SELECT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate -
Wednesday, 22 Feb 2006

Finance Bill 2006: Committee Stage (Resumed).

Vice Chairman (Deputy Finneran)

The Chairman apologises for not being present but he will be here later. I welcome the Minister for Finance and his officials. The purpose of the meeting is to resume consideration of the Finance Bill 2006 which was referred to the select committee by Dáil Éireann on 8 February. The select committee is required by the Dáil to report completion of its consideration of the Bill not later than Thursday, 23 February. The times by which it must complete its consideration of specific groups of sections and the amendments tabled thereto are determined by an allocation of time order made by the Dáil on 16 February. The order of the Dáil further provides that any division claimed on the proceedings of the Bill must be postponed until immediately before the time set for the relevant guillotine or, if proceedings conclude before the time for the guillotine is reached, on completion of those proceedings. The putting of any question contingent on a postponed division must similarly be postponed.

We are resuming consideration of the Bill on section 33.

NEW SECTIONS.

Ms Burton

I move amendment No. 90:

In page 103, before section 33, to insert the following new section:

"33.—Where a taxpayer claims relief based on the construction of any premises, he or she shall furnish to the Revenue Commissioners sufficient information to demonstrate that he or she or any relevant contractor is complying with any relevant requirement imposed by the Health and Safety Authority or by law in respect of the construction.".

In this Part the Minister proposes significant extensions of property-based tax breaks, for instance, to mental health centres and psychiatric institutions. The purpose of my amendment is to ensure that, where a taxpayer claims relief on the construction of a premises, he or she would be obliged to furnish to Revenue information showing the relevant contractor had complied with health and safety legislation or other laws relating to the construction.

The Minister will be as horrified as everybody else at the number of deaths in the construction sector. There was a time when such deaths were confined to large projects but, unfortunately, nowadays communities are bereaved regularly throughout the year because, for example, trenches collapse on individual houses sites. Tragic accidents have also occurred involving electrical cables on sites, while many deaths have occurred on the sites of one-off houses in rural Ireland.

The construction industry is booming but, unfortunately, the number of health and safety inspectors is limited. The Government has stated at the social partnership talks that it intends to upgrade this sector but every year many are killed and maimed for life. The construction industry pension fund is in considerable difficulty with more than half of workers without cover. Workers are treated as self-employed contractors and if they have an accident, they often find they have no cover. This is cowboy territory, similar to the wild west. A number of firms are very careful but pay the price for cowboy operations.

Revenue has a critical role in the construction industry. When I raised this issue last year, Revenue proposed to conduct more audits of the industry this year but connections need to be made with those who benefit from vast tax breaks. Three studies in this area highlight the fact that, although the Minister is closing a number of schemes in 2008, the tax breaks will continue to be a significant cost on the Exchequer for at least another ten years. Given that construction companies and developers derive enormous benefits, which people such as me consider excessive and unnecessary, why not introduce legislation to make the developments compliant with health and safety legislation?

If the Minister or his officials make more detailed recommendations in this regard, we would be happy to accept them but the number of men killed every year is a key issue. The most basic safety requirements on a construction site are ignored and young guys take risks. They hook up electrical generators with a piece of wire to a neighbouring house and, unfortunately, are killed regularly. Workers are often badly injured and then find out they have absolutely no entitlements.

Will the Minister link the entitlements to generous tax reliefs to a requirement that all health and safety legislation be complied with by developers, otherwise the reliefs would be jeopardised? As developers only understand the language of money, perhaps a stringent financial penalty such as the threat of the loss of tax breaks might make some of them operate with care.

Minister for Finance (Mr. Cowen)

While I agree that safety in the workplace is important, I do not agree Revenue is the competent authority for the receipt or evaluation of the information in question. Its role is to administer the tax system and collect the appropriate tax due under the law. The Health and Safety Authority is the specific body charged with responsibility for the promotion and enforcement of workplace health and safety. It monitors compliance with occupational health and safety legislation and takes enforcement action, including prosecution, where necessary. We must be careful in defining the statutory roles of the various authorities involved. Revenue's primary role is to collect tax. Clearly, it is not the competent authority to oversee or enforce compliance with health and safety standards. That responsibility lies with the HSA.

Mr. Bruton

While I understand the Minister's position, he should it make it a condition in respect of State contracts that certain provisions should apply to contractors, specifically in regard to pension provisions of building workers, many of whom are without cover because of long running abuse of the system. While Revenue does not have a specific role, will the Minister accept there is a greater obligation on the Government in respect of State contracts to ensure standards are maintained, particularly in regard to pensions?

Mr. Cowen

That is primarily a matter for the Department of Enterprise, Trade and Employment which has the regulatory function in making sure the necessary standards under labour and health and safety law——

Mr. Bruton

The Minister for Social and Family Affairs indicated earlier this week that he had approached the Minister's Department to provide that State contracts would include a compliance obligation on contractors to provide pensions for building workers to ensure they would not use the "lump" or various other systems to evade pension contributions by making contractors out of workers. The Minister for Social and Family Affairs, Deputy Brennan, clearly indicated that it is the Department of Finance and not the Department of Enterprise, Trade and Employment that would have a role in providing a compliance requirement for State contracts.

Mr. Cowen

He expressed that view but obviously the issue will have to get full and detailed consideration at Government level before a decision is made. Deputy Brennan merely expressed a view on the matter.

Mr. Bruton

Does the Minister have a view on the matter?

Mr. Cowen

I have not completed any consideration of the matter. If I receive a proposal in writing, I will give it consideration.

Ms C. Murphy

I support this amendment. There is a similarity between what the Minister has done in section 11 in respect of the Private Residential Tenancies Board and what is being sought here. There is an interconnection between various Departments and the Revenue Commissioners can play a very positive role in achieving compliance. That is being sought in section 11 and I would have thought that the same connection would be made with regard to health and safety, which is a more important issue than compliance in terms of the Private Residential Tenancies Board.

Mr. Cowen

The issue is whether a simple administrative linkage can be established in a simple way. For example, I can ensure improvements in registrations with the board by linking registration to interest relief but it is not as simple as that in this instance. Health and safety issues are a matter for the relevant competent authorities and we should not confuse the issue, particularly if it does not serve any good administrative purpose or improve the efficiency of the tax collection system. The job of the Revenue Commissioners is to collect tax. The job of the Health and Safety Authority is to ensure that we have proper compliance with standards set in health and work safety legislation and that these are implemented on construction sites. We should let both bodies get on with their respective jobs.

Mr. Boyle

I support the amendment but the difficulty lies in applying the existing criteria for many of the property-based tax reliefs. Considerable evidence exists of breaches of the criteria on the beneficial ownership of properties in respect of which tax relief is being sought. In many cases it is not clear whether the ownership superseded the application for relief by the time period specified, whether there was engagement with the pre-planning process required for some of the reliefs or whether the property for which tax relief is being sought had a prior use in terms of the purpose for which the tax relief is being applied. In such circumstances, where there appears to be a setting aside of criteria or at least the turning of a blind eye, one cannot be confident that other safeguards or levels of consultation will be put in place to ensure that the type of buildings being built are actually needed or safe. When one considers that the apartment-based schemes have created one third of all of our accommodation units since 1995 but that the vast majority of them do not come close to conforming to energy saving standards, we have a right to be concerned. It is reasonable to assert that these units were built solely because of tax reliefs and that such reliefs were not properly administered or policed and that the safeguards necessary to ensure they were the type of buildings needed in this country were lacking.

Ms Burton

The Revenue Commissioners have, in the past year, managed to arrange for the training of many of the staff who follow tax matters in the construction industry. The commissioners have arranged for staff to complete the Safe Pass programme and have purchased the gear required for them to enter building sites and ascertain whether they are tax compliant. The Minister may recall that the Revenue Commissioners advised the committee and the Committee of Public Accounts that there was an unspecified period, of between a year and a half and two years, when its staff could not enter building sites. Much of the on-site auditing of the construction industry effectively collapsed at the height of the building boom because the Revenue Commissioners had to be compliant with health and safety regulations. I understand that this issue has been addressed and that the commissioners continue to train staff so that they will qualify under the Safe Pass programme. As already stated, for a period of time, the Revenue Commissioners' examinations of the construction industry were heavily curtailed because of a lack of Safe Pass training. However, that difficulty has been overcome.

I have been promised by the chairman of the Revenue Commissioners, on foot of questions I put to him at various committee meetings, that the construction industry is to be a special area of activity for his office because there are deep suspicions that there is a significant level of tax avoidance being perpetrated by cowboy contractors. What would be wrong with a situation whereby obtaining a tax relief involved demonstrating visible compliance, by means of certification, with health and safety regulations? When members of the Irish Taxation Institute appeared before the committee last year to discuss the various tax breaks, they produced a very solid argument on the issue of linking certification with tax breaks and IBEC made the same point in its submission. It is in everybody's interest that we should have good regulation and that we should not allow people to go out and be killed, because they are doing simple construction jobs, at a time when the State is handing out enormous tax breaks to developers. Like me, the Minister must be aware of the appalling accident rate in this country. We are involved in a national debate on how to reduce the deaths on our roads but we must also pay attention to the fact that the number of deaths and injuries on our building sites is way out of line with the position in other European countries.

I am prepared to listen to any reasonable proposals that officials in the Department of Finance might produce so that we can make stronger links in the chain to provide enhanced protection against awful deaths and injuries on building sites. I am familiar with some of the apartment blocks in Dublin where young men died and other Deputies can point to houses, some of them built in tax break areas, where, because a trench was not dug properly, children lost their fathers. Some of these men were only 22 or 23 year old apprentices.

It is a very simple administrative matter. Staff in the Revenue Commissioners have completed the Safe Pass programme. I am not saying that the wording of this proposal is perfect. I hope the Minister is prepared to examine this and revert to the committee at a later date.

Another link in the chain to enhance protection would be very helpful and would be in the interests of compliant people in the building industry. There are many good people in the building industry, as well as many cowboys. It would be in everybody's interest to enhance safety in the building industry and to use a broad brush approach, including certification, to ensure compliance with health and safety regulations. At the planning stage of projects, health and safety requirements should at least be to the fore in such circumstances and I presume that is why the Government is considering doing that in respect of public procurement projects. At the project design and management level, health and safety regulations must be implemented, even if it means chasing people to wear hard hats and the correct boots. It can be a difficult task on a building site but it is worth doing. I appeal to the Minister to examine this proposal.

Mr. Cowen

As already stated, I would not be dismissive of the work of the Health and Safety Authority and the further work it will undertake on the basis of increased resources. However, I do not think the tax code is a universal mechanism for implementing every other area of the law. One applies statutory functions to those who have that responsibility, ensures they are resourced, that they are effective and efficient in what they do, and that they are in a position to apply the law proportionately and rationally. Including in the Finance Bill a role for Revenue in the health and safety area would not be the way to go. The job of Revenue is to collect tax.

Another reason I cannot accept the amendment is that the claimants of this tax relief might have no responsibility for the construction of the building. It might have been built before they acquired an interest in it and claimed the tax relief. There is not necessarily a direct link between claimants of this relief and responsibility for the construction of the building which is the subject of the relief.

For all of those reasons it would not be appropriate to accept the amendment.

Ms Burton

When a project that will qualify for tax relief is developed, the people down the line who buy the apartment may or may not have been involved in its construction. However, the developers of the project normally make application to ensure their scheme complies with the tax relief scheme from which they hope to benefit. I understand investors in, say, a private hospital project must submit indications of interest. How does the system work?

Mr. Boyle

The Minister did not respond to my earlier contribution. Is he satisfied that existing criteria in terms of existing use, beneficial ownership and pre-planning are being fully complied with in the application of tax reliefs?

Mr. Cowen

Certainly planning is. We have no indication that there is any problem in that regard. The amendment seeks to require those who claim relief would furnish to the Revenue Commissioners information that demonstrates sufficiently that any relevant contractors comply with any relevant requirement imposed by the Health and Safety Authority or by law in respect of the structure. I do not see this as an appropriate amendment and do not believe it would be workable. The vast majority of claimants would not be involved in the construction of the building.

Where there is concern about the need to comply — I agree that it is important that workplace safety legislation is complied with — the statutory body which has that function, the Health and Safety Authority, should do its job. It is not Revenue's job. Revenue's job is to collect tax. That is where we disagree and that is how I see it.

Ms Burton

The Minister has implied that there is no application process. I am at sea in regard to this. Will the Minister tell us what actually happens?

Mr. Cowen

I did not imply anything. I said the vast majority of claimants of this tax relief would not be involved in the construction of the premises which were the subject of the tax relief. Imposing a requirement on them, as the amendment would, to demonstrate that it was built in accordance with all the health and safety laws would not be appropriate.

Ms Burton

How is the tax relief acquired?

Mr. Cowen

It is self-assessed and claimed on the form. Certification in regard to construction is related to planning considerations, not health and safety. Claims for the tax relief come at a later stage.

Ms Burton

Is the Minister saying investors who build a private hospital or psychiatric facility do not get in touch with anybody? After construction is complete, they apply on a tax form for the tax relief, stating they have spent €100 million on a new hospital. Is that what happens?

Mr. Cowen

First, they seek certification from the HSE. When they get planning permission, they build a hospital in compliance with planning permission, having obtained certification from the HSE that it meets the qualifying criteria.

Ms Burton

Do they never make contact with the Department of Finance or the Revenue Commissioners?

Mr. Cowen

They make contact with the Revenue Commissioners at the appropriate time, when they make their claim for relief.

Ms Burton

How does the Minister meet his commitments to ex post or ex ante evaluation that he promised us yesterday? He is saying the Department does not know anything about this.

Mr. Cowen

I did not say that.

Ms Burton

How is the evaluation done if the Minister does not know?

Mr. Cowen

I did not say that. The problem is that the Deputy wants me to do another cost benefit analysis in respect of every proposal that comes before me. The Government has decided and the consultants have confirmed that we should continue with tax reliefs in respect of private hospitals because we are providing more public beds in public hospitals by taking private beds out of them to a greater degree and putting them into a private facility. I explained in a very detailed reply to Deputy Ó Caoláin, who said before he left yesterday that he was obliged to receive the information, that there was an estimated tax cost of €2 million involved in respect of psychiatric hospitals. The Government intends to continue with its policy. I do not require an ex ante evaluation of every project. The tax relief will be available based on certification from the HSE in the first instance, compliance with planning permission and making a claim for the relief. I have said that in respect of new tax relief schemes, my administrative practice will be to carry out an ex ante evaluation. That is what I said yesterday and that is what I am saying today.

Ms Burton

The Minister is saying the Department of Finance or the Revenue Commissioners have nothing to do with the development of schemes that are to benefit from tax relief. They are only involved when individual investors fill in their tax forms.

Mr. Cowen

When they have obtained prior certification from the HSE.

Ms Burton

Certification has only now been introduced by the HSE after the issue was raised here in the past two years. It was not introduced at the beginning under the scheme for private hospitals introduced by the Minister's predecessor, Mr. McCreevy.

Mr. Cowen

I am advised it was.

Ms Burton

We spotted the former Minister's amendment only at the last minute. He confessed he had received a letter from a doctor in his constituency and in the period afterwards some kind of process was introduced. I am asking the Minister whether, with regard to the others, there is any certification scheme in operation. How does the system operate? If I had €100 million and wanted to use it tax efficiently and read information in the newspapers about these schemes, how would I go about getting involved?

Mr. Cowen

If one has sought certification from the HSE each year, one is operating in accordance with requirements. The annual certificate provides this. On this basis, an application is submitted to the tax authorities which give the relief on the basis of being in compliance with the annual certification procedure.

Ms Burton

Why, in the context of the proposal from the Labour Party to enhance safety in the construction industry, is it not possible for them to submit evidence along with their applications for the relief to show that a scheme complied with health and safety requirements?

