty which has come to the notice of the Revenue Commissioners. In the particular instance, the Revenue Commissioners have advised me that matters were arranged so that the consideration for the conveyance of a property was a non-marketable security which involved a payment of the consideration several days after the date on which the conveyance was executed. The argument being made is that since no amount was due to be paid on the day of the date of the conveyance, under section 40 there could be no stamp duty chargeable in respect of the conveyance. The Revenue Commissioners are in the process of challenging this interpretation and it is possible it may be a matter for the courts to finally determine the issue.
As stamp duty is a tax on property transactions, in particular land and buildings, any period of uncertainty as to the correct interpretation of the stamp duty code could lead to a significant number of transactions being structured in a similar way in the hope that they might also avoid stamp duty. Clearly, this would be an undesirable avoidance mechanism. As can be appreciated, if this simple planning device were to be successful in avoiding stamp duty, it would be available for most property transactions which currently attract stamp duty and this would have serious implications for the Exchequer yield.
Whatever the outcome of Revenue's challenge, this amendment will make certain that in such circumstances ad valorem stamp duty will be payable in respect of the value of property being conveyed. The amendment will be effective for instruments executed on or after 2 March 2005, that is, today.
I hope the amendment is successful in light of the Minister's indication that the case in question presents a serious risk of significant loss to the Exchequer. Is the net point of the amendment to overcome an attempt at avoidance by replacing the words "due" and "payable" by the date of execution?
Yes, the net point is that one cannot defer consideration of the conveyance. Stamp duty is payable on the value of the conveyance and an attempt was being made to provide a mechanism by which one would defer consideration of the value beyond the date on the basis that stamp duty would no longer apply under the 1891 provision.
Is the amendment focused on one large and valuable conveyance or is it concerned with a developing practice?
The first and only one is large.
Are we talking about significant conveyance, in the region of many millions of euro?
This is an overaggressive tax strategy indulged in by tax planners, one of which the Chairman of the Revenue Commissioners said before Christmas that he was minded to take action against. Would a general anti-avoidance mechanism get across this? Or is this an individual reading the stamp duty legislation and deciding to have a go at this?
It is a matter of interpretation. This is where the original legislation as presented does not tie in the way in which we want of it. The nature of tax advice is to devise clever means of avoiding stamp duty, despite the best efforts by everybody. An opportunity was seen in this particular method. The individuals concerned will go to the Revenue Commissioners, then the appeals process and the courts to make their case. We must ensure that every time an opening emerges, it is closed off on the basis that it could have a wider application. We hope we will win the case. However, regardless of whether we win, we do not want to be fighting such a case a second time.
Is this case at the appeals stage or in the courts?
It is at the appeals stage.
Amendment agreed to.
SECTION 111.
Amendments Nos. 88, 89 and 90 are related and will be discussed together.
I move amendment No. 88:
In page 124, lines 20 to 34, to delete all words from and including "in" in line 20 down to and including "penalty" in line 34 and substitute the following:
"and—
(a) before 1 March 2005 without regard to subsection (3), and
(b) on or after 1 March 2005 with or without regard to subsection (3),
the duty chargeable (if any) in respect of the instrument has been accounted for to the Commissioners, and one or more conveyances or transfers (referred to in this section as ‘subsequent transfers') of other interests in the same dwellinghouse are effected within the subsequent 12 month period, the transferee or where there is more than one transferee, each such transferee, being a party to the first transfer, jointly and severally, shall become liable to pay to the Commissioners a penalty in an amount equal to the amount of the difference between—
(i) the amount of duty chargeable if the first transfer was one to which subsection (3) applied, and
(ii) any duty paid on that first transfer together with the amount of any penalty previously".
These amendments make changes to section 111, inserting a new section 45A into the Stamp Duties Consolidation Act 1999. The purpose of section 45A is to counter attempts at avoidance whereby a house or apartment is purchased by more than one purchaser and each purchaser takes a separate conveyance or transfer of an interest in the house or apartment in an attempt to avail of lower stamp duty rates.
The provisions of the new section 45A put beyond doubt that the rate of stamp duty on such conveyances or transfers will be determined on the basis of the aggregate value of the whole house, and any contents therein, thereby ensuring that should the practice of having more than one conveyance or transfer continue, there can be no gain to the purchaser from a stamp duty perspective.
For example, a property of a certain value attracts, say, the 9% rate of stamp duty. The value of the property is then divided up among three purchasers. An attempt is then made to claim for the third of the value so as to detract the lower stamp duty rate in each of the three cases which may be lower than the punitive amount of a 9% duty.
What is the principle of taxation in this case? Say two unrelated people decide to share the purchase of a house. Does this mean they cannot buy half a house each, be the owners of a half a house and attract the tax that would apply? Most taxes are levied on the individual who makes a purchase. Traditionally, stamp duty applies to property and is one reason why it is perceived by many as an inequitable tax. Allied to this, extraordinary thresholds are in place. It is not a case where the first slice is at 1% and the next at 2%. When one crosses the threshold, the whole value is caught at the higher rate.
The Minister for Finance is closing the door on this practice. By taking such a hard line in maintaining the view that the two people who buy half a house each should not be regarded as having bought a property for half the price, he must look afresh at the inequitable structure of the stamp duty code which encouraged people to use this practice. This was raised by the Minister's predecessor and he averted to the fact that the tax was introduced by William of Orange and how far-seeing he was in having such a structure. Looking back on the heritage of William of Orange, we in the Republic may view some of the features of his tax code as iniquitous. The Minister, who comes from a different political tradition, may wish to look afresh at this heritage and restructure stamp duty in a fairer way.
I understand the Minister wants to reduce a potential loss to the Exchequer. Was there a significant loss of stamp duty revenue through the use of this mechanism? There are a number of scenarios where people buy property together, such as parents helping their children to buy a property. There are legitimate reasons for such practice. Take the example of a couple in a non-marital relationship. While generous laws apply to married couples, some couples, for various reasons, cannot get married, including those of the same gender. This gives significant reasons as to why some individuals would buy half or part of a property. Siblings may also genuinely wish to buy half a property. Would an overall reform of the stamp duty code help to ease this problem? The lack of thresholds makes it difficult and gives people a reason for seeking ways around them.
On several amendments, we have discussed attempts by the Revenue Commissioners to close off tax avoidance tactics. It is generally agreed that the Minister and his Department are doing the right thing. The payment of stamp duty is no different from the payment of tax in so far as it is due to the State. Why should a distinction be made if someone is able to contrive a situation where he or she is not paying the legitimate tax duty on a property? If it was paid, we might then be in a position to deal with those outstanding issues regarding stamp duty. I compliment the Minister on the major step he took for first-time buyers and stamp duty in the budget. It found universal approval as an innovative and progressive step.
Deputy Finneran's point is the core of the issue. The amendment is to avoid contrived efforts in suggesting two conveyances when there is only one. For example, the laws on joint tenancy and tenancy in common protect the property interests of people in marital and non-marital relationships. Where more than one individual buys a property, they can buy as joint tenants whereby the full interest of the property devolves to the survivor. Individuals can also buy as tenants in common where their interests remain separate. A business partnership, when purchasing a premises, normally employs the tenant in common provision. This is because all sides wish to retain the benefit and value of their interests for their heirs and successors, rather than it becoming the benefit of the surviving partner. This amendment is not addressing that situation. If one had a building where two families could live, such as an apartment setting, then the individual purchaser would not be part of a wider aggregate value. This is fine with the Revenue Commissioners. This is to avoid contrivance. It was becoming a growing practice. There has always been a certification on the conveyance where one must confirm, when one certifies the value of a transaction as being X euro, that it is not part of a wider series of transactions which would be greater than that. As a solicitor, conveyor or purchaser, one is certifying that it is not part of a wider series of transactions which would have a greater value. These are well established principles in terms of stamp duty liability. This is to avoid transaction splitting in contrived situations.
If one buys a house as tenants in common, one is only taxed on half the house.
If Deputy Bruton and I buy a business property, the conveyance is based on the value of the property but there is one conveyance and not two. The property is conveyed to both of us as tenants in common. Two conveyances do not take place. By buying as tenants in common, we protect our respective rights to our 50% interest in the property rather than submit it to the prospect of Deputy Bruton or I acquiring the 100% based on who survives the other. That is a joint tenancy. In other words, there are rules and laws relating to acquisition of interests as joint tenants, as tenants in common or otherwise which deal with all that.
This deals with a separate situation where people, probably because of the way the ad valorem duty is structured, sought to minimise their exposure by contriving a situation to suggest that two people were buying a property with one buying the top half and the other the bottom half. It is a contrived situation and it is an avoidance mechanism. It is not a bone fida situation.
If I bought the bottom half of an apartment and Deputy Bruton had a self-contained apartment in the top half and if both of us bought the property, as tenants in common or as joint tenants, we could say these were two separate transactions. I could have my separate conveyance and the Deputy could have his. Instead of it being at €200,000, it would be at €100,000 each and we would attract stamp duty at €100,000 each.
Many people are buying half a house because that is what is available and what they can afford. The Minister is effectively saying the object of tax is not the person buying but the house which is being conveyed. That is where the problem——
I take the Deputy's point. If it is a bona fide situation and if one is buying half a house and the conveyance is for the ground floor and the first floor of a four storey building and the maps and so on are attached to the conveyance to show what one is buying — although it could be ten people buying — the value of that part of the building being conveyed is what determines the rate of stamp duty it attracts. No one is saying one cannot do that. What we are simply saying is that one cannot then split it into one sixth, one sixth and one sixth and suggest three conveyances are going on when there is only one.
That begs the question of the unfair structure. Most taxes are regarded as a tax on individuals and the activities in which they get involved. In this case, it is not a tax on the individual.
It is a stamp duty instrument.
In the modern scene, it creates many fairly anomalous situations.
In the modern scene, between residents and non-residents, it is €1.4 billion. That is how important it is.
The unfairness is in some of its structure which I think most people recognise is becoming all the greater because it is now raising so much money. If it has not been looked at since William of Orange, perhaps the Minister should have a fresh look at the structure.
It is not part of my tradition but I am a pluralist and take on board good ideas from anywhere. Changing the structure of stamp duty to lessen the burden would mean that the tax forgone would have to be recouped elsewhere, for example, in income tax. That is the way stamp duty applies everywhere. It is not a progressive tax in that sense. One pays on the basis of the value of the instrument. It is a stamp duty on the instrument and was probably introduced long before income tax was devised.
Amendment agreed to.
I move amendment No. 89:
In page 124, line 40, to delete "subsection (4)(a)" and substitute "subsection (4)(i)".
Amendment agreed to.
I move amendment No. 90:
In page 124, line 41, to delete "which would have been charged" and substitute "chargeable".
Amendment agreed to.
Section 111, as amended, agreed to.
Section 112 agreed to.
SECTION 113.
Question proposed: "That section 113 stand part of the Bill."
Will the Minister clarify the purpose of this new clawback provision? Why is he introducing it?
Section 113 amends the Stamp Duties Consolidation Act 1999 which exempts transfer of land to young, trained farmers from stamp duty. The need for the change to the clawback provision is that a recent capital acquisitions tax appeal case highlighted that the clawback provisions in regard to CAT agriculture relief were deficient in that they did not specify that the agricultural property sold must be replaced by other agriculture property of equal value or that the entire amount of the proceeds of sale must be reinvested in agricultural property. Since the clawback provisions contained in sections 81 and 81A of the Stamp Duties Consolidation Act 1999 are drafted in the same way, a similar problem exists.
This amendment is, therefore, necessary and provides that a clawback of the relief granted, by way of imposition of a penalty, will apply where any proceeds from a disposal of land effected within five years of the date of execution of the instrument to which the relief applied are not reinvested in other land within one year of such disposal.
Where the young farmer must dispose of the land as a consequence of a compulsory purchase order and is seeking to replace the land but is not able to do so within a one year period, is the one year period not quite onerous?
It is a five year period, as I understand.
Perhaps I have misread it. It states "Where any proceeds from the disposal are not reinvested in other land within one year of such disposal".
We introduced this provision on the basis of an exchange of land — a bona fide exchange for consolidation purposes. We restricted it for that reason. It is not a question of being able to acquire more land. That would give the proposal a remit beyond what was sought. This issue arises from the CAP reform era in which we are and how we can ensure greater viability of farmers and how we can help them to consolidate holdings. A person might have a land holding half a mile away from another person. This would allow them to exchange land without attracting stamp duty on the value of the exchange. If one piece of land was worth €100,000 and the other was worth €70,000, stamp duty would be paid only on €30,000 as €70,000 would be exempt. The exchange should not take place after a year. It should be simultaneous.
I welcome the provision which is one for which we have looked for some time. It is a step in the right direction. Perhaps it could be teased out further. There is much severed land and much road development. There are difficulties for farmers with severed land. In many cases, the acreage is less than what the Minister said.
Historically, land has been severed. We have looked for this provision for some time and have discussed it on two Finance Bills. We have made progress in this area, which I welcome. I thank the Minister for introducing this provision, which will be greatly welcomed throughout the country. If there is a need for further refinement of this measure, we can discuss it with the Minister on Committee Stage of the next Finance Bill. I hope to attend such meetings with my colleagues.
Question put and agreed to.
Section 114 agreed to.
SECTION 115.
Question proposed: "That section 115 stand part of the Bill."
I would like to inform the committee that I intend to propose an amendment to section 115 on Report Stage. The amendment will correct a minor drafting error.
Question put and agreed to.
Sections 116 and 117 agreed to.
NEW SECTIONS.
As amendments Nos. 91 and 92 are related they may be discussed together.
I move amendment No. 91:
In page 133, before section 118, to insert the following new section:
118.—(1) Section 88 of the Principal Act is amended—
(a) in subsection (1)(b) by substituting the following for subparagraph (i):
‘(i) units in an investment undertaking within the meaning of section 739B of the Taxes Consolidation Act 1997 or units in a common contractual fund within the meaning of section 739I (inserted by the Finance Act 2005) of that Act,’,
and
(b) in subsection (2)(b) by substituting ‘an investment undertaking within the meaning of section 739B of the Taxes Consolidation Act 1997’ for ‘a collective investment undertaking within the meaning of section 734 of the Taxes Consolidation Act, 1997’.
(2) This section applies as respects conveyances or transfers effected on or after the date of the passing of this Act".
This amendment inserts a new section 118 into the Bill. The new section will amend section 88 of the Stamp Duties Consolidation Act 1999, which exempts transfers of certain stocks and marketable securities from stamp duty. Amendment No. 91 has two purposes. It will give a stamp duty exemption to conveyances or transfers of units in a common contractual fund within the meaning of section 739I of the Taxes Consolidation Act 1997. Section 739I is being inserted into the 1997 Act by section 40 of this Bill. The amendment also makes a technical change by replacing the reference to "collective investment undertakings" within the meaning of section 734 of the Taxes Consolidation Act 1997 with a more up-to-date reference to "investment undertakings" within the meaning of section 739B of the Taxes Consolidation Act 1997. The new section proposed in this amendment applies to conveyances or transfers effected on or after the date of passing of the Finance Act 2005.