Mr. Cowen

As I explained on three or four occasions, not all claimants for the tax relief would have responsibility for construction. Having that linkage, therefore, makes no sense. In the construction phase, people must build in compliance with planning permission. When they sell to other investors, one of the requirements from solicitors acting for those investors is a certificate of compliance, with planning permission and architects confirming that it was built properly. In the meantime, during the construction phase, the Health and Safety Authority is the statutory authority with the function to ensure that requirements regarding health and safety at work are met through ongoing monitoring. That is the situation and how things work and that is why I cannot accept the amendment.

Vice Chairman

Is the amendment being pressed?

Ms Burton

Can the Minister provide any information regarding whether Revenue officials, when visiting sites, as they are now able to do in light of their Safe Pass training, have ever raised or reported on safety issues? I realise that the Minister might not have the answer to hand but perhaps he might communicate further with us in respect of that matter. Are there any statistics on deaths and injuries on sites subject to tax breaks? Can the Minister obtain those statistics?

Mr. Cowen

I would not have a clue about that. I am sure that, in any case where State authorities liaise on an ongoing basis, if there is any visible reason that a concern must be expressed by one public official or authority to another, that happens. I am sure that it occurs from time to time but I do not know whether I will be able to verify it and provide numbers, dates and times. That might be very difficult.

Ms Burton

We just want the numbers.

Mr. Cowen

Common sense suggests that if, for example, a local authority official visits a site, sees a problem and is concerned about it, he or she would contact whatever competent authority has responsibility in the area causing the concern. That might involve a subsequent visit by the HSE, if necessary. The idea that I would be able to find that out and provide times, numbers and dates is unrealistic. However, if the situation were sufficiently serious, one could speculate on that happening with some degree of confidence.

That does not address the basic issue here, which is that I do not believe it good administrative practice to say that tax collecting authorities should also have responsibility for health and safety at work. We have a Health and Safety Authority with statutory functions in that area and it should carry out that task. As already stated, in the normal course of their work, I am sure that officials would bring it to the attention of a colleague, just as I bring matters to the attention of other Ministers. I am sure that it happens in the public service, just as it does in my daily experience.

Vice Chairman

Is the amendment being pressed?

Ms Burton

Yes.

Vice Chairman

The order of the Dáil provides that any division claimed on the proceedings of the Bill must be postponed until immediately before the time set for the relevant guillotine. I expect that to be at 1 p.m.

Amendment No. 91 is out of order, since it is declaratory in nature.

Amendment No. 91 not moved.

Ms Burton

I move amendment No. 92:

In page 103, before section 33, to insert the following new section:

"33.—Pending a report from the Minister for Finance to both Houses of the Oireachtas on the matter, a caravan park approved by Fáilte Ireland and included in its register of approved caravan parks could be regarded as a holiday camp for capital allowance purposes.".

The regulations on taxation and capital allowance arrangements regarding caravan parks have changed. I know that this sector of the holiday industry is undergoing change. As with bed and breakfast establishments, there has been some decline. Operators are concerned that the way in which arbitrary changes were made to their taxation treatment will constitute a further difficulty for the sector. Can the Minister explain the changes made and is he prepared to take into account the interests of this sector, which, particularly in the west in counties such as Cork and Kerry, is still significant in nature? Perhaps he might indicate what consideration he could give. I am sure that he has been approached by several operators. Perhaps he might comment on why the changes were made and whether he can address the concerns that have arisen.

Mr. Cowen

For members' information, section 34 of the Finance Act 2005 introduced several changes to the capital allowance regime for hotels, guesthouses, holiday hostels and holiday camps. Guesthouses and holiday hostels were specifically brought into the capital allowances regime for the first time. An entitlement to capital allowances was provided for the first time on the basis of buildings being listed in the appropriate Fáilte Ireland register. Following changes in the Finance Act 2005, Revenue administrative practice granting capital allowances on buildings and structures erected in a registered caravan park was reviewed. The list of premises that qualify for capital allowances as outlined by me in the Finance Act 2005 was confined to the four main categories mentioned above and, for reasons of Exchequer costs, failed to include several tourist accommodation facilities registered with Fáilte Ireland such as caravan parks.

The Department of Arts, Sport and Tourism held discussions with the Revenue Commissioners and the Department of Finance while examining submissions made to it on behalf of the Irish Caravan and Camping Council. As a result, the Revenue Commissioners decided that it was not appropriate to continue an administrative practice granting capital allowances when the law had been clarified by statute and that a non-statutory scheme on behalf of caravan parks should cease with effect from 1 January 2006. Allowances regarding expenditure incurred before that date are not affected.

It should be noted that some of the expenditure that might typically be incurred by caravan park operators may be eligible for plant and machinery capital allowances. However, that would not generally include any buildings or structures.

Mr. Bruton

I am puzzled because the Revenue was clearly operating on the basis of a precedent whereby caravan parks approved by Fáilte Ireland could be regarded as admissible for capital purposes. It is not clear whether the change was made with legislative authority or simply on the basis of the Revenue changing its mind. However, from the Minister's response, I gather that Exchequer cost reasons were the primary factor in the Revenue doing so. I would be interested to hear what were those reasons. I may be wrong but I would have thought that, compared with the overall hotel, guesthouse and holiday camp sector, such caravan parks would not account for big bucks.

The Minister stated that there had been discussions between the Department of Arts, Sport and Tourism, the Revenue Commissioners and the caravan people that resulted in the removal of the concession. What was the nature of those discussions? Was the Department of Arts, Sport and Tourism saying that it was not public policy to promote caravan parks? Did it decide that it was not a good thing or was it, as the Minister seemed to state in his reply, done for reasons of Exchequer costs? The core issue seems to be that policy changed, not on the basis of a decision taken by the Minister, as policy director of the Revenue Commissioners and the Department of Finance, but because Revenue changed its interpretation of a precedent. This does not seem fair or satisfactory. People expect the Minister to be the policymaker. He receives sanction from this committee and thereafter people accept it as the law. However, judging by his remarks, it sounds as though Revenue did not like the cut of its jib and changed its approach to this issue without public sanction from the House. This makes me uneasy because policy should not be made on the hoof in this fashion.

Mr. Cowen

It is not a question of policy being made on the hoof. Section 34 of the Finance Act 2005 introduced a number of changes, including one whereby the four categories I mentioned, namely, hotels, guesthouses, holiday hostels and holiday camps, became subjects that would qualify under the capital allowance system. Hence, a specific change was introduced which provided for these four categories only.

Mr. Bruton

At the time I was informed that the effect would be to take away tax relief from the caravan sector. It appears this measure almost came about inadvertently. While the Minister's intention at the time was to broaden tax relief, this succeeded in narrowing it for a specific sector.

Mr. Cowen

The entitlement to capital allowances was provided for the first time for those four categories, or rather, holiday hostels. However, the point is that it was provided on the basis of the registration of buildings in the appropriate Fáilte Ireland register.

Mr. Bruton

That had been the precedent. The precedent had been that caravan parks approved by Fáilte Ireland and included in the register received the allowances. When the new legislation was introduced, Revenue changed its view and adopted a new precedent. While it may or may not be correct in this respect, the change should have been legislatively sanctioned by the Minister and the select committee in the Finance Act. The change appears to have come about as a result of a decision by Revenue to tidy up and this group fell through the crevices. Will the Minister elaborate on the Exchequer cost reasons? What did the discussions with the Department of Arts, Sports and Tourism consist of? Was there a public policy element to this issue and, if so, what was it?

Mr. Cowen

One argument is that if capital allowances are to be applied in this case, they should also be applied, for example, to bed and breakfast accommodation. What would be the Exchequer cost implications in that case? The starting and finishing points must be logical and the intention of the 2005 legislation was to clarify, rather than to extend, the relief. The Revenue Commissioners have followed up on this clarification. Hence, if a caravan park can be registered as a holiday camp under the relevant legislation contained in the Tourist Traffic Acts, it will qualify for relief. Moreover, any case in which expenditure was incurred before the change in practice came into effect will be unaffected. Hence, the change applies to future developments. The Finance Act 2005 clarified the question of what would and would not be subject to relief.

Mr. Bruton

Ought this not be subject to an order coming before the House? At the least, the committee should review it or sanction should be given. It should not simply be a case of Revenue changing its mind on a precedent. It has been presented to me that Revenue adopted a new approach.

Mr. Cowen

They do not accept that the legislation was for clarification purposes. It clarified what the position would be henceforth.

Mr. Bruton

Hence, the precedent directly follows on from the legislation and Revenue did not change an interpretation. It has been presented to me that this constituted a change in interpretation.

Mr. Cowen

On the basis of clarification in the Finance Act 2005, it did not continue with a previous administrative practice as to what would or would not attract capital allowances. That was the point.

Ms Burton

Why was clarification needed? Did the Minister's officials suspect the administrative arrangement was subject to abuse? If so, what was the cost?

Caravan holidays are still popular. I do not know whether the Minister ever goes on them.

Mr. Cowen

Yes. All the time.

Ms Burton

I also do. They are popular among those who, for example, surf on the west coast. Vast numbers of Dubliners have mobile homes along the south-east coast. It is an active, albeit small, part of the tourist trade. We have generous tax breaks for hotels which the committee has discussed ad nauseam. I promise, for the Chairman’s sake, not to discuss them again. Did an abuse take place? Will the Minister enlighten committee members on the matter? People had operated on the basis of a particular arrangement. Now they find themselves shut out from what they understood to be their position previously. Was there an abuse or tax avoidance scheme based in caravan parks in Donegal, Clogherhead or somewhere similar?

Mr. Cowen

No. Before the enactment of the Finance Bill 2005, the phrase used was "the trade of hotel-keeping". The 2005 legislation brought forward clarification to eliminate any grey areas which might suggest the trade of hotel-keeping would include ventures such as caravan parks. Anyone's understanding of the trade of hotel-keeping would regard this to be a wide interpretation. Hence, in 2005 specific categories were introduced which would attract capital allowances. On the basis of that clarification, the broad and generous definition of "trade of hotel-keeping" was replaced with four specific categories which would attract capital allowances. Moreover, as I have stated, if a caravan park could be registered as a holiday camp under the relevant Tourist Traffic Acts, it would also qualify for relief. Hence, this was a question of clarifying a matter which had been a grey area and it was dealt with at an official level.

Ms Burton

Is the Minister stating all such caravan parks are free and will have no problem in registering as holiday camps?

Mr. Cowen

If they qualify under the criteria that applied to them at the time, any case in which expenditure was incurred before the change of practice will be unaffected.

Ms Burton

Some may have a small business and did not know this. In those counties with caravan parks local authorities constantly try to improve the standards and quality, which costs money. In addition, where people are buying mobile homes and renting a site, which is popular throughout the country——

Mr. Cowen

If people have a caravan park of high standard which they can register as a holiday camp under the relevant Tourist Traffic Acts, they will qualify for the relief. Hence, caravan parks which meet that criterion qualify for the relief.

Ms Burton

Up to now, however, the smaller sites——

Mr. Cowen

If the Deputy is concerned about standards——

Ms Burton

——with perhaps ten or 20 mobile homes——

Mr. Cowen

If they meet the requirements for a holiday camp under the relevant Tourist Traffic Acts, they will qualify.

Ms Burton

Will the Minister forward me a note on his comments?

Mr. Cowen

Yes.

Amendment, by leave, withdrawn.

Question proposed: "That section 33 stand part of the Bill".

Ms Burton

Let me ask a general question about the section. I seek some information. The section deals with third level student accommodation and effectively constitutes a further extension of the scheme. I want the Minister to explain this. Will he provide the committee with the names of those schemes which have been approved? In addition, will he provide the names of those colleges or third level institutions, in respect of which they have been approved in the past two years, since changes, curtailments and so on were made? A number of schemes did not complete the planning process and extensions were granted in last year's Finance Act. While the Minister provided information in this regard last year, will he supply a note on the colleges, schemes, the number of apartments and the cost involved?

Mr. Cowen

These are third level buildings, not apartments. I amended the rules last year to accommodate people. It is down to one, UL. If it meets the 15% requirement by the end of the year to start construction, it will qualify.

Ms Burton

Will the Minister give the committee a note, please?

Mr. Cowen

Yes.

Question put and agreed to.

SECTION 34.

Mr. Cowen

: I move amendment No. 93:

In page 105, line 22, to delete "section 272(4)(ga)” and substitute “section 272(4)(ga)(i)”.

Section 34 amends the scheme of capital allowances for capital expenditure incurred on theconstruction and refurbishment of qualifying private hospitals. The amendment corrects a minor cross-referencing error by substituting section 272(4)(ga)(i) for section 272(4)(ga).

Ms Burton

I oppose the section. The Minister stated on Second Stage that, under this section, he would extend the period for which the private hospital or mental health centre must be a medical facility from seven to 15 years. I assume this change is on foot of last year's Finance Bill Committee Stage debate, when others and I pointed out that there was no requirement for private medical hospitals, other care facilities, sports injury clinics and so on to stay in business for one day longer than the life of their tax breaks. While the section extends the period for which the qualifying institution must act as a medical facility, does it accelerate the period for which a tax break can be received? I am not clear about this following the Minister's announcement on budget day and publication of the Bill. On budget day he made a specific reference to fast forwarding the availability of tax relief in respect of such developments. Will he clarify the matter?

Mr. Bruton

Will the Minister elaborate on the changes he is making, including the extension of the lifetime of the relief from seven to 15 years? He has stated the annual write-off is unchanged. Therefore, the write-off of 15% annually will exhaust the relief after seven years. If the write-off has been availed of, is he providing for it to be used over 15 years? Will the Minister also elaborate on the annual certification? It is important that if a 42% subsidy is provided, a public benefit should be generated from the taxpayer's point of view. I am not satisfied that the way in which the relief has been structured during the years is sufficiently robust to ensure the Exchequer is getting 42% value in services to public patients — our primary concern — and that makes me uneasy. I examined the assessment of hospital tax reliefs conducted by the consultants appointed by the Minister and was disappointed that they had produced a notional figure for the public benefit derived from private hospitals. The report contained no analysis of whether the alleged public benefit had accrued. The consultants said it was 10% of something or other and that was, therefore, assumed to be a benefit. We are still in the dark as to whether the taxpayer is getting value for the subsidies provided under the scheme.

The Minister will say the purpose of the scheme is to decant private patients out of public beds and into private hospitals on public campuses and that, indirectly, this will free public beds. However, I am puzzled because the Minister for Health and Children is saying she wants to abolish mixed contracts, where consultants have both public and private practices. If using private beds outside public hospitals is beneficial and private consultants with mixed practices continue to serve public patients, she is moving to head off that rationale by saying there will only be public contracts.

There is a lack of clarity on public policy in this area and what are the perceived gains, about which I am not satisfied. This may be a good policy but the jury is out. If the Minister is to apply such a relief, we are entitled to a statement of the scale of under-provision in the sector to establish the gap he is trying to fill; why the private sector cannot invest on its own; and where is the gap in its investment return that requires the State to step in and provide a subsidy. The social gains must be spelled out in what the public patient will obtain as a result. We also need to see that this approach has been designed as a minimum cost mechanism to secure the benefit.

The Minister has clearly set up this framework which has been endorsed by the consultants but those boxes are not being filled. The Minister is proceeding on the basis of a wing and a prayer that the 42% subsidy will secure a public benefit. His predecessor said it was obvious there was a huge scarcity of health resources and that the private sector should be brought in to do some work. That was the rationale but it is not sufficient. I agree the private sector should be more actively involved but if that was done, the Minister should tender for a public hospital contract using a public-private partnership arrangement. A schedule of services to public patients to be delivered by the private sector should be put out to tender; companies could enter into a PPP contract; performance indicators could be used and the public service delivered using the skill and innovation of the private sector. However, that is not the route the Minister is taking. He is not contracting for a commitment to public services with strong performance indicators and exacting standards applied. Therefore, the Government is not in a position to say it is obtaining something good for public patients which is spelled out in a contract being delivered. I am very uneasy.