This is a budgetary decision that is being included in the Finance Bill. It is an innovative move on the part of the Minister. It is appropriate that I should comment on the reception that has been given to this provision. The Minister has given the first real break to first-time buyers, who have had to contend with inflated property prices in recent times. He should be complimented on taking on board the concerns which were expressed by all parties and interested groups.
I do not know about Deputy Finneran's experience in County Roscommon, but I know that the only people who will benefit from this measure in Dublin are those who were in the process of purchasing second-hand houses when it was announced. The effect of this provision was to increase property values significantly. Within a week, there was a dramatic increase in the prices of second-hand houses in areas where such properties had been available for less than €317,000. For that reason, there is an argument for the introduction of marginal reliefs or sliding scales. The increases from 3% to 6% to 9% are absolute. There is no marginal or sliding relief as one moves from one level to another. That matter could be examined. I am not familiar with the circumstances in County Roscommon, but I know that in large parts of Dublin——
Houses are not that cheap in Roscommon, which is a progressive county. Some 400 civil servants will be transferred there soon.
Will they be building new homes there?
Not all Dublin people will be buying there.
This provision has had an impact on prices in the city, particularly in older areas. The money that would have been saved by first-time buyers was clawed back by builders and estate agents, unfortunately. I would not say that the benefit of the measure lasted more than approximately eight weeks.
It is an exaggeration to suggest that there has been a dramatic increase in prices, as there has been no such increase.
Has the Minister seen the statistics?
I have the statistics. I keep a close eye on the estate agency sector because members of my family are involved in it. The section of the Bill providing for stamp duty exemptions will give first-time buyers a form of access to the second-hand market that they did not have previously.
That is the important point. First-time buyers will be able to access the second-hand housing market in a way they could not before now, regardless of whether the marginal increase in the price of housing is 4%, 5% or6%. All second-hand houses attracted stamp duty in the past, under the previous structures. That is the benefit of this provision. One should not attempt to blur the matter by suggesting otherwise. The value of property transactions has been increasing for some time despite the fact that the level of housing completions is now at a record level, compared to seven or eight years ago. The important issue is that of access to the second-hand housing market. First-time buyers will be exempt from paying stamp duty on houses valued at less than €317,500, which is more than the average price for second-hand houses in Dublin or anywhere else. It is rather ungracious to suggest that the new system was rendered ineffective within seven days of its introduction.
I do not want to get into unnecessary detail about this matter. The date on which it was determined that the average price of a second-hand house was €317,500, which was alluded to by the Minister, was some time before the date on which the new system was introduced. The average price of a second-hand house in the more established parts of Dublin is well in excess of €317,500, unfortunately. We are promoting the idea that young families and first-time buyers have to move to the distant outskirts of Dublin to get value for money within the €317,500 threshold, while housing in more established areas with strong educational facilities is out of their reach. I do not pretend that the Minister's action is not helping, because it certainly is, but we should not deny there are problems in the stamp duty structure. Can the Minister give the estimated cost of this concession? How many first-time buyers will benefit from it? How much will the changes be worth to each first-time buyer, on average?
I will outline the figures in a moment. The average price of a second-hand property in this country in the second quarter of last year was €301,620. That figure decreased to €293,114 in the third quarter. The average price of such a property being bought by a first-time buyer in the second quarter of last year increased from €230,000 to €236,000 between the second and third quarters of last year. The average price of a second-hand property in Dublin decreased from €399,500 to €382,500 in that time. The average price of a second-hand property being bought by a first-time buyer in the Dublin area increased from €301,000 to €310,000 between the second and third quarters of last year. Some of the assertions made by members of the committee are not borne out by the data available to me. We should not refer only to the exemption from stamp duty of first-time buyers in respect of houses costing over €317,500. Significant reliefs have been granted to first-time buyers in the second-hand market who are buying houses valued over €317,500.
Such people can enjoy savings of up to €12,000 in some cases. The estimated cost of the changes in the stamp duty regime affecting first-time buyers will be approximately €60 million this year. The cost will be approximately €63 million in a full year.
I also asked the Minister to inform the committee of the number of beneficiaries.
I do not have that figure to hand.
I understand that the average benefit to a first-time buyer will be between €9,000 and €12,000 in inner city areas of Dublin. The Minister confirmed in the figures he just cited that the increase in property values was approximately €2,000 less than that.
I accept that members of the Minister's family are involved in the estate agency business. He might not be familiar with property prices in Dublin, however.
I am very familiar with such matters, with all due respect. There is no need for the Deputy to patronise me. As Minister for Finance, I receive data on matters of this nature on a daily basis. I have listened to enough patronising comments this week. In the third quarter of 2004, the average price of a second-hand house bought by a first-time buyer in Dublin was €310,700, which is under the threshold. That is the situation. Any suggestion that there was a dramatic increase in that figure in the days and weeks after the announcement in my Budget Statement is incorrect, inaccurate and ungracious.
Certain figures suggest that the estimated benefit of the new measure for people near the old threshold will be approximately €6,000. What strikes me about those figures is that there are only 10,000 first-time buyers of new homes out of——
Second-hand. Even still, the number of people getting a chance to buy in areas other than greenfield locations is still extraordinarily low. It underlines the fact that the State must continuously create new facilities although facilities in established areas are sometimes under-utilised. That is another issue.
I take the Deputy's point but this change is to facilitate first-time buyers' entry into this market. They used to be practically excluded from it because the policy was always such that the exemptions applied only to the new house market. The figure of 10,000 will increase because first-time buyers will no longer have to regard the new house market as the only prospect for them.
I hope this measure will introduce more equilibrium to the market. All we are trying to do is improve the range of choice. We are all agreed that we want to see more first-time buyers in the second-hand market. This provision is facilitating greater choice in an area of the market from which they felt excluded because of the incentivisation that pertained to the purchase of new homes.
Amendment agreed to.
I move amendment No. 92:
In page 133, before section 118, to insert the following new section:
118.—(1) Section 90 of the Principal Act is amended in subsection (3)(b) by substituting ‘an investment undertaking within the meaning of section 739B of the Taxes Consolidation Act 1997’ for ‘a collective investment undertaking within the meaning of section 734 of the Taxes Consolidation Act, 1997’.
(2) This section applies as respects instruments executed on or after the date of the passing of this Act.".
Amendment agreed to.
I move amendment No. 93:
In page 133, before section 118, to insert the following new section:
118.—Section 124 of the Principal Act is amended in subsection (1), by the insertion of the following paragraph after paragraph (c):
‘(d) The stamp duty at the rate specified in paragraph (c) shall be calculated on an annual basis from 1 April in each year and in the event that an account is in existence for less than a full 12 months from 1 April annually a refund shall be payable calculated on the formula A multiplied by B divided by C where A is the sum referred to in paragraph (c), B is the number of days the account was in existence and C is 365, subject to the proviso that a bank shall have refunded the sum as calculated to the account holder.’.”.
I tabled this amendment because I did so last year. I know the Minister has tabled a somewhat similar amendment. One point surprised me about his amendment, which is to deal with the fact that when one shops around for a credit card, one gets hit twice for stamp duty. Whatever arrangement he is making appears to have a very long lead-in time. I am not sure it is entirely satisfactory and I wonder why he feels the need to postpone until 2006 the removal of the double charging and, in some cases, the treble charging of stamp duty as a result of transferring to another provider. I campaigned last year for the then Minister to accept an amendment such as this. He stated he would re-examine it and I am glad the present Minister has a proposal in this regard. Perhaps he will consider the merit of both amendments and explain why he cannot do what he intends in respect of Laser cards until 1 January 2006.
As the Deputy knows, customers switching account providers between 2 April one year and 1 April the next year will pay stamp duty on the closure of the first account.The date pertaining to the credit card switch is 2 April.On the basis of a letter from the first financial provider which proves that the stamp duty has been paid, customers will then be liable for any subsequent stamp duty charged in that year. In addition, only one stamp duty charge will arise when switching such financial products with the same card provider.That is effective from 2 April.
On debit cards, including Laser, and combined cards, customers will pay only one stamp duty charge in respect of any such card held on a particular date — 31 December in respect of Laser — regardless of whether they have switched account provider or financial product during that calendar year. Owing to the prior need to synchronise accounting periods among the financial institutions, this will be effective from 1 January 2006. It is a logistical issue for the financial institutions. One pays one charge as of a particular date — 31 December in respect of Laser cards. The effective date for the other cards will be 2 April because we do not have the same problem with them. It is a question of synchronisation in the industry.
Is it the industry that cannot do it rather than the Department?
Yes. It is not the Department.
Amendment, by leave, withdrawn.
SECTION 118.
Amendments. Nos. 94 and 95 form a composite proposal and may be discussed together by agreement.
I move amendment No. 94:
In page 133, subsection (1), lines 39 and 40, to delete "amended by substituting" and substitute the following:
"amended—
(a) by substituting”.
These amendments make changes to section 118 of the Bill, which amends section 92B of the Stamp Duties Consolidation Act 1999 to give effect to the budget announcement that there is to be a reduction of stamp duty rates for first-time buyers who are owner-occupiers of second-hand residential property. The provisions of section 118 mean there is now no stamp duty for first-time buyers of second-hand houses worth up to €317,500, and reduced rates apply for first-time buyers of second-hand houses up to €635,000. The stamp duty rate structure on which first-time buyer relief is based applies to all houses, both new and second-hand. The common exemption limit for both categories has been increased from €190,500 to €317,500 for first-time buyers who are owner-occupiers of any house, whether it be new or second-hand.
Amendment agreed to.
I move amendment No. 95:
In page 134, to delete lines 15 to 17 and substitute the following:
"to the nearest €,
(b) in subsection (3)(b) by substituting ‘any instrument, to which neither section 92 nor subsection (3A) applies, which contains a statement, in such form as the Commissioners may specify, certifying that subsection (3A) does not apply,’ for ‘any instrument, other than one to which section 92 applies, which contains a statement, in such form as the Commissioners may specify, certifying’, and
(c) by inserting the following subsection after subsection (3):
‘(3A) This subsection applies to an instrument—
(a) which gives effect to the purchase of a dwellinghouse or apartment on the erection of the dwellinghouse or apartment,or
(b) to which section 29 or 53 applies,
where the total floor area of that dwellinghouse or apartment—
(i) does not, or will not, exceed 125 square metres, and
(ii) is not, or will not, be less than 38 square metres,
as measured in the manner specified in regulations made by the Minister for the Environment, Heritage and Local Government for the purposes of section 91A.'.
(2)(a) Paragraph (a) of subsection (1) applies as respects instruments executed on or after 2 December 2004.
(b) Paragraphs (b) and (c) of subsection (1) apply as respects instruments executed on or after 1 March 2005.”.
This is a technical amendment.
Amendment agreed to.
Amendment No. 96 not moved.
Section 118, as amended, agreed to.
Section 119 agreed to.
SECTION 120.
Question proposed: "That section 120 stand part of the Bill."
I will be tabling an amendment to section 120 on Report Stage to correct a drafting error.
Question put and agreed to.
SECTION 121.
Question proposed: "That section 121 stand part of the Bill."
Will the Minister clarify the position on the making of inquiries and assessments?
I may be tabling an amendment on Report Stage to address an issue that has arisen regarding the stamp duty exemption on new houses where payments for the houses are effectively made in stages.
Is one restricted to a four-year look-back in respect of stamp duty?
This section amends section 159C of the Stamp Duties Consolidation Act 1999, which restricts the period in which Revenue may make inquiries or assessments in respect of underpayments of stamp duty to a period of four years from the date on which the instrument was stamped by the Revenue Commissioners. This restriction does not apply where the underpayment arises from fraud or neglect by the taxpayer.
The purpose of the section is to correct a drafting error concerning the definition of "neglect". The amended definition now contains the particular circumstances in which the four year limit already referred to will not apply. This section was effective from 3 February 2005.
Question put and agreed to.
Section 122 agreed to.
NEW SECTION.
I move amendment No. 97:
In page 147, before section 123, to insert the following new section:
"123.—Section 86 of the Capital Acquisitions Tax Consolidation Act 2003 is amended by the insertion of the following new subsections:
‘(3A) Subject to subsections (5), (6) and (7), a sum not exceeding €75,000 comprised in a gift or inheritance which is taken by a donee or a successor—
(a) Where such as the whole or part of the taxable gift or inheritance will be invested in a dwelling house and such condition is complied with within two years after the date of the gift or the date of the inheritance then the gift or inheritance is deemed for the purposes of such section to have consisted—
(i) at the date of the gift or at the date of the inheritance of a dwelling house to the extent to which the gift or inheritance is subject to such conditions and has been invested.
(ii) is not at the date of the gift or at the date of the inheritance beneficially entitled to any other dwelling house or to any interest in any other dwelling house, and
(iii) continues to occupy the dwelling as that donee or successor's only or main residence throughout the relevant period.
(b) In the event the gift or inheritance is for the purposes of the purchase of incorporeal hereditiaments for the erection of a dwelling house the provision requiring the donee or successor to occupy the dwelling house as their only or main resident will commence on the date of completion or within two years of the date of the gift or inheritance whichever shall be the earlier is exempt from tax in relation to that gift or inheritance, and the value of such gift or inheritance is not to be taken into account in computing tax on any gift or inheritance to take by that person unless the exemption cease to apply under subsection (6) or (7).
(3B) Where the gift or inheritance referred to in subsection (3A) is incorporeal hereditiaments the said incorporeal hereditiaments shall, provided such incorporeal hereditiaments do not exceed one hectare, be valued for valuation purposes at its current face value only provided however the relief will cease to apply the dwelling house (in a habitable condition as the Minister for Finance by regulation from time to time determines) is not erected within two years of the date of such gift or inheritance.'.".
The purpose of the amendment is to address circumstances in which gifts or contributions are made to help people meet the cost of setting up a home. Does the Minister consider there is justification for the making of some concessions through the capital acquisitions tax code given that arrangements involving a gift or donation of a site are becoming increasingly common in an effort to help people get on the bottom rung of the home ownership ladder? Representations have been made suggesting this should be done.
The purpose of the Deputy's amendment is not entirely clear. It appears to seek an exemption from gift or inheritance tax where cash is received rather than a dwelling. Is that correct?
The amount of cash in question is not to exceed €75,000. It has to be applied in acquiring a dwelling.
Yes, it is to help in cases where one gives a gift to assist in the purchase of a house. Should a concession not be given in this regard? One of the submissions I received made this case.