I support opening up opportunities for the private sector to deliver health services to public patients but the case has not been proved that this tax relief is effective in doing so. It is an expensive relief. Some 16 hospitals are thinking of undertaking this investment. It is driven by the property element rather than a desire to identify public service gaps that need to be filled. The Minister will not be able to do this today because the preparatory work has not been done by his officials or the Department of Health and Children.

Vice Chairman

I am sorry to interrupt the Deputy but we must suspend the sitting until after the Dáil vote which has just been signalled.

Sitting suspended at 12.10 p.m. and resumed at 12.35 p.m.

Mr. Bruton

I was about to conclude. Deputy McGrath pointed out that the Indecon report also found there is no evidence that many of these tax allowable hospitals and nursing homes succeeded in keeping down the cost to users of the facilities by virtue of the fact that there was tax relief. To summarise and not detain the meeting, we need to have a much more careful list of requirements in regard to these reliefs that demonstrates their value, that shows they warrant the 42% effective subsidy. The requirements now in the legislation, namely, that 20% of the beds be available for public patients and that half of those offer some discount to public patients are not sufficient to show they are achieving a public benefit commensurate with the tax relief.

Mr. P. McGrath

In regard to the proposed new relief for hospitals, can the Minister confirm that the same provision in respect of nursing homes and hotels will obtain whereby if the facility fails to continue providing the relevant service for a certain period — in the case of nursing homes and hotels it was ten years — the total relief will be clawed back? There were some high profile nursing homes regarding which we cannot go into detail. There was a prominent one in Dublin, another in the midlands and one in County Carlow that closed within the specified period. Can the Minister confirm that the requirement to pay back all the relief if provision of the service ceases is being enforced or has a loophole been found? Some hotels in Dublin gained relief, or I presume they gained relief as they came on stream within the requisite period and it seemed that they were in line for relief. Can the Minister confirm the provision also applies to them?

To confirm Deputy Bruton's point, the Indecon report pointed out that the relief for nursing homes amounted to an estimated €38.5 million and yet had no impact on the cost to patients.

Ms C. Murphy

I listened with interest to the response to the budget debate. A point that cropped up several times was that where the Minister would like to do something funds were limited. With that as a backdrop I wondered where the vision was in regard to this proposal. The head of the HSE has stated he sees primary health care as the way to go. It will require a significant amount of investment if we are to have a really solid primary health care service. If that is to be the approach, should the Minister not pump the funds into that area rather than subsidising a section in respect of which he stated he did not believe there was a need for the number of beds being argued for? However, given that there are 48 people on trolleys in Naas hospital this morning, I wonder if he is correct. Focusing health policy on primary health care and keeping people healthy before they are obliged to go to hospital is the correct approach.

This proposal is similar to others, such as that regarding investment in the capital cost of developing child care places. There is no evidence that it provided less expensive options for child care and there is no real evidence that there will be a benefit from this proposal for public patients. Deputy Bruton used the word "puzzle" in respect of this matter. I can identify with his sentiments because there is a total lack of coherence. It is difficult to understand how the Minister can argue to extend the lifespan of this provision when there does not appear to be a coherent approach in respect of the provision of the required number of hospital beds and the sectors in which they should be provided.

This may well become a double subsidy. A subsidy is given for the capital costs of developing these facilities but there is also the issue of the provision of lands in the grounds of public hospitals. How will that be treated? Will the double subsidy be allowed? It is unclear how the public will benefit from this but it is clear that it is being jumped on by people who want to develop these facilities. This is a benefit for one group of people but I am not sure it will benefit the patients or the public.

Caoimhghín Ó Caoláin

I oppose the section. It was wrong to introduce tax breaks for private hospitals in the first instance and it is doubly wrong to extend them. The Fianna Fáil manifesto prior to the last general election clearly stated that the party was committed to ending the two-tier public-private system in the health services. However, this and other measures will produce an extension of that two-tier system.

It is compounding the situation that is feeding the inequalities in our health system and it is patently wrong. This relief was introduced by the Minister's predecessor and former Deputy, Mr. McCreevy, against the advice of the Department of Health and Children which, in a missive of March 2001, stated that the overall thrust of Government policy is to remove or significantly reduce public subsidisation of the private health sector. However, that was never reflected or honoured in the Department of Finance's approach under the previous Minister. The current Minister, Deputy Cowen, is, regrettably, perpetuating and deepening the inequality in our health service by proceeding in this way.

This is wrong. It is an influence within the Government that I do not believe has its genesis within the Minister's party. In my constituency and throughout the country, people are fighting, and are stretched to the nth degree, to try to protect public acute hospital and health care services. In this instance, however, further public moneys are being ploughed into private health facilities working under the profit motive. Public moneys are going into the deep pockets of speculators, developers and those who wish to provide health care for profit rather than taking the approach of thousands of good people working within the public system who have a vocational perspective in terms of wanting to deliver excellence in our health care services but who are being denied the resources to do that to the best of their ability. This is patently wrong.

The review of tax reliefs demonstrated that the people who benefit from this are investors who are earning in excess of €200,000 per annum. Those earnings are a far cry from the reality of most people's experience yet that is what this relief involves.

I oppose section 34 and the Minister's amendment. We should not be perpetuating inequality, which is what this does. It runs contrary to a public commitment given by the Government, or the eight main players within it, prior to the last general election. It might not be apparent in the Minister's constituency, which is lucky for the people who live there, but the reality of this approach is visible in my community, where the ravages of the loss and contraction of services, at time of plenty, are hurting greatly.

Mr. Boyle

To be fair, the Minister has clearly stated what he intends to do with this tax relief. That is different from how it was introduced, when his predecessor rather sheepishly announced that he intended to table an amendment on Report Stage to provide for this relief. I was obliged to ask him what he intended to do and that was the first notification of the intent of this relief. Even if the relief achieves what the Minister says in terms of releasing private beds within the public system and increasing the number of public beds, it is also likely, regardless of the private versus public debate, to result in a lopsided health service.

This relief is being introduced without any thought as to how it will be applied geographically or how it will be applied to meet health needs where they occur. The likelihood is that a Hanly report-type private health care system will develop through osmosis. The sector is profit driven and the hospitals are more likely to be located in centres of population where the biggest return can be secured from the investment. On these grounds, I share the concerns and the opposition of other speakers to the principle of the tax relief and its application.

Deputy Catherine Murphy referred to the double subsidy that is likely to result from this tax relief. Just as in the case of the development of apartment accommodation, where there was a treble subsidy from the State in terms of a tax relief on capital investment, tax relief on the rents received and the State, being the largest landlord in the land, paid 40% of all rents through supplementary rent allowance, we are now introducing a system where public lands are being made available, there is tax relief on capital development and, ultimately, many of the patients who will use this private health care system will be subsidised by the taxpayers through tax relief on private medical insurance.

The policy lacks direction. It will lead to the building of hospitals that do not meet the needs of the health system or the needs of patients where they are living and suffering and will only meet the needs of speculators, just as unrestricted apartment and housing development did through the other tax reliefs.

Mr. Cowen

Perhaps I should outline a few facts with regard to capital allowances for the construction of private hospitals. Hospitals must have the capacity to provide medical and surgical services all year round, have a minimum of 70 inpatient beds, provide outpatient services, operating theatres, on-site therapeutic and diagnostic services and be capable of providing up to five of a range of specialist services that are outlined. Mental health services have been added to the list in the Bill. That is the first point.

The second point is that site costs are not included with regard to being able to claim capital allowances. They are only allowed in respect of that part of the hospital used for the assessment or treatment of patients. With providing services for private patients, 20% of bed capacity must be made available to public patients, which capacity must be provided for the State at a discount of at least 10%.

Ms Burton

Does that imply the Government proposes to give the site cost free where it forms part of public hospital land?

Mr. Cowen

No, I am saying sites do not attract capital allowances. We are dealing with capital allowances for private hospitals and I am explaining to what the allowances apply.

With regard to the consultants' reports, the Bill refers to the wider benefits that private hospitals will provide, namely, they will take pressure off the public health sector and, as Deputy Bruton suggested, raise the prospect of providing services for the public service, where required, agreed and contracted. The new provisions in the section also ensure reliefs will be withdrawn where use is changed within 15 years in order that the building is no longer used as a nursing home, hospital, convalescent home or otherwise.

Ms Burton

On a point of clarification, I questioned the Minister on this matter on Second Stage. He is not being honest with the committee.

Chairman

The Deputy should let the Minister speak.

Ms Burton

He is providing for the transfer of allowances between one kind of institution and another. I questioned him specifically on this matter on Second Stage. He should answer some of our legitimate questions.

Chairman

The Minister is in possession. The Deputy should let him finish.

Ms Burton

He is not answering our questions.

Chairman

Six members have spoken since the break. The Minister did not interrupt them. He should be given a chance to respond to them.

Ms Burton

Will he answer the question?

Mr. Cowen

On the question specifically asked by the Deputy, there is no acceleration of the seven year write-off period.

Ms Burton

But there can be a transfer. For example, if Leas Cross nursing home closes, under the Bill it could become a psychiatric institution one month later and the relief will be rolled over. Is that correct or incorrect?

Mr. Cowen

I will check the matter for the Deputy. I do not know the answer.

Ms Burton

May I read out what is contained in the Bill?

Mr. Cowen

The point is that the qualifying criteria are laid out. I was asked by Deputy Murphy whether one could get relief for capital allowances and site costs. The answer is no. Deputy Burton asked whether the relief was being accelerated and the increase in the qualifying period from seven years to 15 years was a trade-off. The answer is no. If the Deputy wants to espouse conspiracy theories, it is for me to shatter them. I am sorry if the facts do not meet her conspiracy theory but what can I do about it?

Ms Burton

A nursing home might close and some months later reopen as another type of care facility such as a mental health centre or otherwise. Is it provided in section 38 that where a building or structure ceases to be one type of relevant facility and within six months becomes another type of relevant facility, the provisions of the sections, clawback sections, are not triggered? That is contained in the Bill.

Mr. Cowen

Yes. If they meet any of the relevant criteria I have outlined, they do not get increased relief.

Ms Burton

They roll them over.

Mr. Cowen

The existing reliefs remain.

Ms Burton

If the nursing home is closed by the HSE, it can become another type of centre and continue to gain the relief provided it is included in the Minister's scheme. If it is closed by the HSE for reasons of non-performance, the reliefs can be rolled over into another type of relevant facility.

Mr. Cowen

If the institution was not certified in one respect, it will not be certified in any respect within six months, unless the HSE is satisfied it can be properly certified.

Ms Burton

It is stated in the Bill.

Mr. Cowen

If the HSE so certifies. While I do not want to be specific with regard to nursing homes, it is not a question of anyone deciding what they want to do and then availing of the reliefs. A HSE certification process must be gone through to ensure the institution will meet the requirements outlined. That is the point.

There is no surreptitious agenda as to how we can fit something to accommodate somebody. It is a question of making sure the wider benefit that will derive from having an increased number of places will meet the criteria I have outlined. I have answered the Deputy's questions in this regard. If she has further questions, I will answer them to the best of my ability. However, we should be sensible and rational about the issue. If she opposes the principle behind it, that is fair enough but she should not ascribe motives to me which are groundless and nonsensical.

Ms C. Murphy

With regard to the double subsidy, the report, where it reviewed the schemes, indicated that they would have happened in any case and did not require the extent of the subsidy provided for. It appears there will be a subsidy by way of hospitals being built on existing public hospital lands. Is that not sufficient subsidy without providing an additional or double subsidy? Given that resources are limited, they should be channelled into primary health care, rather than to those who are speculating on land for the purposes of providing private health care.

Mr. Cowen

On the review of capital allowances for private hospitals, the consultants stated that existing investment would not have occurred in the absence of the tax incentive. Existing beds in public hospitals are designated for private patient purposes. We suggest these beds should be designated as public beds in public hospitals, which would reduce the need to provide beds for the public sector, and that the private beds designated in public hospitals should be covered by the private hospital arrangement I have outlined. This can be done on-site in order that public patients have access to the same consultant staff as private hospital patients under the existing contracts.

The Tánaiste has tried to outline that if consultants refuse to amend their contracts to allow for work practices which will make more consultants available in the public sector — a consultant-provided service rather than a consultant-led service — she is prepared to consider the proposal to introduce contracts for public patient-only consultants in an effort to improve the deal for public patients. That is what she is trying to achieve.

People talk about the question of the tax incentives but I am convinced we would not have got another 8,500 nursing beds into the system when we needed them if we had simply tried to do it through public revision. We know the pressure we are under in providing adequate nursing home places. When one considers the length of time it took to provide 15,000 publicly provided nursing home beds, the provision of 8,500 beds from the private sector through the tax incentive scheme when we needed them suggests it was an important additional public policy mechanism.

The report also states costs for patients rose less under the tax incentivised private nursing home scheme than they did for those who were not in a position to avail of it — costs for one group of patients rose by 72% but by just 47% for the other.

Ms Burton

Where is that stated in the report?

Mr. P. McGrath

If one makes a simple calculation by dividing the total cost by the number of beds that availed of the tax scheme, the cost is somewhere over €30,000 per bed. An exercise should be undertaken to consider what services could be provided in the public sector for that sum. If one calculated the cost of keeping a patient in HSE midland area facilities and compared that cost with the total amount of the bonus of €30,000 to the private sector, plus the ongoing nursing home subvention, one would probably find that the public bed was as competitive or cheaper than the private one. I would like to see this exercise done, and perhaps it has been done.

Mr. Cowen

There are different operational cost regimes and many issues involved. I am making the point that the consultants found, over the period of the review, that the increase in nursing home costs for residents was more substantial in the case of facilities that have not availed of the tax incentive. The increase in non-tax incentivised nursing homes was 72.6%, while the increase in tax incentivised nursing homes was 47%. That is a benefit for families. The weekly cost of places has risen over the past number of years. Indecon survey evidence suggests the tax incentive scheme had been effective in reducing the increase in nursing home accommodation costs.

Indecon believes that in the absence of investment in the sector, cost increases would likely have been greater. We should not be surprised that this is the case. We know the private sector is in a position to provide the accelerated provision because of its method of operation as opposed to the public procurement method. Some 8,500 places were provided in that period, and it is clear that the cost would have been greater using the public procurement method. It would clearly have been greater as fewer places would have been provided in the same length of time.

These are examples of the wider benefits. Most people would say that these incentive schemes can be beneficial in certain circumstances but when this is so, everybody slinks away from them. In this particular area we know through demographics, the increase in our elderly population and a host of social and medical reasons the importance of the need to continue to provide services and places in this area. It is important that we are able to cope with the demand. The partial provision of these services by the private sector under these types of schemes is something which should be availed of. I would not like to think where we would be now if we did not have those schemes, or if we did not have 8,500 extra nursing home places. That is a basic question.

Chairman

As it is now 1 p.m. I am required by the Order of the Dáil of 16 February to take the postponed vote on section 33, amendment No. 90. A division has been called.

Mr. Cowen

I must give notice of some Report Stage amendments at this stage. A Report Stage amendment may be required to section 40 to deal with an administrative issue. On section 41, I am currently examining whether it is necessary to put beyond doubt by way of a Report Stage amendment that the RCT system operates where the relevant operations are carried out in the State, even where persons involved are not resident in the State. I am considering a Report Stage amendment to address the point raised by Deputy Bruton in amendments Nos. 96 and 97. The intention is to ensure that changes introduced in section 36 do not impact adversely on pipeline projects at an advanced stage of construction.

Chairman

We will now take the vote.