That does not concern section 86. Section 86 of the Capital Acquisitions Tax Consolidation Act 2003 grants a gift tax exemption, subject to certain conditions, to a person in receipt of a gift of a dwelling and an inheritance tax exemption to a person who inherits a dwelling. The person must have occupied the dwelling continuously as his or her only main residence for three years prior to the date of the gift or inheritance, and must not at the date of the gift or inheritance be beneficially entitled to any other dwelling or to an interest in any other dwelling, and must continue to occupy the dwelling as his or her only main residence for a period of six years commencing on the date of the gift or inheritance.
An exception to this latter condition is where the person is aged 55 years or more at the date of the gift or inheritance or dies within the six year period. These provisions were introduced in the Finance Act 2000 to address the situation where a person residing in a house could incur a liability to tax where he or she was gifted or inherited the house in which he or she had been living for some time.
The relief could apply to close relatives. It was also directed at situations where the donor and donee are not related since there was a minimum threshold exemption in such circumstances. The provision allows the person to replace the house gifted or inherited.
Section 86 of the Capital Acquisitions Tax Consolidation Act 2003 concerns persons who may have no resources to pay the tax liability that would otherwise result from inheriting or being gifted the house in which he or she has been living. The Deputy suggests we extend this to a situation whereby a person could get money, regardless of the nature of the relationship, for the purpose of acquiring a house. That is a different concept. In section 86 we try to ensure that those living with an elderly person, whether related or not, would not be deemed to lose the house because he or she has no means of paying tax.
The threshold for a gift from parent to child is very substantial, at €166,000, but Deputy Bruton has in mind that, regardless of the relationship, if the person wanted——
Perhaps I should reconsider this. I cannot recall which submission made the case but it seems to be a growing feature of people contributing——
Can a parent not give €6,000 a year at present which is not included in the total amount?
The parent can give €3,000. For the niece or nephew of the person €46,673 is the limit.
Can each parent give €3,000 a year?
Therefore, two parents can give a child €6,000 a year. That is quite generous.
Everyone can give €3,000.
I know but we are talking about parents assisting their children.
It applies to other relatives, the grandparents can give €3,000 each, everyone can give it.
I must bear that in mind that everyone can give €3,000.
Am I correct that in an earlier Finance Bill concessions were given, even where the person was not a relative, if he or she had been living in the house for a particular time? Is there no provision for that?
We made that provision for capital gains tax and stamp duty but not capital acquisitions tax because the thresholds are so high. Section 86 was introduced for a specific reason.
It was to cover a companion or someone like that living in a house, so that person was not turned out on the road.
It could be a housekeeper.
I will withdraw the amendment. It was not sufficiently thought through.
Amendment, by leave, withdrawn.
Section 123 agreed to.
Section 124 agreed to.
NEW SECTION.
A revised wording for amendment No. 98 was circulated on a white page this morning which replaces the amendment No. 98 printed in the green leaflet issued yesterday.
I move amendment No. 98:
In page 148, before section 125, to insert the following new section:
125.—(1) Section 72 of the Principal Act is amended—
(a) in subsection (1)—
(i) before the definition of ‘insured', by inserting the following definition:
‘"approved retirement fund tax" means tax which a qualifying fund manager is obliged to deduct in accordance with the provisions of section 784A(4)(c) of the Taxes Consolidation Act 1997;’,
and
(ii) in the definition of ‘relevant tax', by substituting ‘means approved retirement fund tax and inheritance tax' for ‘means inheritance tax',
and
(b) in subsection (2), by inserting the following after paragraph (b):
‘(c) For the purposes of this section, an amount of the proceeds of a qualifying insurance policy equal to the amount of approved retirement fund tax shall be treated as applied in paying relevant tax of that amount.’.
(2) This section has effect in relation to relevant tax payable in respect of inheritances taken on or after 3 February 2005.".
This amendment relates to section 125 and it amends section 72 of the Capital Acquisitions Tax Consolidation Act 2003 which grants an exemption from inheritance tax for the proceeds of certain insurance policies. The policies concerned are those taken out specifically to pay a liability to inheritance tax.
Section 125 of the Bill as initiated extends the exemption from inheritance tax in section 72 of the Capital Acquisitions Tax Consolidation Act 2003 to cover tax payable in respect of an approved retirement fund commonly known as an ARF. An ARF is an alternative to an annuity and takes the form of a capital sum on retirement that can be retained in a tax free vehicle until distributions are made from the fund. Tax is required to be deducted at the standard rate of income tax from assets in an ARF where the beneficiary of those assets is a child of the deceased who is 21 years of age or over.
This amendment has two purposes, one being to ensure that section 125 applies to insurance policies taken out on or after 3 February 2005. The section is being amended to cover tax arising on inheritances taken on or after that date. It is to allow holders of existing policies to benefit from these changes. It will also allow them to increase their cover on such policies to provide for tax payable in respect of an ARF, if appropriate, rather than having to take out a new policy.
The second purpose of the amendment is to address an issue raised in representations made to my Department inquiring how the proceeds of a policy taken out to pay ARF tax could actually be used to pay that tax in practise as the qualifying fund manager is legally responsible for paying the tax out of the ARF.
Qualifying fund managers are banks in the State, including the Post Office Savings Bank, and banks in other EU countries, building societies, credit unions, life assurance companies, collective investment undertakings, stockbrokers and certain investment intermediaries. This issue is addressed by effectively giving a credit for the ARF tax payable by the qualifying fund manager and thus ensures that the condition in section 72 that the proceeds of a policy are used to pay relevant tax is met. I commend these amendments to the committee.
A person who has an annuity on retirement can take out an ARF. This might be a proprietary director of a company with a shareholding above a certain amount.
Are ARFs available to people in the PAYE sector or who are salaried?
They are available to those people only if they have no pension scheme.
Does the Minister have any figures for this? It seems to be an extraordinarily attractive form of tax and retirement planning available exclusively to very high net worth individuals. Did the Minister see the recent reports about companies which made multi-million euro payments to proprietary directors and chief executives of companies to the tune of €5 million or €6 million in several separate cases in order to fund ARFs?
The Minister's commentary suggested that the way some of these ARFs are structured there might be intervals of a generation before any tax would arise. Will the Minister make any information on that available to us?
In our review of tax schemes we are reviewing pensions and ARFs.
I am not well-versed in this area. Published accounts of several companies show they are making multi-million euro payments very often to the owner-founder and the managing director of the company to establish an ARF. There are significant tax advantages in this. Deputy Ned O'Keeffe may know about it.
I need to find out about it myself.
There have been several well-publicised cases on this. I will mention the Minister's predecessor for the last time this week.
The Deputy should go on and tell us his name.
The lights will not go out if the Deputy mentions his name.
I realise it is difficult for Fianna Fáil to remember his name.
Over the past three years, he introduced an extraordinary range of attractive additional breaks for people like proprietary directors in regard to pensions. It is probably one of the biggest areas of tax avoidance. Many of these people are putting more into ARFs on an annual or once-off basis than many PAYE workers would earn over a ten year period. On the one hand, we want to encourage people to invest in pensions, but we want to give everyone the benefit of State support for the investments on an equitable basis. Some of these tax breaks appear to be designed by the former Minister to benefit exceptionally high network individuals and proprietary directors.