Caoimhghín Ó Caoláin

Is there facility for a further vote——

Chairman

We are taking the postponed vote on amendment No. 90 and I will then put a guillotine question relating to all sections and amendments in the name of the Minister not yet dealt with but which are required to be dealt with by 1 p.m.

Amendment put.

The Committee divided: Tá, 5; Níl, 7.

Tá

• Bruton, Richard.
• Burton, Joan.
• McGrath, Paul.
• Murphy, Catherine.
• Ó Caoláin, Caoimhghín.

Níl

• Cowen, Brian.
• Cregan, John.
• Finneran, Michael.
• Fleming, Seán.
• McGuinness, John.
• Nolan, M.J.
• O’Keeffe, Ned.

Amendment declared lost.

Chairman

As it is now 1 p.m. I am required to put the following question in accordance with an Order of the Dáil of 16 February: "That the amendments set down by the Minister for Finance to sections 33 to 49 and not disposed of are hereby made to the Bill; and, in respect of each of the said sections undisposed of, that the section, or, as appropriate, the sections, as amended, are hereby agreed to."

Question put.

The Committee divided: Tá, 7; Níl, 5.

Tá

• Cowen, Brian.
• Cregan, John.
• Finneran, Michael.
• Fleming, Seán.
• McGuinness, John.
• Nolan, M.J.
• O’Keeffe, Ned.

Níl

• Bruton, Richard.
• Burton, Joan.
• McGrath, Paul.
• Murphy, Catherine.
• Ó Caoláin, Caoimhghín.

Question declared carried.

Sitting suspended at 1.10 p.m. and resumed at 2.30 p.m.

NEW SECTIONS.

Ms Burton

I move amendment No. 111:

In page 136, before section 50, to insert the following new section:

"50.—Where an Irish citizen resident abroad for the purposes of the Principal Act is within the State for a period exceeding 10 days in any year of assessment he or she shall, for statistical purposes, give to the Commissioners on or before the 31st day of October in the following year a statement of his or her profits or gains outside the State.".

The purpose of this amendment is to ensure those who are non-resident for tax purposes but return to the State for significant periods would be obliged to give information to the Revenue Commissioners on profits and gains made outside the State. Some notorious cases arose of wealthy people who declared themselves to be residing outside the State for tax purposes but, in practice, returned here frequently and to all intents and purposes lived in the State.

The Minister has stated the arrangements relating to residency were reviewed some time ago but I put it to him that this was done prior to the widespread availability of private aircraft. Recent statistics suggest that, alongside the United States, Ireland now has the largest number of private helicopters. According to the midnight or Cinderella rule, somebody who leaves before midnight is not counted as being here for a full day. However, we do not know the length of time a person must spend outside the jurisdiction. Do they take a twirl over the Irish Sea for half an hour or do they quit the territory? The Taoiseach answered questions on this issue some time ago, saying he found it unacceptable that very wealthy people paid no tax. Although we did not have time to discuss them, there are arrangements in earlier sections of the Bill to introduce a form of minimum taxation per annum by rolling over reliefs into later years. We welcome this. This other arrangement, however, is a source of considerable scandal to taxpayers who pay a lot of tax such as the person on a single income who pays tax at 42% on earnings over €30,000 if he or she gets overtime or bonuses and members of families who are compliant taxpayers.

The issue of non-residency was specifically excluded by the Minister from the consultants' study and the third volume by officials in the Department. We know from volume 3 of the study of extraordinary arrangements for tax avoidance by successful individuals who have sufficient capital to put €100 million in a pension fund. There is a lesser example of €67 million being put in a pension fund by a company in which there is a proprietary director. I raised last year the example of a person approaching retirement who has a major car dealership franchise which he or she sells and, effectively, lives offshore for a number of years to avoid tax arising, either from the sale of the business or other arrangements for its transfer. That is a simple example.

The Minister tabled an amendment to the double taxation agreement with Portugal which was discussed before the committee some time ago to limit the most famous case where profits from the privatisation of our telephone network went to an individual who had gained handsomely and was able to go to Portugal. I believe the Revenue Commissioners may be contesting his tax liability. It is a scandal to the ordinary, hard working taxpayer that we have such arrangements. I recognise that for those who work in the tax avoidance industry such as builders, it is their job to make money for their clients. I worked for a large accountancy practice, about which I am not saying anything. However, it is our job in the Dáil to ensure a level playing field for the compliant taxpayer who does not own a helicopter or private jet to which he or she can run.

As with the study of tax breaks for property-based developments, to make policy decisions in this area we need information. At the heart of this is the routine compilation of statistics. I have seen photographs of people who, for tax purposes, are apparently offshore at race meetings and weddings, with some fetching up in the famous tent at the Galway Races run by Fianna Fáil. They are prominent in the newspapers. We want information on the extent of this practice and who the lucky people are who avail of our hospitality and public services.

The other side of the argument is that many of the people concerned are very generous on an individual basis to charity, particularly local causes, which is welcome. However, in a republic citizens should enjoy a level playing field where they support the State through modest taxation. The modesty of the tax take from every citizen should be in proportion to the number who contribute. The people concerned remain outside the taxation framework and while it is up to tax advisers to tell them how to play the game, it is for us to explore how they do this, to get information on who they are and to compile statistics in order that we can make a reasoned judgment on how to deal with the issue. This has ramifications on a wider scale because the creation of these offshore structures, a feature of modern tax practice globally, has associated problems, with criminals laundering money and putting their assets beyond reach. It is for tax jurisdictions to take action and it starts with information.

The Minister and the Taoiseach said last year that a watch was being kept. I understood the Taoiseach to say a review was taking place but the Minister corrected this by saying there was no review and none was included in the three volumes of the study. Nonetheless, the Taoiseach did give strong indications that he was concerned and I thought the Minister shared his concern.

Mr. Cowen

The amendment which seeks to link tax liability with citizenship is out of line with normal practice in OECD countries in which tax liability is based on residence, not citizenship. The United States is the only OECD country to base tax liability on citizenship and I have no intention of changing the normal residence rules for taxation, even for statistical purposes.

The provisions of the 1994 Act followed a major review by the Revenue Commissioners and the Department of Finance and were agreed to by the then Fianna Fáil-Labour Party Government. They are in line with international practice and being adhered to. This proposal to link tax liability to citizenship would change fundamentally the arrangements for assessing tax liability in the State. It states that if an Irish citizen who is not resident here enters the State for 11 days, he or she should the following year give a statement of his or her profits or gains outside the State. There are many rules for acquiring citizenship. Of the 800,000 US visitors to the State every year, some are Irish citizens. In Britain 3.5 million people are of Irish ancestry. Furthermore, 800,000 people from Northern Ireland visit here for more than ten days every year. This proposal does not pass a reality check.

Ms Burton

How did the Minister follow up on earlier indications that he and the Taoiseach gave that the scandal whereby some extraordinarily wealthy individuals were able to claim offshore residency for tax purposes while residing here permanently would be investigated? The 1994 legislation to which the Minister refers was drafted before it was common for very wealthy people to own private aeroplanes and helicopters which enabled them to use the Cinderella rule and leave the State at midnight. The Minister is perfectly aware that it is possible to use citizenship as a basis for liability to taxation for citizens living abroad. The United States is a case in point. Millions of people who acquired US citizenship by virtue of birth and subsequently chose to live in other jurisdictions are liable to taxation in the United States. Will the Minister compile statistics on the phenomenon of people using non-residency status to avoid taxation here? He chose to omit this scheme from the study of tax breaks. The Fianna Fáil Party's only concern in this regard appears to be to devise tax laws which specifically facilitate the wealthiest in society and make a mockery of ordinary people who contribute taxation at the 42% rate. Why should wealthy people object to paying their fair share of taxation? Why should we accept this scandal? The tax forgone is not recompensed by charitable donations, however welcome they are. We live in a free republic, to which it is every citizen's responsibility to contribute, just as it is every citizen's right to be assisted by the State when he or she has a particular need.

Mr. Cowen

It is difficult to leave the Deputy's assertions on the record for longer than is necessary. The Labour Party did not agree to the provisions of the 1994 Finance Act on the basis of a dearth of helicopters or private aircraft in the State. Its agreement was based on the fact that the Revenue Commissioners and Department of Finance had undertaken a full review of the non-residency rules applicable in many other countries and tax codes. Variations of the 183-day residency rule apply in Australia, Austria, Canada, the Czech Republic, Denmark, Finland, Germany, Italy, New Zealand, Norway, Portugal, Spain, Sweden and the United Kingdom, all of which will have a number of private helicopters and aircraft. The suggestion that there were not many helicopters around in 1994 and the Labour Party would not have agreed to the scheme if there had been is patent political nonsense. The decision was taken after due consideration of a major and full review and enacted by the then Administration, not for the purposes the Deputy has ascribed to it, but for the reasons I have outlined, namely, that the scheme is in line with OECD norms regarding non-residency rules.

It is also incorrect to suggest the Revenue Commissioners, the Government or anyone else is facilitating what the Deputy described as a scandal. Revenue monitors the position on an ongoing basis and is satisfied, on the basis of the audits and risk analysis and investigations it undertakes, that this part of the tax code is being adhered to, as one would expect with regard to any other part. All the Deputy's assertions are unfounded.

Mr. Bruton

Previous Finance Bills introduced measures to close off areas of abuse, including in the area of capital gains tax where a prominent case had arisen involving a substantial sale from which no capital gains had tax accrued because of the manner in which the tax affairs had been arranged. To what extent are the Revenue Commissioners monitoring potential abuses of the non-residency rules, whether on the basis of failure to leave the State on the days required or the use of tax vehicles built on the residency requirement to artificially avoid paying tax? A couple of amendments were included in successive Finance Bills on this issue. To what extent is this area still subject to active investigation and monitoring?

Changes in the Bill in the area of remittance tax to some extent address the same problem, albeit in reverse, in that the Government is removing a tax concession enjoyed, I presume, for a considerable period by overseas companies which brought executives to Ireland to work. This scheme has been represented by certain quarters — admittedly those with a vested interest — as beneficial. There is, however, no doubt that its removal marks an abrupt policy change in how overseas companies operate here. Since we did not have an opportunity to scrutinise the relevant section, will the Minister comment on whether he considered the potentially adverse impact of the proposal to reduce the remittance scheme's availability in terms of a brain drain? I am conscious that a substantial amount of money — the estimate of €100 million provided by the Minister in the Budget Statement is not small change — will be gained as a result of this change in tax law. While we want an equitable tax regime, we do not want the operations of companies which have invested here in good faith to be unduly disrupted. In making his decision how does the Minister propose to balance the two dimensions of the public interest?

Mr. Cowen

With regard to the first issue the Deputy raised, non-residency rules are monitored by Revenue on an ongoing basis, as one would expect. The Revenue Commissioners conscientiously discharge their responsibility to maintain the integrity of the tax system and employ their own methodologies to satisfy themselves as to compliance with the statutory rules governing non-resident status. They tell me there are no grounds for believing there is a failure to comply with these statutory rules.

As I stated, the chairman of the Revenue Commissioners keeps me abreast of issues which arise in regard to non-resident status and I am in constant liaison with him, through a series of meetings, as one would expect. Should he be dissatisfied with the position at any time, I am sure he would communicate his concerns to me and I would have to take these on board. This issue is monitored by Revenue in the same way as one would expect any other category of taxpayer to be monitored and there is no basis, as far as the chairman of the Revenue Commissioners is concerned, for believing there is a lack of compliance with the statutory rules governing non-resident status. It is important to state this in the interests of accuracy and fairness to the Revenue Commissioners and those who seek to avail of non-resident status under our tax code.

On the second issue raised by the Deputy, section 68 sets out rules for the assessment and charge of capital gains tax on the disposal of chargeable assets. This gives effect to a budget announcement that the deferral of capital gains tax on disposal of a chargeable asset to a spouse, separated spouse or former spouse will not apply to disposals on or after 7 December 2005, where the spouse acquiring the asset would not be liable to Irish capital gains tax if he or she were to dispose of it in the year in which he or she acquired it, that is, if he or she disposed of the asset abroad while being non-resident in the State for tax purposes. This example from section 68 shows that we deal with any issue that comes to our attention. In that section we are closing off further opportunities that may have been identified for sales of shares during temporary periods of non-residence. This demonstrates our continuing vigilance and commitment to close off real loopholes as they appear. Doing this is consistent with non-resident status being a feature of the tax codes of some of the countries I have mentioned and others which have similar provisions which are in line with international practice. That needs to be said in the interests of accuracy.

The Deputy referred to the remittance basis of taxation. I need to move on this issue as it is clearly becoming a more widespread practice than was traditionally the case. We used to have a further card to play in industrial promotions in trying to attract foreign investment, as certain specialised labour and management expertise were required. It has been used for a long time and with some success in that respect. We have seen the development and maturation of the international financial services industry and, thankfully, many Irish people have been promoted to positions of management responsibility in many of these areas. I needed to make that move on principle to ensure the whole system was not compromised by the widespread use of such a basis for taxation. Obviously, I have received representations setting out concerns. If I end up needing to deal with other unforeseen marginal issues beyond the question of holding the tax, the PAYE basis for income etc. that would put them at a disadvantage against those who were resident here or Irish and were able to use other facets of the tax code or result in them being denied their use in the countries from which they had come, that may be something I would consider and might address on Report Stage. As matters stand, however, I do not have such a proposal. If one were to emerge and I were to receive representations, I would come back to members of the committee at that stage to discuss it.

Mr. Boyle

Our concern lies with the last point the Minister made. It is not so much an issue of citizenship and residency. While I was born in the United States, I have not received any demands from its Internal Revenue Service for any of my tax dollars. This is about the principle of money earned and wealth in Ireland being taxed here. The Minister seems to have addressed the matter in his proposals on remittance tax. However, the concern is that, at least anecdotally, the residency laws have been used by people whose wealth is in Ireland and whose earnings are ostensibly made in the economy, yet they are not contributing anything to the taxation system.

The public has concerns about the matter and those of us in opposition have asked the Minister to change the central principle. How can we ensure the money earned in Ireland is taxed here without people claiming — mainly on a pretext owing to the controversial way the laws apply — that they live outside the country for more than a particular number of days? In the main, they are Irish citizens whose operations and businesses are located in Ireland. However, the only reason they are not contributing to the Exchequer is that they can take advantage of a rule that allows them not to be considered part of the taxation system because of where they live and how they choose to live. Until the Minister addresses this, in the way he has addressed the remittance tax, the issue will continue to concern the public.

Mr. Cowen

This matter is addressed under Schedule D to the Income Tax Act 1967 which states tax under the Schedule shall be charged in respect of the annual profits or gains arising or accruing "to any person, whether a citizen of Ireland or not, although not resident in the State, from any property whatever in the State, or from any trade, profession or employment exercised within the State". Even an Irish citizen who is non-resident and derives income sourced in the State is subject to income tax under Schedule D of the tax code. The contention often made that being non-resident de facto exempts a person from tax liability in Ireland is not correct if such a person has a trade, profession, employment or property in Ireland from which income is derived.

Mr. Boyle

Part of the problem with the way in which the law is applied is the way people can regard themselves as individuals. Sometimes people change their legal identities and use the company corporate structure. There are means for people to choose whether they are a citizen or a resident, or an individual or a company to avoid such liabilities. Despite successive Finance Acts, there are still loopholes.

Mr. Cowen

People who are non-resident and have those sources of income here pay tax on that income. The company which organises that trade, activity or employment in the State also pays tax. Obviously, some have political purposes in misinforming the public by suggesting simplistically that there is a scandal, that the authorities are turning their backs, that people are being allowed to break the law and that the law is meaningless. That is nonsense. I make it clear that the chairman of the Revenue Commissioners is satisfied on the basis of ongoing risk analysis and the audits they conduct that they have no evidence to suggest those who are seeking non-residence status are not complying with the rules required to achieve it. That is a statement of fact, to which people can attach whatever political innuendo they wish. I stand over the statement from the chairman of the Revenue Commissioners who has my utmost confidence.

Mr. Boyle

While I will not identify any particular individual, we have seen cases where people have avoided paying large amounts of tax to the State, even though they are Irish citizens and the money has been earned in Ireland. They have availed of both the residency rules and the fact that they have registered their corporate identity outside the country. In the case of a particular individual, many millions have been lost to the State because of these loopholes.

Mr. Cowen

I have closed off any loopholes or use of the tax code that were not foreseeable or in keeping with the intentions of the Oireachtas. In the Bill I have introduced a notification process in respect of aggressive tax planning that would lead to abuse of the tax system. I have also introduced horizontal measures to ensure that, regardless of the legitimate use of capital allowances, a contribution will be made by those availing of them. I do so in the interests of trying to uphold confidence in our system that contributions will be made by everyone. I have taken proactive steps in every instance and, as the Deputy is aware, that would be an ongoing battle between tax planners and public authorities wherever there is a tax code in existence throughout the world. In discussing these matters I refute the continuing innuendo that is ascribed to me in my position, or my party, that I am standing over any untoward behaviour by anybody. I am working with the public authorities conscientiously to ensure our tax system works as we intend it to work.

Caoimhghín Ó Caoláin

I do not wish to drag this on unduly but I seek clarification on one aspect from the Minister. He has described as a myth the notion that non-residency tax loopholes are being abused.

Mr. Cowen

I did not say that either. I said the contention that non-residency de facto absolves someone from tax liability, even if he or she has interests, a trade, a profession or property in this State, is not a fact. It is not correct under our tax code. Income under Schedule D of our tax code attracts income tax.

Caoimhghín Ó Caoláin

Accepting that, the Minister has repeatedly indicated that there is no evidence in regard to the abuse of the non-residency measures. The Minister based that strongly made statement, repeated here today, on the information provided to him by the Revenue Commissioners. Is that information based on the view that de facto there is no evidence or is it as a consequence of a thorough investigation and examination of all the possible breaches and malpractices that could be employed by people seeking to evade paying their fair and credible share? Having no evidence is one thing. We could do nothing and say we have no evidence. Is the statement repeated by the Minister made following a full and thorough examination or is it just in the absence of any evidence? Will the Minister clarify the status of his statement?

Mr. Cowen

On the basis of the cases examined during the course of this year the Revenue Commissioners have no reason to conclude the individuals concerned failed to comply with the statutory rules governing non-resident status. That is based on a risk-based audit programme for 2005 whereby the high wealth individuals unit of our large cases division in the Revenue Commissioners has been monitoring compliance with the statutory rules governing residence of certain taxpayers who claim to be non-resident in Ireland in particular years. The monitoring exercise consists of a series of audits on a cross-section of those taxpayers. It is on the basis of proactive, professional work by people who have an accepted and known competence in this area.

Ms Burton

I wish to make a comment, as the Minister made a comment about the Labour Party. The purpose of this amendment is simple. It seeks to compile statistical information. I do not know why we should be scared of that. The Minister's leader, the Taoiseach, is on record during the debate earlier in the year as saying these issues would be kept under review, and the Minister said the same.

Four years ago, when I raised with the Minister's predecessor the issue of the yacht, Christina O, and its €200 million shipping allowances, floating around the Mediterranean, he said that was another figment of the Labour Party’s imagination. When I raised questions about the use of certain tax breaks there was, understandably, a deep reluctance, particularly on the part of the Minister’s predecessor, to even consider the topic. I could give the Minister ten other such examples. We have now come through all that and I congratulate the Minister on the fact that there is a later section specifically designed to reflect the undesirability of the Christina O investors’ experience of taking Irish taxpayers for a ride. The Minister is attempting, as he said, to close off that loophole. The Minister said the last review was carried out in 1994 by the Labour Party and Fianna Fáil in Government.

Mr. Cowen

I said that a review was done then.

Ms Burton

I ask the Minister to bear with me. That was 12 years ago and since that time the economy has taken off and grown out of all recognition. We are living in a very changed environment. The problem we faced at that time was mass unemployment and I, the Minister and others remember those days. We are now talking about the principle of fairness in the tax code. Many of the other changes the Minister said he is proud to make are as a result of those type of discussions. I hope the Minister will keep an open mind in that respect because the person earning only €30,000 a year and paying 42% tax on a few hours' overtime believes it is a scandal that someone can leave an airport in this jurisdiction for an undefined period, adopt the Cinderella rule and leave the country by midnight but to all intents and purposes live here and yet be non-resident for tax purposes.

Compliant taxpayers believe it is another scandal that a person who has earned a profit of approximately €250 million on the sale of a State asset can whizz off to Portugal and enjoy the proceeds of that sale tax free. The Minister may not share that view. Tax is often a game and it is our job on this side of the game to ensure people pay their tax fairly. This amendment is about only statistics. The Opposition does not have the resources or permission under Standing Orders to change the legislation. I ask the Minister, therefore, to keep an open mind on this issue.

Mr. Cowen

I have an open mind on these issues. I have an open mind on all issues and I approach all problems rationally and on the basis of evidence, not on any other basis. I explained my position, the origins of it and the proactive work done by Revenue on these matters to ensure this part of the tax code is respected and upheld. I have explained the outcome of those deliberations by Revenue and I take that advice. I take that statement from Revenue with the seriousness with which it was given.

Apart from anything else, this amendment would have the impact of bringing into question those who are non-resident who visit here as citizens. It is not something with which I could agree. I have explained that the non-residency rules work as they are supposed to work based on the 180-day residence rule, which is in line with OECD practice. I outlined some of the countries that apply similar rules. I cannot add to what I have said. I have given the facts.

Amendment put and declared lost.

Ms Burton

I move amendment No. 112:

In page 136, before section 50, to insert the following new section:

"50.—The Revenue Commissioners shall publish at least annually a list of all schemes approved under Part 30, Chapter One, Taxes Consolidation Act 1997.".

The purpose of this amendment is to have the Minister publish on an annual basis a list of approved pension schemes. As finance spokesperson for the Labour Party, I strongly support his move in the Bill to provide some pension savings incentives for those who hold SSIAs. During the past two years I have tabled a series of questions to the Department on two specific areas, one being the small self-administered pension fund schemes described in Volume 3 of the internal review of certain tax schemes. All I was able to ascertain was that the number of such schemes was 2,558. That number is repeated in the report.

The Minister is probably aware that around 2000 his predecessor, Mr. McCreevy, dramatically changed the rules for pension savings and pension schemes. I imagine there is all-party agreement on the need to encourage people to provide for their pension, particularly those in the private sector because they do not have access to the favourable pensions regime that many public servants, including Deputies and Ministers, enjoy. When Mr. McCreevy changed the legislation in the run-up to a general election, I am not sure to what extent it was debated. At the time the number of approved retirement funds was 118. When he changed the rules, this number shot up to 6,166. Approved retirement fund schemes and SSASs are legitimate vehicles, particularly for self-employed directors when on a modest scale but when Mr. McCreevey changed the rules, the amount invested in approved schemes increased from €20 million to €1.1 billion. At the end of the report the Minister's officials compiled there are two case studies involving a €100 million fund and a more modest one in which a company has invested €6 million or €7 million.

Will the Minister publish a list of SSASs and ARFs? We need to know and should be entitled to know if Newbridge Town Council or Leixlip Town Council receives a grant of €100,000. If a GAA club receives a grant, this information is publicly available. I am happy to say that in recent years the Department, in response to queries from a number of parties, has finally published a list of charitable organisations on the Revenue website.

The purpose of the amendment is to ensure the Minister would publish a list of all schemes. If he wanted to provide for limits, perhaps they could be applied as set out in the Bill — a €5 million lump sum and a €1.25 million or €1.5 million tax free capital payment. We could speak about schemes above these limits. It is extraordinary that half the people in the country have no pension provisions and that many workers, particularly in the private sector, have poor provision. An extraordinary scenario has been disclosed in the report by the Minister's officials. The schemes initiated before the new arrangements were applied will continue. I ask the Minister to accept the amendment.

Mr. Cowen

The amendment is concerned with Revenue approval of private sector occupational pension schemes under Chapter One, Part 30, Taxes Consolidation Act 1997, and seeking the annual publication of all schemes so approved. Under current legislation, Revenue approves occupational pension schemes if they satisfy certain prescribed conditions in relation to the scheme and the benefits provided under it. Revenue approval is very valuable in that from it many of the tax reliefs flow.

An immediate difficulty with the proposal relates to the issue of taxpayer confidentiality in dealings with Revenue. One might argue that this may not be such a significant issue if we were dealing only with, say, relatively large employer-defined benefit or defined contribution schemes. The fact is, however, that Revenue approval of occupational pension schemes covers a broad range of schemes from the very large to the very small. In many cases small schemes comprise small self-administered single member schemes. Clearly, there is a risk that in publishing a list of approved schemes individual taxpayers could be identified. In addition, if one was to go down the road suggested by the Deputy, I do not see how publication could be limited to occupational pension schemes; it would have to be extended to retirement annuity contracts and PRSAs. It appears it would only be a short step from there to seek publication of the names of all individual taxpayers in receipt of tax relief.

The protection of individual privacy in dealings with Revenue presents a very strong argument against releasing a taxpayer's personal information to third parties. All taxpayers have legitimate expectations in this regard and it is an expectation Revenue protects carefully, except in limited circumstances where information may be released by law or with the agreement of the taxpayer — an example would be the quarterly list of tax defaulters. It might well be argued that Revenue already publishes information on tax approved charities and artists whose work has been determined by Revenue to be artistic and meritorious of exemption but there is a big difference between the two. In the case of charities, there is clearly a public interest in publishing a list of those which have obtained Revenue approval as it informs the public, particularly those who might wish to contribute to a charity, that it has been vetted to some degree and provides an element of confidence for potential contributors that their donations will be used for charitable purposes. These are considerations of which we have to be mindful.

In respect of my watch, any aspects of approved retirement funds that have proved problematic after a number of years experience have been directly addressed by me in a clear cut manner in the Bill.

Ms Burton

The report compiled by the Department indicates there are 2,558 SSASs and 6,166 ARFs. I am happy if the Minister wants to set disclosure limits that follow the revised pension arrangements for which he is providing in the Bill for funds of €5 million. In the examples his officials gave of two individuals with €100 million, they said they could go no further and, for reasons of confidentiality, the precise figures are not being published. In regard to ARFs, in case studies 1 and 2 the annual remuneration of the individuals involved increased from a seven figure sum at the time the scheme was established to an average annual sum five times greater. I presume that the individuals were over 55 and approaching retirement.

When the former Minister, Mr. McCreevy, opened the floodgates for them and their tax advisers, their earnings, which amounted to approximately €200,000 each, were bumped up to €1 million per year. The individuals were, for the most part, proprietary directors. The firm then made contributions to the pension funds on the individuals' behalf that were proportionate to their earnings. Two people, therefore, accumulated a pension fund of €100 million each, as outlined in the case studies, from which they basically received a tax-free benefit of €25 million. It was possible for them to put the balance of €75 million into an ARF, which could then pass on to their spouses and children. The report indicates that this is likely to be the case.

This is obviously a very specialised and rarefied area of tax planning. I am sure the number of people in this country who could afford to create such a fund is quite limited. The name of every charity is published and, as the Minister correctly stated, the names of artists who benefit from the artists' exemption are also published. We know that most of those who benefit from that exemption have very small incomes but that there are a couple of very high earners availing of it. Bearing in mind freedom of information, will the Minster not consider the case for publishing the information I seek to have published?

It seems that there is extraordinary largesse on the part of the State. I do not know the impetus for the former Minister's changes in 2000 but, as I stated, €1.1 billion went into the schemes in question. Many women in my constituency left work to raise their families at home and now have no pension cover. In this regard, one should contrast the two classes of citizens and taxpayers. In other jurisdictions, it is possible to obtain the kind of information about which I am concerned. I refer to the upper end of tax planning and those who reap the benefits of the schemes are of very high net worth.

Information is available on every GAA club in the country, and rightly so, and every charity is listed by the Revenue Commissioners. Given the technical experts available to the Minister, including the 20 officials accompanying him, I find it difficult to believe that if the information on the schemes to which I refer were published, a cleaner with a PRSA would also find her name published. The brainpower of the Minister's officials is surely such that he can be advised on how to restrict the information to that disclosed in his own report, namely, information on the SSASs and the ARFs, which are usually only available to proprietary directors of companies.

Mr. Cowen

Issues of confidentiality must be respected and freedom of information considerations do not supersede them. Citizens have legitimate expectations in their dealings with the tax system. Where issues have proved problematic, I have dealt with them in a clear-cut way in the Bill. The reason for large sums of money being in pension funds is, to a large extent, associated with the ability to transfer funds to an ARF on retirement. This will no longer be possible after the enactment of this Bill. From 2007 onwards, an increasing annual percentage of the value of ARFs will be deemed to be distributed to the pensioner and chargeable as income at the taxpayer's marginal rate of tax. This change will also affect ARFs created before the enactment of the legislation.

I explained in my initial reply the position on so many of the various funds and individual managed funds. If one were to go down the road suggested, one would be heading into the sort of territory I outlined earlier. The real task is to ensure that the pension arrangements work in such a way that they are deemed equitable and fair in all circumstances. We have introduced serious changes to achieve this.

It is no longer possible to transfer funds into untaxed ARFs. We are making substantive changes regarding their application and operation. Even if people earn more income than I do, it does not excuse me from having to ensure the confidentiality rules apply to them as they apply to every other citizen.

Chairman

Is the amendment being pressed?

Ms Burton

Yes.

Chairman

In accordance with the order of the Dáil, any division claimed on the proceedings on the Bill must be postponed until immediately before the time set for the relevant guillotine, that is, not later than 5 p.m. We must also postpone putting the question on the section until the vote on the amendment.

SECTION 51.

Mr. Cowen

I move amendment No. 113:

In page 138, to delete lines 39 to 53 and in page 139, to delete lines 1 and 2 and substitute the following:

"(d) Where this subsection applies to a company for an accounting period and the company makes for that accounting period one or more distributions out of relevant income, then so much of the amount of that distribution, or the aggregate of such distributions, as does not exceed the amount of aggregate expenditure on research and development incurred by the company in relation to the accounting period shall be treated as a distribution made out of disregarded income; but a distribution shall not be treated as a distribution made out of disregarded income unless the relevant income is income from a qualifying patent in respect of an invention that was patented for bona fide commercial reasons and not primarily for the purpose of avoiding liability to tax.”.”.

This is a drafting amendment to ensure that section 51 will operate as intended. The section introduces a number of anti-avoidance measures to prevent abuse of the tax free treatment of distributions out of income from patent royalties. One of the provisions of the section is aimed at providing the avoidance of income tax by an arrangement that dresses up franchising, licensing of other similar fees between unconnected parties as patent royalty payments, thereby resulting in distributions out of such income by the company in receipt of such payments being exempt from tax. For such arrangements, any exemption for distributions will be limited to expenditure incurred by the company and its group of companies on research and development over a three-year period. In addition, the distribution will not be treated as being paid out of exempt patent royalty income unless the patent was patented for bona fide commercial reasons and not primarily for the purpose of avoiding liability to tax. I commend this amendment.

Mr. Bruton

One of the most unsatisfactory parts of the Minister's tax review concerned patent income. It seems that no estimate was made by the Revenue Commissioners of the cost or level of take-up. The Minister asked Forfás to examine the matter and it undertook a broadly targeted consultation with key enterprise stakeholders. It stated that due to the very low levels of response from the survey cohort, and in the absence of any detailed information available through the Office of the Revenue Commissioners, it is not possible to establish a robust empirical assessment of the use of the incentive among the clients of the enterprise development agencies.