One of the aspects about which people have complained to me is that if one is self-employed and one is using these vehicles, not only does one get much more benefit from tax relief than an ordinary worker, but if an ordinary person wants to top up one's pension through AVCs, one is restricted to remaining in the same fund. The reason one is restricted to remaining in the same fund is because there is a cap on any benefit one can get out of the scheme. Half one's income is the maximum pension, and there are different maximums, but there is no maximum for the beneficiaries of these other schemes.
There is in-built unfairness in the pension area which has grown up over time. There is a case for examining the equity of tax treatment of pension contributions. The Revenue Commissioners know what they cost a year. The amount of tax foregone is massive, but the distribution of it is not equitable.
Most of the money relates to PAYE people. This provision was introduced to increase choice. Prior to that, self-employed people were paying into annuity-based schemes where there were low interest rates and very poor returns. If one died two or three years into the scheme, unless one made specific provision for one's spouse, the whole thing was gone. By promoting pension provision, one is trying to provide choice. One is trying to ensure that schemes are in place which will encourage people to invest for the purpose of having a pension at the end. If one sticks to community-based schemes in a low interest regime, one is ensuring that people do not get into that area.
As Deputy Bruton said, employees using the AVC regime are very confined in what they can do, whereas the ARF for proprietary directors is hugely advantageous.
Those with AVCs can take out ARFs. They are not barred from doing so; they have that option.
Will the Deputy explain where the ARF is damaging the economy?
It would cost the State a lot and we want to see the tax breaks, which the State is providing for pensions, being spread equitably. I spoke earlier about women who have no pension entitlement built up because they left the labour force to take up home duties, or they were forced to leave employment. We are talking about equity. I support the principle of the State encouraging people to put aside money for pensions. However, I would distinguish between that and a proprietary director being allowed to put in an ARF of €5 million in order to facilitate very lucrative tax planning compared to ordinary PAYE workers who could not contribute 25% of their income to any kind of pension fund, whether an AVC or otherwise. We are trying to get a more level playing pitch.
People in defined benefit schemes can use their added voluntary contributions afterwards to do what we have referred to. It is not just confined to just proprietary directors. They can put into the scheme the added voluntary contribution.
What about public servants who have limited years of service? If people in VEC employment do not have full service, they can only take out AVCs.
Public servants can do this. They can put the added voluntary contribution into the ARF, not their main pension. Their main pension remains within their scheme.
Amendment agreed to.
Question, "That section 125 stand part of the Bill," put and declared lost.
NEW SECTION.
I move amendment No. 99:
In page 148, before section 126, to insert the following new section:
126.—(1) Section 75 of the Principal Act is amended—
(a) by substituting the following for subsection (1):
‘(1) In this section—
"common contractual fund" has the meaning assigned to it by section 7391 of the Taxes Consolidation Act 1997;
"investment undertaking" has the meaning assigned to it by section 739B of the Taxes Consolidation Act 1997;
"unit", in relation to a common contractual fund, has the meaning assigned to it by section 7391 of the Taxes Consolidation Act 1997;
"unit", in relation to an investment undertaking, has the meaning assigned to it by section 739B of the Taxes Consolidation Act 1997.',
(b) in subsection (2), by substituting ‘common contractual fund’ for ‘specified collective investment undertaking’, and
(c) by substituting the following for subsection (3):
‘(3) Where—
(a) any unit of an investment undertaking which is comprised in a gift or inheritance came into the beneficial ownership of the disponer or became subject to the disposition prior to 15 February 2001, and
(b) the conditions at subparagraphs (i) and (iii) of subsection (2) are complied with,
then that subsection shall apply to that unit of an investment undertaking comprised in a gift or inheritance, if at the date of the disposition, the proper law of the disposition was not the law of the State.'.
(2) This section has effect in relation to gifts or inheritances taken on or after the passing of this Act.".
This amendment relates to section 126. It amends section 75 of the Capital Acquisitions Tax Consolidation Act 2003, which grants exemption from gifts or inheritance tax to units of certain collective funds. The purpose of the amendment is to extend this exemption to units of an investment vehicle known as common contractual funds, which we discussed earlier. It is a fund structure, based on a contractual relationship between the participating investors. A limited type of CCF is currently available in Ireland. Legislation to provide for a general CCF is being brought forward by the Minister for Enterprise, Trade and Employment later this year. The tax treatment that will apply to all CCFs is provided for in section 40 of the Bill. Essentially, it provides that all CCFs will be tax transparent as long as the unit holders are institutional investors and that certain reporting requirements are met.
The effect of the amendment is that, subject to certain conditions, units of a CCF comprised in a gift or inheritance will be exempt from gift or inheritance tax. I have also tabled Committee Stage amendments to exempt CCFs from dividend withholding tax in respect of dividends being paid to collective funds from interest payments to certain non-resident companies and from stamp duty on the conveyance and transfer of units in a collective fund and in respect of an instrument which relates to stocks or marketable securities of a corporate collective fund.
Amendment agreed to.
SECTION 126.
Amendment No. 101 is consequential on amendment No. 100. Therefore, amendments Nos. 100 and 101 may be discussed together.
I move amendment No. 100:
In page 148, to delete line 30 and substitute the following:
"tion (4)—
(a) by substituting the following for paragraph (a):”.
These are technical amendments. They propose to correct an omission in section 126 which, among other things, substitutes the term "disposal" for the term "sale" in section 89(4)(a) of the Capital Acquisitions Tax Consolidation Act 2003.
Amendment agreed to.
I move amendment No. 101:
In page 149, between lines 33 and 34, to insert the following:
"and
(b) in paragraph (b), by substituting ‘disposal’ for ‘sale’.”.
Amendment agreed to.
Section 126, as amended, agreed to.
Sections 127 and 128 agreed to.
Amendment No. 102 not moved.
Sections 129 to 131, inclusive, agreed to.
SECTION 132.
Question proposed: "That section 132 stand part of the Bill."
What is the purpose of section 132?
It is an amendment of Chapter 1 (income tax and corporation tax penalties) of Part 47 of the Taxes Consolidation Act 1997. Sections 1053 and 1054 of the Act provide for scenarios where civil penalties can be imposed on a taxpayer. Where, by reason of fraud or neglect, the taxpayer fails to furnish Revenue with a tax return or furnishes an incorrect tax return, the taxpayer can be liable to a tax geared penalty. The maximum tax geared penalty that can be imposed is 100% of the tax thereby undercharged in the case of neglect and 200% of the tax undercharged in the case of fraud. Under section 1065 of the Taxes Consolidation Act 1997, the Revenue Commissioners are empowered to mitigate this 100% or 200% penalty.
For several years, the Revenue Commissioners have made public their mitigation policy in their published code of practice for Revenue auditors. Mitigation is dependant on such factors as to the degree of culpability and whether the taxpayer concerned voluntarily provided information regarding the tax undercharge. The starting point used by the Revenue Commissioners before taking mitigation into account is 100% of the tax undercharge in all cases. The revenue powers group recommended that this should be provided for in statute which is what this section seeks to achieve. It should be remembered that anyone making a settlement with the Revenue Commissioners is liable to pay interest on the tax undercharged in addition to a penalty.
The impression given in the explanatory memorandum is that negligence and fraud are now being treated as equivalents. This does not sound like a fair principle.
The practice of the Revenue Commissioners is that they start at 100%, whether the offence be fraud or negligence. They work down from that rate, depending on the seriousness of the offence. In other words, the revenue powers group looked at these powers, whether they were in use and what the de facto position was and came forward with recommendations to modernise and upgrade.
If the Minister is trying to provide certainty should he not ensure that negligence is not deemed to be as serious an offence as fraud?