It is clear there is a huge gap in the information regarding this tax relief. What efforts are being taken by the Minister to establish the level of use of the relief? I understand that the 2004 tax returns should begin to give us some information shortly. Forfás recommended in its submission that an anti-avoidance mechanism should be put in place but that does not seem to have been included in the Bill. Forfás is concerned about the scheme being exploited for research developments, lacking substance and not meeting an appropriate standard of technological information. It proposed that a further requirement could be added to the existing qualifying criteria in the case of claims under short-term patents. It suggested that such patents should be supported by at least one search, validated by the Patents Office, to support the innovative nature of the underlying patent. In essence, Forfás seems to have opened up the possibility that we should start to screen the extent of the use of the scheme by narrowing its focus to cases with a genuine research and development dimension. This does not seem to be a significant issue of concern for many bone fide entrepreneurs because most of Forfás's clients did not bother to respond to it.

I would be interested in the Minister's reflections on the attempt to assess the use of this relief. It seems that anything involving research and development is blessed by some special sanctity. Many things that should not benefit from tax relief are the subject of such relief because they are deemed to be related to research and development or patents. Perhaps the Minister will give the committee some insight into what he hopes to do in this regard in the coming years. What sort of research is being conducted by officials from the Revenue Commissioners or the Department of Finance? What are they doing to ensure that this relief becomes a more targeted vehicle for the promotion of more genuine patent-related activity? It is widely suspected that the relief is being used in a quite shallow manner simply for the purposes of tax avoidance.

Mr. Cowen

The Deputy has made a fair point. It is unfortunate that data relating to this issue are not as widely available as one might like. In general, our level of data on exemptions is not good. I have asked Forfás and the Department of Enterprise, Trade and Employment to try to find ways of getting a better handle on this entire area. We need to get more information so that we can assess properly what is happening. Certain other issues which came to light in the course of the review — such as the need for increased availability of data, greater involvement by Forfás or other statistics agencies in data collection, strengthened anti-avoidance measures in respect of distributions of exempt patent royalty income derived from manufacturing or deemed manufacturing where the payer of the royalty and the recipient company are connected and limits on the recharacterising of certain payments as patent royalties to prevent tax avoidance — will be considered in due course. It has emerged that much more groundwork needs to be done by the agencies and the line Departments.

Mr. Bruton

Is it not the case that the business expansion scheme, for example, requires certification by a body such as IDA Ireland or Enterprise Ireland? Should a similar certification requirement be imposed in respect of the patent income scheme?

Mr. Cowen

I am open to examining that possibility when sufficient data are available. We need to pull this area together to see the full picture. We will then need to reflect on that and to examine what needs to be done to ensure that the level of innovation is what it needs to be to give credibility to the relief. I take the Deputy's point. We will need to return to this issue.

Mr. Bruton

When will we see hard data on the extent of the claiming of exemptions? Will we see such data in the 2004 tax returns? Will data be available before next year's Finance Bill is published?

Mr. Cowen

During the course of this year, we should be able to more accurately collate information on what is happening.

Ms Burton

I want to ask the Minister about creating licences and licensees in respect of franchising arrangements arising from patents. The impression has been given that there is a considerable amount of avoidance in the area of patents. It is correct that the Government wants to encourage research and development. Most parties in the House support its efforts to do so by means of tax incentives. Does the Minister have any idea of the amount of money involved in the licence fee area? I presume that many multinational companies are using licence fee structures in Ireland. I have seen references to some of them in newspapers. Does the Minister have any idea of the amounts of money involved in this? One hears quite an amount, anecdotally, about the significance of this area. How is patent income treated on an individual tax return at present?

Mr. Cowen

I do not know. I will obtain that information and communicate it to the Deputy.

Ms Burton

Does the Minister have any idea of the overall amounts?

Mr. Cowen

I do not have that information to hand.

Amendment agreed to.

Section 51, as amended, agreed to.

Sections 52 and 53 agreed to.

SECTION 54.

Question proposed: "That section 54 stand part of the Bill."

Ms Burton

Can the Minister confirm that the references to shipping in section 54 and other sections of the Bill could cover the scheme under which certain people have invested in a yacht that sails around the Mediterranean Sea? What section of the Bill is supposed to deal with the scheme in question? I have read a briefing note, which I think emanated from the Department of Finance, indicating that the Christina O will stay on its own. The note suggests, in effect, that the Minister is closing off the scheme to other boats and yachts. Is such a measure being introduced in this section of the Bill, or in other sections of the Bill? Can the Minister enlighten us in this regard? His predecessor was very reluctant to discuss the matter. When I raised it on the Adjournment over two years ago, the Minister’s constituency colleague, who represents Fianna Fáil’s coalition partners, got very hot under the collar when he tried to protect the investors in the Christina O. I do not think there is any sea near the constituency they share. On that occasion, the Minister of State became very exercised by the prospect that any injustice might be done to the investors in the Christina O if they were to be discussed in public in any way or if their enjoyment of tax breaks was to be restricted in any way.

Mr. Cowen

I do not comment on individual cases. This section extends the lifespan of the restriction on the use of losses and capital allowances for qualifying shipping trades, as outlined in section 407 of the Taxes Consolidation Act 1997. The termination date has been extended by a further four years to 31 December 2010. Section 407 restricts the offsetting of losses and capital allowances arising in respect of a shipping trade against non-shipping income. If a ship is leased for use in the shipping trade, section 407 ensures that the capital allowances in respect of that ship can only be offset against the income arising under that lease but not against other leasing income. The objective of these restrictions is to minimise the use of tax losses from tax reliefs in the shipping sector to shelter non-shipping income from taxation. I wish to clarify that tonnage tax does not apply to pleasure boats and, just to put the matter beyond doubt, the definition of qualifying ships is being tightened up in section 60 of this Bill.

Deputy Bruton

The Revenue Commissioners set out several recommendations in the review of this tonnage tax. The Minister seems to be referring to one of them, namely, that the legislation should be amended to ensure that the statutory prohibition on purely recreational craft accessing the scheme be as robust as possible. There were other recommendations that involved amending the powers of the Revenue Commissioners to require information and a formal application process. A list of these is included in the Bill.

Mr. Cowen

Section 60 covers the recommendations in this area. There are some administrative matters that can by carried out by Revenue that do not require——

Ms Burton

Is the Christina O included?

Mr. Cowen

It is a misconception to suggest that the vessel to which the Deputy refers was the beneficiary of a tonnage tax. The concerns about a tonnage tax covering vessels such as pleasure craft are unfounded.

Question put and agreed to.

Section 55 agreed to.

SECTION 56.

Mr. Cowen

I move amendment No. 114:

In page 152, lines 30 and 31, to delete "deductible trading expense" and substitute "trading receipt".

This amendment corrects a drafting error.

Amendment agreed to.

Mr. Cowen

I move amendment No. 115:

In page 153, line 50, to delete "paragraph" and substitute "subparagraph".

There may be some technical drafting in the amendments to section 56 on Report Stage. This amendment also corrects a drafting error.

Amendment agreed to.

Section 56, as amended, agreed to.

NEW SECTIONS.

Mr. Cowen

I move amendment No. 116:

In page 154, before section 57, to insert the following new section:

"57.—(1) The Principal Act is amended by inserting the following after section 79A:

"79B.—(1) (a) In this section—

"foreign currency asset", in relation to a company, means an asset of the company—

(i) the consideration for the acquisition of which consisted solely of an amount denominated in a currency other than the currency of the State, and

(ii) any gain on the disposal of which would be taken into account in computing income of the company chargeable to tax under Case I of Schedule D;

"relevant foreign currency liability", in relation to a company, means a liability, not being a relevant monetary item (within the meaning of section 79) which arises from a sum subscribed for paid-up redeemable share capital of the company which is denominated in a currency other than the currency of the State;

"rate of exchange" has the meaning assigned to it by section 79.

(b) For the purposes of this section—

(i) where at any time a company disposes of a foreign currency asset which has been matched with a corresponding relevant foreign currency liability and the company does not discharge the liability at that time, the company shall be deemed to discharge the liability, and to incur a new liability equal to the amount of the liability, at that time,

(ii) where in accordance with subsection (2) a company specifies that a foreign currency asset acquired by it at any time is to be matched with a corresponding relevant foreign currency liability incurred by it before that time, the company shall be deemed to discharge the foreign currency liability, and to incur a new liability equal to the amount of the liability, at that time, and

(iii) the amount of a gain or loss on the discharge of a relevant foreign currency liability shall be the amount which would be the gain accruing to, or as the case may be the loss incurred by, the company on the disposal of an asset acquired by it at the time the liability was incurred and disposed of at the time at which the liability was discharged if—

(I) the amount given by the company to discharge the liability was the amount given by the company as consideration for the acquisition of the asset, and

(II) the amount of the liability incurred by the company was the consideration received by the company on the disposal of the asset.

(2)(a) A company may, by giving notice in writing to the inspector, other than the currency of the State shall be matched with such corresponding relevant foreign currency liability denominated in that currency as is specified by the company.

(b) A notice under paragraph (a) shall be given within three weeks after the acquisition by the company concerned of the foreign currency asset.

(3) Where in an accounting period a company disposes of a foreign currency asset which has been matched by the company under subsection (2) with a relevant foreign currency liability of the company, then any gain or loss, whether realised or unrealised, on the relevant foreign currency liability shall be taken into account in computing the trading income of the company.".".

This amendment inserts a new section into the Taxes Consolidation Act 1997. The new section is designed to enable a company with a foreign currency asset to match it, for tax purposes, with redeemable preference shares denominated in the same currency. Where a financial services company makes a loan in a foreign currency, it will be exposed to the risk of losses arising from movements in the exchange rate of the currency concerned. On occasion, such a company will protect itself from that risk by issuing redeemable preference shares denominated in the same currency so that any foreign exchange gain or loss on the loan will be matched by a corresponding foreign exchange loss or gain on the share capital. Where a company protects itself in this way, it may not achieve neutrality in tax terms. This is because any gain or loss on the loan would be taken into account in calculating its trading income for tax purposes. However, the corresponding loss or gain on the share capital will be ignored for such purposes. Depending on the movement of the currencies concerned, this can result in the company getting a tax advantage or suffering a tax disadvantage.

The new section will allow a company to opt to maximise the loan and share capital for tax purposes but it will be obliged to do so within three weeks of acquiring the loan. The amendment thus provides tax neutrality for such a transaction for both the company concerned and the Exchequer.

Amendment agreed to.

Mr. Cowen

I move amendment No. 117:

In page 154, before section 57, to insert the following new section:

"58.—Schedule 24 to the Principal Act is amended—

(a) in paragraph 4 by inserting the following after subparagraph (2):

"(2A) For the purposes of subparagraph (2) but subject to subparagraph (3), where credit is to be allowed against corporation tax for foreign tax in respect of any income of a company (in this subparagraph referred to as ‘that income'), being income which is taken into account in computing the profits or gains of a trade carried on by the company in an accounting period, the relevant income shall be so much of the profits or gains of the trade for that accounting period as is determined by the formula—

P x I

R

where—

P is the amount of the profits or gains of the trade for the accounting period,

I is the amount of that income for the accounting period before deducting any disbursements or expenses of the trade, and

R is the total amount receivable by the company in the carrying on of the trade in the accounting period.",

and

(b) by inserting the following after paragraph 9E:

"9F(1)(a) In this paragraph—

the "aggregate amount of corporation tax payable by a company for an accounting period in respect of relevant interest of the company for the accounting period from foreign companies" means so much of the corporation tax which, apart from this paragraph, would be payable by the company for that accounting period as would not have been payable had the interest not been chargeable to tax;

"foreign company" means a company resident outside the State;

"relevant foreign tax", in relation to interest receivable by a company, means tax which—

(i) under the laws of any foreign territory has been deducted from the amount of the interest,

(ii) corresponds to income or corporation tax,

(iii) has not been repaid to the company; "unrelieved foreign tax" has the meaning assigned to it in subparagraph (2).

(b) For the purposes of this paragraph—

(i) interest which is receivable by a company (in this clause referred to as the "receiving company") from a company is relevant interest if—

(I) the interest falls to be taken into account in computing the trading income of a trade carried on by the receiving company,

(II) the interest arises from a source within a territory in regard to which arrangements have the force of law, and

(III) one of those companies is the 25 per cent subsidiary of the other or both companies are 25 per cent subsidiaries of a third company;

(ii) subject to subclause (iii), a company shall be deemed to be a 25 per cent subsidiary of another company if and so long as not less than 25 per cent of its ordinary share capital would be treated as owned directly or indirectly by that other company if section 9 (other than subsection (1) of that section) were to apply for the purposes of this paragraph;

(iii) a company (in this subclause referred to as a "subsidiary company") shall not be deemed to be a 25 per cent subsidiary of another company (in this subclause referred to as the "parent company") at any time if the percentage—

(I) of any profits, which are available for distribution to equity holders, of the subsidiary company at such time to which the parent company is beneficially entitled at such time, or

(II) of any assets, which are available for distribution to equity holders on a winding up, of the subsidiary company at such time to which the parent company would be beneficially entitled at such time on a winding up of the subsidiary company, is less than 25 per cent of such profits or assets (as the case may be) of the subsidiary company at such time, and sections 413, 414, 415 and 418 shall, with any necessary modifications but without regards to section 411(1)(c) in so far as it relates to those sections, apply to the determination of the percentage of those profits or assets (as the case may be) to which a company is beneficially entitled as they apply to the determination for the purposes of Chapter 5 of Part 12 of the percentage of any such profits or assets to which a company is so entitled.

(2) Where, as respects any relevant interest received in an accounting period by a company, any part of the foreign tax cannot, apart from this paragraph, be allowed as a credit against corporation tax and, accordingly, the amount of income representing the interest is treated under paragraph 7(3)(c) as reduced by that part of the foreign tax, then an amount determined by the formula—

100-R x D

100

where—

R is the rate per cent specified in section 21(1), and

D is the amount of the part of the foreign tax by which the income is to be treated under paragraph 7(3)(c) as reduced,

shall be treated for the purposes of subparagraph (3) as unrelieved foreign tax of that accounting period.

(3) The aggregate amount of corporation tax payable by a company for an accounting period in respect of relevant interest of the company in that accounting period shall be reduced by the unrelieved foreign tax of that accounting period.".".

Report Stage amendments may be brought forward for sections 57, 58 and 61 and with regard to securitisation. These will essentially be technical amendments. There will also be an amendment on life insurance definitions in section 69.

Amendment No. 117 inserts a new section in the Bill. The new section makes a number of changes to Schedule 24 of the Taxes Consolidation Act 1997. The first change clarifies the rules to calculate the amount of doubly taxed income. Where income of a company that is subject to Irish corporation tax has suffered foreign tax, double taxation relief is given by reducing the Irish tax on the doubly taxed income by the foreign tax on that income. If the Irish tax and the doubly taxed income is less than the foreign tax, then the credit is limited to the amount of that Irish tax. It is important to determine for this purpose what is the Irish tax on the doubly taxed income. It is calculated by applying the corporation tax rate to the doubly taxed income. The manner of calculating such income can be an issue in the case of interest received by a company. The question is whether the doubly taxed income is the gross amount received or the amount received net of expenses. The correct approach is now being clarified. The new section provides that doubly taxed income is a proportion of net taxable income of the company, based on the ratio of the interest received to the total receipts of the accounting period concerned.

The second change is concerned with the pooling of foreign tax credits on interest in the case of a company that carries on a financial trade. The change applies to interest which is sourced in a country with which Ireland has a tax treaty and which has been received by the company from its associated companies. Under the amendment, relief will be allowed for the foreign tax on doubly taxed interest that cannot be relieved against Irish tax on that income because of the restriction of the credit to Irish tax on the doubly taxed income. Under the revised rules, the surplus foreign tax will be credited against tax on other interests from associated companies that are sourced in the tax treaty country. I hope people can make sense of that. I commend the amendment to the committee.

Amendment agreed to.

SECTION 57.

Question proposed: "That section 57 stand part of the Bill."

Mr. Boyle

In the past, the tax code allowed companies to avail of tax relief in respect of losses on the sale of shares. There is no similar relief for individuals, which was quite controversial at the time of the subsequent resale of the Eircom shares. Has the Minister reconsidered why the relief exists for companies and not individuals? What is the current position in that regard?

Mr. Cowen

I understand that one can obtain relief from other capital gains if one, as an individual, suffers loss of shares. It can be carried forward but it cannot be set against income. It can be set against other capital gains for that year.

Question put and agreed to.

SECTION 58.

Chairman

Amendment Nos. 118 and 119 are related and may be discussed together.

Mr. Cowen

I move amendment No. 118:

In page 155, line 9, to delete "acquiring," and substitute "acquiring".

Amendment No. 119 makes a change to section 58. That section places a restriction on the amount of interest to be allowed under section 247 of the Taxes Consolidation Act 1997, where the borrower is connected with both the lender and the company whose shares are being acquired. The restriction is being applied because the tax base can be eroded by an arrangement involving one company in a group borrowing from another company in the group, in order to acquire shares in a company that is already within the group. This simply transfers ownership of the shares within the group and creates debt within the group. Nothing new is created, except an interest reduction for tax purposes. It has been pointed out that as drafted, the section could have a negative effect on a situation where a company borrows funds from a connected party to acquire shares in a third party, where shares are required in two tranches, a 60% tranche and the balance of 40%. As the section is drafted, the purchase of the first tranche would be a purchase of shares in an unconnected party. However, when the second tranche is purchased, it will be the purpose of shares in the connected party because 60% of the target company is already owned.

This amendment changes the approach in the new subsection (4)(a). The new approach is that interest relief will be restricted where the borrower is connected both with the lender and with the company from which the shares are being acquired. This change will result in interest relief being available where shares are acquired from a third party. In addition, it targets better the restriction to a situation where indebtedness is created within a group to acquire shares that are already within the ownership of the group. Amendment No. 118 is a consequential drafting amendment.

Amendment agreed to.

Mr. Cowen

I move amendment No. 119:

In page 155, to delete lines 11 to 14 and substitute the following:

"a company (from such company, referred to in this paragraph as the ‘issuing company', or another company, being in either case a company which, at the time of the acquiring of the capital or immediately after that time, was connected with the investing company) if the loan is made to the".

Amendment agreed to.

Chairman

Amendments Nos. 120 and 121 are related and may be discussed together.

Mr. Cowen

I move amendment No. 120:

In page 157, line 37, to delete "period (by" and substitute "period, by".

These are drafting amendments.

Amendment agreed to.

Mr. Cowen

I move amendment No. 121:

In page 157, line 39, to delete "excess')" and substitute "excess'".

Amendment agreed to.

Mr. Cowen

I move amendment No. 122:

In page 158, to delete lines 16 to 46 and substitute the following:

"not exceed the lesser of—

(I) the part of the relevant income of the electing company for the second-mentioned period which may be apportioned to the relevant accounting period (by reference to the proportion which the length of the period common to the relevant accounting period and the second-mentioned accounting period bears to the length of the second-mentioned accounting period), and

(II) the amount by which such part of that relevant income of the electing company exceeds the aggregate of any amounts, being—

(A) amounts of any relief, which is referable to the second-mentioned period, surrendered at any time by the electing company under Chapter 5 of Part 12, or

(B) amounts, which are not amounts referred to in clause (A), of any losses which could have been set off under section 396(2) against profits of the second-mentioned period but which were not set off against those profits,

but relief, for interest paid by the investing company, which has been allowed by virtue of this paragraph shall be deemed for the purposes mentioned in Paragraph 4(5) of Schedule 24 to the Principal Act to have been allocated by the company concerned to the relevant income of the company by reference to which the relief for the interest was allowed.".

This amendment makes a further change to section 58. Section 58 restricts the amount of interest to be allowed under section 247 of the Taxes Consolidation Act 1997 in certain circumstances. Furthermore, there are a number of exceptions to the restrictions. One such exception is that the borrowing company will be permitted to offset the interest on the borrowing against interest or dividend income that is chargeable to Irish tax and that can be linked to the use of borrowed funds. Where the interest on the borrowing exceeds such interest and dividends of the borrowing company, the borrowing company can surrender the excess to another connected company that has such interest or dividends.

I would point out to the select committee that while the amendment contains much text, much of the text repeats what is already in the Bill. I am informed that this repetition is required to get the correct indentation for the new text. The new text is contained in the last few lines of the amendment that commence with the words "but relief, ..."

I commend the amendment.

Mr. Bruton

I am a little confused about all this. This the section where the Minister is restricting the right of a person to get interest relief to borrow to fund shares in a company. Is that correct? In what circumstances will the Minister continue to allow that practice? I understand the Minister is trying to prevent the practice being used as a way of sheltering income from outside the business? What is the basic principle being applied as to when a person can get interest relief on the acquisition of shares?

Mr. Cowen

It is a technical area. Basically we are curtailing artificial arrangements where they are being created for the purpose of creating an interest relief entitlement when in fact there is no real activity taking place. Perhaps I can read out a note on the section.

In this year's budget I announced that I proposed to place restrictions on the offset of interest under section 247 of the Taxes Consolidation Act 1997 in certain circumstances. Section 58 of the Bill sets out the various restrictions on section 247 interest relief. Section 247 provides relief for interest in respect of moneys borrowed to purchase directly or indirectly through a holding company an interest in a trading company or a rental company. Interest relief is also available where the money is onlent to any such company or is used to pay off a loan, the interest on which would qualify for relief if it were not paid off.

If a company that is a member of a group borrows from another group member in order to purchase shares from yet another group member, there is scope for artificial indebtedness being created. In such cases, shares already in the ownership of the group could change hands within the group and indebtedness would then be created within the group. Such a scenario would not involve any new capital being injected into the group but would generate interest in respect of which relief under section 247 would be sought. Section 58 addresses this by restricting the availability of interest relief under section 247. From the date of publication of the Bill, 2 February 2006, relief under section 247 will not be available in respect of interest paid by an investing company on a loan made to it by a company which is connected with it where the loan is used to acquire ordinary share capital of a company that is also connected with the investing company or to onlend to another company which uses the funds directly or indirectly to acquire capital of a company that is connected with the investing company.

A number of exceptions have been provided for in an effort to minimise the impact of the rules on commercial arrangements which might involve increasing the capacity of a company to conduct new business by increasing its capital. These exceptions are, first, the section will not apply were the loan is used to acquire shares on their issue by a company and the share capital is used to increase the capital available to that company for use in its trader business and not as part of an arrangement involving a circular flow of funds to the original lending company or a connected company. Second, it will not apply to the extent that the interest in respect of which relief under section 247 is being claimed by the investing company is matched by interest received or receivable by that company or by dividends received by that company, which are chargeable to corporation tax. Finally, there are further provisions easing the new restrictions where such matching income arises in other companies that are connected with the investing company. Where the interest that is to be relieved under section 247 is greater than the matching income in the investing company, the company that paid the interest and the connected company that has related matching income, may elect to have the surplus interest offset against the connected company's matching income. The section contains provisions to ensure that the restriction cannot be avoided by back to back loans through an unconnected party.

Mr. Bruton

It is complex but I understand it. The drift of it seems right.

Amendment agreed to.

Mr. Cowen

I move amendment No. 123:

In page 159, line 8, to delete "(d)(ii)” and substitute “(d)(i)”.

These amendments relate to the same sections. They are technical amendments to correct a cross-reference.

Amendment agreed to.

Mr. Cowen

I move amendment No. 124:

In page 159, line 12, to delete "it."." and substitute the following:

"it.

(g) For the purposes of paragraph (e), ‘relevant income’ of a company shall be increased or reduced by any amount of profit or gain or, as the case may be, loss directly related to that income or to the source of that income which is an amount rising—

(i) by virtue of a change in a rate of exchange (within the meaning of section 79), or

(ii) from any contract entered into by the company for the purpose of eliminating or reducing the risk of loss being incurred by the company due to a change in a rate of exchange (within the meaning of section 79) or in a rate of interest.

(h) For the purposes of paragraph (c), share capital shall not be treated as issued by a company as part of an arrangement or understanding of a type described in that paragraph, entered into in connection with an original loan (within the meaning of that paragraph), solely because that share capital is used directly or indirectly in paying off, to the person who made the original loan (within that meaning) or to a person connected with that person, a loan, advance or debt (in this paragraph referred to as the ‘other loan’) other than the original loan where—

(i) the other loan was used wholly and exclusively for the purposes of a trade or business of the company and not as part of any arrangement or understanding, entered into in connection with the other loan, the purpose or one of the purposes of which was to provide moneys, directly or indirectly—

(I) to a person (referred to in clause (II) as the ‘original lender') who made, or directly or indirectly funded, the other loan and to thereby achieve directly or indirectly the effective repayment of the other loan or the greater part of it, or

(II) to another person who is connected with the original lender and to thereby achieve a provision of moneys that is, notwithstanding that the moneys are being provided (as part of the arrangement or understanding) to a person other than the original lender, equivalent to the achievement directly or indirectly of the effective repayment, referred to in clause (I), of the other loan or the greater part of it,

at a time before interest ceased to be payable by the company in respect of the other loan or such greater part of it, and

(ii) interest on the other loan, if that other loan had been made on or after 2 February 2006, would have been deductible in computing profits, or any description of profits, for the purposes of corporation tax—

(I) if the other loan had not been paid off, and

(II) on the assumption, if the other loan was free of interest, that it carried interest.".".

This amendment has the same impact.

Amendment agreed to.

Section 58, as amended, agreed to.

SECTION 59.

Chairman

We now come to amendment No. 125. Amendment No. 127 is related and it is proposed to discuss amendments Nos. 125 and 127 together.

Mr. Cowen

I move amendment No. 125:

In page 159, subsection (1), lines 16 to 18, to delete paragraph (a) and substitute the following:

"(a) in subsection (1)(a)—

(i) by inserting the following after the definition of "appropriate inspector":

"‘authorised officer' means an officer ofthe Revenue Commissioners authorised by them in writing for the purposes of this section;",

and

(ii) in the definitionof "expenditure on research and development" by inserting "wholly and exclusively" after "incurred by the company",".

These amendments relate to section 59, which deals with the tax credit for research and development expenditure incurred by companies. They provide for the delegation of certain functions under this section to authorised officers of the Revenue Commissioners. The amendments will allow the Revenue Commissioners to delegate their functions under the section to one of their officers authorised by them in writing for these purposes, thereby ensuring that such functions operate in an efficient and practical manner.

Mr. Bruton

I broadly welcome these amendments. The review of industrial performance published by the Minister for Enterprise, Trade and Employment made depressing reading in respect of the extent to which both Irish and foreign-owned companies based in Ireland are investing in research and development. We are at a quarter of best practice in that regard and way behind the eight ball across the spectrum. We like to talk about Ireland going up the value chain, and use other such buzz words, but the reality appears to be very different. We are fairly flat-footed when it comes to small, medium and larger companies here engaging in product development that transforms either process or product lines. Does the Minister believe there is a need to examine that area, both in terms of the positive promotion done by Enterprise Ireland and so on and what the Minister is doing through the Revenue Commissioners? It appears we are bringing the horse to water but not getting it to drink. What is going wrong? Is it because of the ambition of some companies? What is holding back the process? These companies are being lectured on a daily basis about the difficulty of surviving in the marketplace if they do not invest in future research and development projects. Although the Minister has sanctioned substantial amounts of money for research and development through these new funds, it is not filtering down and remains very much an ivory castle activity, so to speak, although I have no doubt it is research of considerable merit. These changes are welcome, and we try to do a little more each year. The Minister is continuing the tradition first introduced by Deputy Pat Rabbitte when he worked in this area. If this is so important to us in the long term, is it time to take a hard look at it from a strategic point of view? Are we getting it together? Are there better examples of policy practice in other countries that we could learn from, whether it be tax-based or other measures?

Mr. Boyle

My comments will be along the lines of those of Deputy Bruton. When the major tax relief was introduced by the then Minister, Mr. McCreevy, some years ago, the qualifying criteria was that it should be only for research and development expenditure over €50,000. That was one of the rare occasions the Minister accepted an amendment to get rid of that qualifying criteria on the argument that many research and development operations start with one or two persons, and that is the type of work we should encourage. Most research and development here is done by multinational companies. The number of Irish companies involved in research and development is worryingly small. Is the Department collecting statistics on the use of this tax relief with regard to the scale of the operations, the number of small businesses that might be availing of it and whether it reflects the national statistics which indicate that research and development is being done mainly by multinational companies based here?

Mr. Finneran

With regard to the opportunity for companies to come here to do research and development, in particular from the United States, I understand that hundreds of small pharmaceutical companies throughout the US have difficulty in getting funding and are generally gobbled up, so to speak, by the multinationals. The experience is that they regard Ireland as being an attractive area. Is there any indication that that is happening? The best example in recent years is Elan, a project that started with two or three people and grew to having a workforce of approximately 800 in its plants in the midlands, south Roscommon and Dublin. While the company ran into some difficulties, I understand it is coming back on stream again. I understand there are large numbers of small companies in the same position. Do we have any indication from the Department of Finance or Revenue that those companies are coming here? Is any opportunity provided to attract those companies to locate here?

I raise this issue because a group of entrepreneurs got together in the Monksland estate outside Athlone and invited a large number of these companies to examine the facility they intended to provide with a view to setting up individual operations in the area, and three or four have indicated an interest. In the discussions we had with them, they said the opportunity for them to get into research and development in the United States was limited because the multinationals wanted to take them over and did not allow them to progress some of their ideas. They was not what they wanted to do but they thought there was an opportunity to do that here.

From a Revenue perspective, have many organisations or small companies located here? One company located recently in my county of Roscommon and I understand 70% of the employees are in the research and development area. Planting that type of seed here can produce the Elans of the future in the pharmaceutical industry and I wonder if we are marketing the opportunities for those companies.

Ms Burton

Perhaps Deputy Finneran should be encouraged to travel to Washington for St. Patrick's Day and make his presentation there.

Does the Minister have any figures on the success of the moves initiated by the then Minister, Mr. McCreevy, some years ago? I represent Dublin West where a very large number of hi-tech companies, both large and small, are located. It is also adjacent to a number of major universities, including Dublin City University, where a huge amount of research and development is taking place. I consistently find people dissatisfied with the way the scheme has worked out. Those who are there on a continuing basis do not necessarily benefit from it and there are consistent complaints about companies involved in designing software which, along with pharmaceuticals, will be one of the major areas in the future. One gets constant feedback that they are less than happy with the way the scheme is working out. That is allied to the fact that there is a suspicion, as we referred to when dealing with the earlier amendment, that there may be abuse of the patents procedure. We would all share a view that the tax relief for research and development should be directed, as far as possible, towards productive research and development. Is the Minister effectively introducing a certification process whereby the research and development quality of the project will be checked, for instance, by other institutions or departments that might have more expertise in the research and development area than the Revenue Commissioners would have directly? The Minister might like to comment on that.