Such distinctions are made. The point is that one starts on the basis that the maximum 100% penalty will be charged, which would be the worst case scenario. One starts with an extra 100% penalty and then one is charged interest. In previous law, the possibility of 200% penalties existed but it was never used.
I can understand that but I find it harder to understand that whereas the old law had a distinction between fraud and negligence, fraud being deemed——
Yes there were 100% or 200%——
Now there does not seem to be any distinction between those two offences.
One now has various categories for mitigation such as deliberate default, gross carelessness and insufficient care. The Revenue Commissioners mitigate the offence with fraud being the worst followed by various degrees of neglect. Even if the offence was fraud, one's de facto maximum penalty is 100%. The change is to bring the statutory provisions up to date with current practice.
Is interest charged on the penalty?
It is charged at 1% per month or 11.75% per annum.
Is the rate not being reduced to 10%?
Yes it will be reduced to 10% on the recommendation of the revenue powers group.
Are there discretionary powers available with this?
Not on the interest rate, but there is discretion on the penalty.
The penalty is related to the offence and the taxpayer's mischievousness.
The interest is payable in addition to the penalty.
Does the Minister agree that the interest rate is exorbitant given the times we live in?
The interest rate is being reduced to 10%.
The wholesale rate is now 2.5%.
Revenue is not a lending agency.
Will they take a deposit?
The Deputies should pay them up-front and keep the money in their own accounts.
The interest rate is too high for people getting into difficulties.
The revenue powers group looked into the issue and made its recommendation. It is best to follow the advice of those who have examined the question in detail.
Deputy Ned O'Keeffe should support my suggestion of a taxpayers' advocate. A taxpayers' advocate would address issues like this.
That is not what the taxpayers' advocate was going to do yesterday.
Question put and agreed to.
SECTION 133
Question proposed: "That section 133 stand part of the Bill."
Is this the section about which Deputy Bruton asked?
We wish to give notice that we may bring forward an amendment to section 133 on Report Stage which deals with certain Revenue offences including aiding and abetting as a result of consultations.
As I understand it, the Minister is going to bring forward amendments on Report Stage. Is this to take into account the representations by professional tax advisors?
Yes, I have had representation from such groups, as might also the Deputy. The purpose is to bring clarity to the situation, not to dilute it or reduce the measure's remit. There have been discussions to ensure that the wording and concepts involved are as clearly understood as possible in law, so that people can work within clear parameters.
The most outstanding example of where bad advice might lead people is the recent non-resident deposit accounts story. Much of the advice was proffered by the banks which have not been obliged to take any responsibility. This committee has discussed the National Irish Bank report and there have been various presentations by AIB bank. The committee has also recently referred to the question of single premium life assurance policies. A little old lady in Drumshambo did not suddenly wake up one morning and decide to invest in a single premium life insurance product. Advice must have been given by financial institutions.
I hope that when the Minister brings forward his proposed amendment pertaining to aiding and abetting, he does not retreat from placing an onus of responsibility on people who give tax advice. All Members will have heard sad stories from people who accepted advice in good faith from various financial institutions which turned out to be non-tax compliant. Such individuals must now make restitution of that money plus penalties but the banks have not been obliged to do so. I hope the Minister will not water down the aiding and abetting provision too much.
Those people sought advice for where they wished to invest their money and this was the advice they got.
In the Deputy's capacity as a professional accountant, she would also give advice.
The Deputy is now a practising politician. But when she was with Waterford Glass I am sure she did.
The point is that while the individuals have been obliged to pay considerable amounts, penalties were not levied on the financial institutions. No matter what is suggested, I do not believe that people dreamed up the use of these vehicles on their own. This is particularly true in the case of the single premium assurance policies.
Can the Minister clarify the offence as it relates to an individual in a financial institution as opposed to the institution's body corporate? In some cases, the abuse was very systematic and organised and there were instances where individuals carried the can. How will the Minister provide for offences against individuals versus the corporate body?
The purpose of the amendment is to get behind the bank official at the counter and ascertain who was directing that the business should be dealt with in a manner that was at variance with the law and with the institution's statutory duties. Section 1078 related to assisting in an incorrect tax return and there was certain case law as to what the remit of that would be. We cannot deal retrospectively in law because it is unconstitutional. We all know that national institutions have paid in tax, interest and penalties. The banks have paid approximately €227 million as a result of the DIRT lookback audit. Revenue investigations are currently under way into other financial instruments to ensure they are compliant with legal requirements. Liabilities will accrue where these instruments are found in to be in breach of the legal requirements.
In response to public concern, I have tried to provide for a widening of that section 1078 power to prosecute people beyond what it is considered the section allows. If tax advisers have concerns, they are entitled to come and make their case to the Department. I want to obtain an outcome that broadens the remit of the traditional section so that if someone higher up gave an instruction, he or she would be liable to prosecution. At the moment, section 1078 denies me that opportunity.
I am glad the Minister has mentioned this as we went through all of this at meetings of this committee where we established that IFSRA was not in a position to level any great penalties against the financial institutions that had come before the committee. I remember a story where someone was overpaid €800 by the Department of Social and Family Affairs and ended up in court and we became heavily involved with a financial institution as regards different products of which some of its employees and senior management were able to avail. There was no case involved with any of them. We are still awaiting a report from the financial institution in question as to whether disciplinary measures will be taken. I am very pleased with what the Minister said here because a balance needs to be struck between the individual and the financial institutions. They have a responsibility and it appears the public did not have faith in the fairness of what was there up to the present.
I would like to take up the point made by Deputy Finneran. The text of the Bill states that an individual will, without prejudice, be guilty of an offence if he or she is knowingly concerned with fraudulent evasion or recklessness and so on. However, it does not designate a person or a corporate body; that person could be the person at the till, as opposed to being the company.
It is included in a subsection. While the ultimate test of these provisions will and should be made in the courts because it is a new provision, it is fair to say that the "beyond reasonable doubt" burden of criminal proof remains high. It is hard to disagree with the punishment of someone who can be shown to have been "knowingly concerned in or to have facilitated the fraudulent evasion of tax". Tax advisers are subject to the money laundering provisions contained in the criminal justice legislation, which also includes the concept of recklessness. I have listened to the concerns raised and I have met with representatives of the Irish Taxation Institute, the Law Society and the accountancy bodies to hear the issues they raised.
I have also indicated that I will bring forward an amendment on Report Stage to section 133 of the Bill. The purpose of the amendment is to provide some definitions and hence clarify what is meant by "fraudulent evasion of tax" and what is meant by a person being "recklessly concerned in the fraudulent evasion of tax". These provisions are not targeted at what people will term the "small fry". Those who assist in cases involving serious and substantial tax frauds are the people who will be targeted. We wish to clarify the position so that everyone involved in the area will know what the parameters are and what is acceptable conduct. The concept of recklessness is already established in the criminal law. It is defined in the Criminal Justice (Theft and Fraud Offences) Act 2001 in respect of stolen property. Recklessness involves someone disregarding information immediately available to him or her and such disregard involves a high degree of culpability.
The chairman of the Revenue Commissioners spoke recently about the difficulty faced by the Revenue Commissioners in getting to court and securing convictions, compared with the Department of Social and Family Affairs. The difficulty pointed out by the chairman related to getting convictions for aiding and abetting tax evasion. The chairman appeared to additionally suggest there was no offence that the DPP could prosecute regarding putting money offshore. The Revenue Commissioners also failed to secure successful prosecutions in this area.
A case was taken by the Department of Social and Family Affairs recently where a woman had defrauded or falsely claimed rent allowance to the sum of €18,000 and was given a two-year suspended sentence. She was defrauding a community welfare officer regarding rent allowance and the Department of Social and Family Affairs correctly prosecuted her. Some people continue to engage in tax evasion. Recent revelations regarding activities in the North would cause one to fear that it is far more active now at an even wider level than most Deputies in the House would probably have been aware of. I would like a high level of assurance from the Minister that he will address the issues highlighted by the chairman of the Revenue Commissioners because otherwise we will not be able to prosecute these people successfully. The Revenue Commissioners have not be able to do so to date.
The Deputy received assurances from the Minister.
Section 133 is concerned with the aiding and abetting of an offence. I have explained that the context of the discussions is about bringing clarity and ensuring that what we do cannot subsequently be challenged successfully. It is about ensuring that someone cannot get off because we failed to sufficiently define and explain what we are trying to achieve. The purpose of Committee Stage and interaction with interested bodies is to bring clarity to the situation. In fairness to the people concerned, no one has suggested that I withdraw the provision or that they did not understand where the provision is coming from or the thinking behind it. We just want to get clarity and to know what are the parameters. This makes for good law, which is what we want.
With regard to putting money offshore, there is nothing illegal about this. The offence lies in not telling the Revenue Commissioners about it. People have responsibilities to notify the Revenue Commissioners about what they are doing. I am making the point that one needs definitions and parameters and to know what it is one is prosecuting. This section seeks to address an area with which the law was not equipped to deal sufficiently. I do not speak of the people who provided advice, signed forms or completed the processing of tax evasion, but those who directed it, initiated the policy and were prepared to ensure this practice prevailed.
I know everyone is anxious to finish but the chairman of the Revenue Commissioners spoke with this committee and with the Committee of Public Accounts. He made a specific reference to the need to include putting money offshore as part of the definition of aiding and abetting. Can the Minister assure us that the chairman's recommendations will be implemented? The suggestion was that this is the kernel of the argument whereby it is not possible to prosecute such cases successfully. The chairman indicated several times that the DPP refused to prosecute.
Advising someone to put money offshore without alerting Revenue is a sub-set of facilitating the fraudulent evasion of tax. The wording of the provision we are introducing clearly covers Deputy Burton's scenario. People can be assured that section 133 is designed to cover a range of fraudulent evasions of tax, including that to which the Deputy refers. There is no question of the scenario not being covered as it and many others are addressed by this wording. Revenue advised us to proceed with this type of wording during our interaction to ensure it will have the necessary power.
I have records of what Mr. Daly said.
The Minister has responded.
The chairman of the Revenue Commissioners told the committee that aiding and abetting a false tax return is an offence but there has been a significant category of tax offences in recent times regarding putting money offshore. The vast bulk that goes offshore is perfectly legal but we are discussing the activity in the context of aiding and abetting tax evasion.
It is covered by this section.
We welcome the provision.
Question put and agreed to.
SECTION 134.
Question proposed: "That section 134 stand part of the Bill."
I support the improvement in this section. We discussed this in 2004 and the figure has increased from €12,700 to €30,000 since then.
Question put and agreed to.
Section 135 agreed to.
SECTION 136.
I move amendment No. 103:
In page 162, line 18, after "tax", to insert "or such other taxes as may be prescribed".
This is a proposal to amend section 1080 of the Taxes Consolidation Act 1997 to allow that section to be used to impose interest on overdue taxes other than income tax and that corporation tax and capital gains will now be at the lower rate. We cannot accept this amendment as it will provide the possibility of the reduced rates of interest on overdue tax provided for by section 136 of the Bill to be extended to all taxes. We are not convinced that late payments of tax are collected by employers and others from wages and other payments due to employees. Customers should benefit from a reduced rate of interest.
The amendment would introduce uncertainty and duplication of the tax code. There tends to be separate interest charges provisions for each tax or group of taxes. Section 1080 of the 1997 Act provides for unpaid income tax, corporation tax and capital gains tax to carry interest. Section 51 of the Capital Acquisitions Tax Consolidation Act 2003 does the same for gift tax and inheritance tax. It likewise makes legal provisions governing PAYE, professional fees, withholding tax and relevant contract tax. DIRT and the various exit taxes that operate in the area of life insurance and investment funds have separate provisions for charges of interest on tax overdue.
Amendment, by leave, withdrawn.
I move amendment No. 104:
In page 169, subsection (6)(b), to delete line 37 and substitute the following:
"(vii) the provisions of section 1083 of the Taxes Consolidation Act 1997 except in so far as they apply section 1082 of that Act to capital gains tax;".
Amendment agreed to.
Section 136, as amended, agreed to.
NEW SECTION.
I move amendment No. 105:
In page 170, before section 137, to insert the following new section:
"137.—Section 964 of the Taxes Consolidation Act 1997 is amended by substituting the following for subsection (1):
‘(1) (a) Notwithstanding subsection (2) of section 966, where the Collector-General duly appointed to collect any income tax has instituted proceedings under section 963 or 966, or continues under this section any proceedings brought under these sections, for the recovery of such tax and, while such proceedings are pending, such Collector-General ceases for any reason to be the Collector-General so appointed to collect such tax, the proceedings may be continued in the name of the Collector-General by any person (in this subsection referred to as the “successor”) duly appointed to collect such tax in succession to that Collector-General or any subsequent Collector-General.
(b) In any case where paragraph (a) applies, the successor shall inform by notice the person or persons against whom the proceedings are being so continued and on service of such notice, notwithstanding any rule of court, it shall not be necessary for the successor to obtain an order of court substituting him or her for the Collector-General who has instituted or continued the proceedings.
(c) Any affidavit or oath to be made by a Collector-General for the purposes of the Judgment Mortgage (Ireland) Act 1850 or the Judgment Mortgage (Ireland) Act 1858 may be made by a successor.'.".
This amendment is technical in nature and concerns proceedings for the collection of income tax where there is a change in the holder of the office of the Collector General.
Amendment agreed to.
Section 137 agreed to.
Sections 138 to 140, inclusive, agreed to.
Schedules 1 to 5, inclusive, agreed to.
SCHEDULE 6.
I move amendment No. 106:
In page 179, paragraph 4, to delete lines 35 and 36.
This is a technical point that the Labour Party's legal adviser advised me to submit.
We have advice from the Attorney General on this. It seeks to make amendments to the Tax Consolidation Acts and the Finance Act 2003 and address various incorrect references and minor drafting errors in those Acts. It seeks to delete paragraph 4(c) of the schedule, which provides that paragraph 3 of the schedule is to have effect from the passing of the Finance Act 2005. Paragraph 3 corrects a minor drafting error in Schedule 2 of the Finance Act, which relates to alcohol products taxed by substituting “exceeding 1.2% vol” for “exceeding 1.2%” in the description of beer in that schedule. Given that paragraph 4 lists a series of commencement dates for other paragraphs in Schedule 6, it would be inappropriate if a commencement were not included for paragraph 3. I am not, therefore, prepared to accept the amendment.
Amendment, by leave, withdrawn.
Schedule 6 agreed to.
TITLE.
Question proposed: "That the Title be the Title to the Bill."
I wish to give notice that I may introduce an amendment on Report Stage in connection with section 122 of the Taxes Consolidation Act 1997, which deals with preferential loans to employees and directors.
Question put and agreed to.
Bill reported with amendments.
I thank the Minister and his officials and members of the committee for facilitating the speedy conclusion of Committee Stage.