Mr. Cowen

We have been grappling with the question of research and development for a long time. Seen through PRTLI and Science Foundation Ireland, there is a far more focused approach to encouraging research and development, both at academic level and in applied research at company level, to improve competitiveness and productivity in the process. The product innovation Deputy Bruton talked about is essential in the Enterprise Strategy Group and its report, Ahead of the Curve, and in terms of how we grow more multinationals from indigenous Irish business. There is a whole thrust in terms of policy initiative that is trying to create that added value, to use some of the buzz words, and put Irish industry into a competitive position — one that will have a sustainable future, given the challenges in the marketplace to provide products and services of the highest quality and at a marketable price.

This research and development credit is deliberately designed to try to encourage incremental research and development expenditure. One of the few disadvantages of a low tax regime is that international companies operating here may wish to do research and development in countries where the tax rate is higher and therefore the value of the deduction for research and development expenditure is higher. That being said, the research and development credit has been designed to overcome that, which might be one of the few disadvantages attaching to a low tax regime. There is much evidence to suggest that is not the only consideration because we have seen some of the biggest bio-pharma projects in Europe, as big as there are anywhere else in the world, locating here in recent years in the context of a low corporation tax regime. We are basing our scheme on the best international practice in terms of the definition of research and development. Our scheme is also particularly generous in allowing capital expenditure to qualify for the credit. We are doing all we can within the context and parameters of best practice to encourage further research and development expenditure within companies, whether they be multinational as a result of foreign direct investment or Irish companies.

In its annual reports of 2001 and 2003, Forfás indicated that there was quite substantial business expenditure on research and development. Many of the statistics are definitional and one must look behind the figures to ascertain the precise reason for the investment. We have put in place very generous incentives and one cannot oblige companies to do more than they are doing. When one puts in place an incentive scheme one is trying to facilitate the companies and create the desired environment. Companies are sometimes under considerable pressure to stay in the market and while one might say it is in their long-term interest to engage in more research and development, cashflow issues and other issues come into play and determine whether they can do so. It depends on the difficulties posed by the trading environment. The Irish manufacturing sector needs to engage in product and process innovation so it can remain viable. We have noted the difficulties the sector has been experiencing in recent years in terms of its cost base and competitiveness.

The Minister for Enterprise, Trade and Employment has the job of presenting to the Government a research and development plan and putting together all the various proposals, initiatives and ideas. In our next national development plan, for the years 2007 to 20013, we will focus on the role of research and development in making provision for the next generation of industries and upskilling existing ones so they can compete in the competitive climate in which they operate.

It is recognised that if we are to build a knowledge economy and continue to provide good remunerative jobs for our citizens, research and development will play a part. Through the budget, the strategic innovation fund, reform of the university system and the leadership role in this regard, and investment in institutes of technology, we are upgrading the national stock of research and development resources. This must take place if we are to remain successful. Challenges must be faced but there has been a pulling together in this area in a far more cohesive way than obtained in the past, during which time we simply took a shot in the dark, provided an incentive and hoped someone would recognise its significance and take it up.

On the issue of using our fiscal regime to encourage companies to avail of reliefs to encourage more research and development, there is a State-led partnership approach involving the private sector, as is evident from the PRTLI and Science Foundation Ireland. The research community states this approach has greatly addressed the dissipation of effort that characterised research activity in the past. We now have a far more cohesive and coherent approach that provides us with better prospects of success based on best international practice.

Mr. N. O’Keeffe

I would like to echo the words of the Minister. The approach to research and development is very innovative and requires investment. In my part of the country, where there have been substantial changes regarding employment in the food sector, we must consider the development of new food products. The economy has probably become over-dependent on the construction industry and we are neglecting our manufacturing jobs, not only those in the food industry. Innovation and product development are required.

We have many fine research institutions in the country but we must target knowledgeable people. As Deputy Finneran said, the small businessman is not aware of what is available to him, be he a foreign national or Irish national. In my area, such people have already been involved in product development but do not have the financial wherewithal to carry out research work and therefore need reliefs and grants. Generous grants are available from Enterprise Ireland, which has made investments in the food sector in both my constituency and that of the Minister. However, much more is required, bearing in mind that people are now talking about low-fat diets and functional foods. The Minister's approach is very innovative and co-ordination between all the relevant agencies should be part of the promotion and incentivisation of research and development.

Amendment agreed to.

Mr. Cowen

I move amendment No. 126:

In page 160, subsection (1)(c), line 4, to delete “subsection” where it firstly occurs.

This is a drafting amendment.

Amendment agreed to.

Mr. Cowen

I move amendment No. 127:

In page 160, line 38, to delete "disclosure."." and substitute the following:

"disclosure.

(8) Any functions which are authorised by subsection (7) to be performed or discharged by the Revenue Commissioners may be performed or discharged by an authorised officer and any references in subsection (7) to the Revenue Commissioners shall, with any necessary modifications, be construed as including references to the authorised officer.".".

Amendment agreed to.

Section 59, as amended, agreed to.

Amendments Nos. 128 and 129 not moved.

Section 60 agreed to.

SECTION 61.

Mr. Cowen

I move amendment No. 130:

In page 165, line 15, to delete "the" and substitute "that".

This is a technical amendment to correct a drafting error.

Amendment agreed to.

Chairman

Amendment No. 132 is consequential on amendment No. 131 and they may be discussed together.

Mr. Cowen

I move amendment No. 131:

In page 167, line 13, to delete "payable."." and substitute "payable.",".

Amendments Nos. 131 and 132 ease the impact of the section 404 ringfence on lessors of short-life assets. The section 404 ringfence is designed to deal with timing mismatches between a lessor's recognition for tax purposes of lease payments received and capital allowances due in respect of the leased assets. The section provides that capital allowances on a lease that involves the back-loading of lease payment may only be offset against income from that lease and will not be available to shelter other income from tax.

To reduce the compliance burden on lessors, section 404 contains a simplified rule to be applied to leases of assets costing less than €63,500 to determine whether leases are subject to the section 404 ringfence. It has been pointed out that leasing companies that carried on international leasing of short-life assets from the IFSC would be subject to the ringfence from 1 January this year. The simplified rule will not be helpful to them because assets will often cost more than €63,500 and, in some case, short payment holidays may arise during the period of the lease. The existing provisions of section 404 would increase the tax cost of such leases and also impose a compliance burden that would act as a barrier to carrying out such business in Ireland.

The amendment is designed to ease the burden on leasing companies while protecting the Exchequer. It removes the €63,500 limit on the cost of the leased asset. However, it provides that the asset must have a maximum useful life of eight years and the lease must not exceed five years. It then provides a revised simplified rule so that, on a cumulative basis, leased payments of approximately one eighth of the cost of the leased assets will be taxable in each year. This equates to the capital allowances that will be made each year.

The requirement pertaining to one eighth of the cost of the leased assets does not apply to the first year in order to deal with the payment holiday issues. However, payments received by the end of the second year must be equal to at least one quarter of the cost of the assets.

One of the conditions that must be met to avail of this simplified approach is that the lessor must elect to have capital allowances on machinery or plant reduced when it is not used throughout the chargeable period. The allowances are to be reduced proportionally on a time basis by reference to the part of the chargeable period throughout which the machinery or plant is used. The amendment will reduce the compliance burden on such companies, thus facilitating the writing of business from Ireland. It also protects the Exchequer from tax loss and I therefore commend it to the committee.

Amendment agreed to.

Mr. Cowen

I move amendment No. 132:

In page 167, between lines 13 and 14, to insert the following:

"(vi) by substituting the following for subsection (6):

"(6) (a) This section shall apply as on and from 23 December 1993; but a lease of an asset shall not be a relevant lease if—

(i) a binding contact in writing for the letting of the asset was concluded before that day, or

(ii) (I) the relevant period does not exceed 5 years,

(II) the predictable useful life of the asset does not exceed 8 years,

(III) the lease provides for lease payments to be made at annual or more frequent regular intervals throughout the relevant period such that, in relation to any chargeable period (in this subsection referred to as the 'current chargeable period') falling wholly or partly into the relevant period (other than the earliest such chargeable period), the aggregate of the amounts of lease payments payable under the lease before the end of the current chargeable period is not less than an amount determined by the formula—

(VxT)

2920

where—

V is an amount equal to the fair value of the asset at the inception of the lease, and

T is the number of days in the period commencing at the inception of the lease and ending at the end of the current chargeable period,

and

(IV) the lessor has made an election in relation to the lease for the treatment referred to in paragraph (b).

(b) Where a lessor has made an election under paragraph (a)(ii)(IV) in relation to a lease, the Tax Acts shall apply as respects assets leased under that lease as they would if the following were inserted in section 284(2):

‘(c) Where machinery or plant which is used in a chargeable period or its basis period is not used throughout that period, the amount of the wear and tear allowance for the chargeable period in respect of the machinery or plant, computed by reference to paragraph (b), shall be reduced to so much as bears to that amount the same proportion as the part of the chargeable period or its basis period throughout which the machinery or plant is used bears to the length of the chargeable period or its basis period.’.”.”.

Amendment agreed to.

Section 61, as amended, agreed to.

Section 62 agreed to.

Amendment No. 133 not moved.

NEW SECTION.

Mr. Bruton

I move amendment No. 134:

In page 167, before section 63, but in Chapter 5, to insert the following new section:

"63.—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,”.”.

The Minister is familiar with the argument I am making in this amendment. The Government usually uses compulsory acquisition orders to acquire land for the widening of roads or the construction of bypasses. The disposal of such land is deemed to be taxable as a capital gain. Many people in rural communities who have had land acquired compulsorily did not seek to sell their land. They wanted to continue their existing bona fide farming activities, but some of their land was taken from them under a compulsory acquisition order for the public good. The sum of money that is given to them as compensation, which they did not seek, is taxed in their hand as if it had been gained as a result of a straightforward sale. A great deal of resentment can be caused when the State seeks to acquire land for genuine public purposes. Many Deputies who live in rural areas feel strongly that the moneys which accrue to land owners in such circumstances should not be taxed as capital gains. The people in question should be given relief from capital gains tax because their land was acquired compulsorily. If people knew that the amount of money they were to be given following negotiations would not be subject to capital gains tax, it would make the entire compulsory acquisition process smoother. My proposal would probably not cause the State to be out of pocket to any great degree, in effect, because money could be saved by eliminating time delays, etc. I know that many rural Deputies feel strongly about this matter. I am not sure whether it will affect Deputy Finneran's local area. This is a source of frustration and annoyance for many rural Deputies, who advocate strongly the provision of an exemption along the lines of that I have recommended.

Mr. Finneran

There is not that much activity of this nature in my constituency.

Mr. Bruton

Rural renewal has not stretched that far.

Mr. Finneran

I do not know what the Deputy is talking about.

Mr. Cowen

Deputy Bruton has made a good effort to encourage Fianna Fáil backbenchers to adopt Fine Gael's position on this question. I notice that Deputy Boyle was left unmoved by Deputy Burton's attempt to garner support for his amendment.

Mr. Boyle

There are some rural areas in my constituency.

Mr. Cowen

The decision that roll-over relief would not be allowed for any purpose on gains arising from disposals made on or after 4 December 2002 was announced in budget 2003 and was enacted, subject to some transitional provisions, in the Finance Act 2003. Deputy Bruton's amendment seeks to reinstate roll-over relief where the disposal arises as a result of a compulsory purchase order. I recall that the Deputy tabled a similar amendment on Committee Stage of last year's Finance Bill. This issue was raised on numerous occasions on Second Stage of this Bill. A typical compulsory purchase order is made for the purpose of the construction of roads. The Government is committed to improving transport infrastructure by extending and upgrading our roads network. It is necessary to obtain land, including farmland, for this purpose.

I would like to speak about the taxation of such disposals. There is no valid reason for land that has been compulsorily purchased to be treated any differently to land that has been offered for sale. The Government's taxation policy involves a wide tax base and low direct tax rates. It would not be appropriate, therefore, to introduce reliefs for such groups which would result in a narrowing of the base. The present rate of capital gains tax is 20%, compared to 40% before the 1998 budget. Roll-over relief was more important to taxpayers when capital gains tax was high — it was as high as 60% in the 1980s. The reinstatement of the relief would result in gains being rolled over time after time. In effect, the gains would not be taxed at all. It is appropriate to tax gains when they are realised. The abolition of roll-over relief allowed this to happen by bringing capital gains tax into line with other taxes. The decision to abolish the relief was consistent with the Government's taxation policy of having a wide tax base and low tax rates. The abolition of the relief and other reliefs was the price that had to be paid to achieve the wide tax base. The increase in capital gains tax receipts in the years since the rate was decreased to 20% is just one indication of the success of the Government's taxation policy. Therefore, I regret that I cannot accept Deputy Bruton's amendment.

Mr. Bruton

Contrary to what the Minister seems to think, I have not proposed this amendment as a means of reversing the abolition of roll-over relief. The amendment specifically examines a limited set of circumstances in which the State decides to compulsorily acquire land. I understand that farmers who have a bona fide interest in continuing to farm on the same scale as they have been farming have to return to the market place to acquire land. If the Minister said that relief on capital gains tax from compulsory purchase orders would be available within a limited timeframe, I would understand that. If one wanted to avail of the capital gains roll-over relief, it would be acceptable for one to have to purchase substitute land and continue one's business within a certain period of time. That would mean that the relief could not become a vehicle for exempting the proceeds of all compulsory purchase orders from the tax net. Such a scheme could be used to give relief to people who have to replace the land they lost because they have a bona fide desire to continue to operate their farm holdings on the same scale.

The Minister rightly said that the cause being advocated was supported by many Deputies on Second Stage. Perhaps there is a need for an amendment that is more forensically designed than the amendment I have tabled. I do not have the benefit of adequate draftsmanship support, but the principle seems to be reasonably well established. That this proposal has a broad base of support among Government and Opposition Deputies suggests that this is not an issue of limited concern. There seems to be a broad base of support among people who represent communities which are affected by what is regarded as an unfair imposition. It is right that the State is trying to facilitate developments and improvements, but a balance needs to be struck between the national interest that is served by compulsory purchase orders and the rights of the individuals who are affected by them.

There is a broad sense that the Minister's predecessor went too far by taking such a blanket approach to this matter. There is a broad base of support for treating a small group of transactions in an alternative manner. Such an approach would not open the floodgates to the reinstatement of roll-over relief. If it was decided to drive a road through the premises of a large company that produces beer, for example, the case could be made that the company should not be taxed on the money it receives, given that it has to build a new brewery. People would think it would be fair to treat such a company well if it were stepping aside to facilitate the State. That is where this is coming from. That this issue keeps being raised is not an indication of some effort to embarrass Fianna Fáil Deputies, but of the apparent groundswell of genuine support for this measure.

Mr. Cowen

It is an indication of the persistence of those who lobby for the inclusion of a measure of this nature, which is part of our system of representative democracy. I have no problem with dealing with amendments like this as they arise, regardless of their level of regularity. Roll-over relief was required when a higher capital gains tax rate was in place. The current rate of 20% is relatively low, although the tax take has increased, as everyone knows, as a result of the increase in transactions involving real assets, as well as shares and other things.

Deputy Bruton is aware that very good compensation is available under the compulsory purchase order arrangements. Various factors, such as the loss of enjoyment of land, are taken into account in assessing the amounts of compensation due to people because the common good unfortunately dictates a particular inconvenience or the loss of strips of land. Those of us from rural communities are acutely aware of that, although as Deputy Finneran points out, people in certain parts of the country do not have the benefits of many of the big projects that we see elsewhere. The blessing of geography deprives us of that pleasure. All of these matters are taken into account. Depending on the degree of inconvenience involved, the proceeds of those amounts of compensation have often been sufficient for a farmer to obtain another portion of land if it becomes available.

In the last two budgets I have tried to assist the consolidation of holdings by changing stamp duty arrangements. The case for this issue will continue to be made as long as it is germane to any part of that constituency, but there are compensation arrangements which take into account the degree to which an individual farmer is affected depending on the alignment of the road concerned. In the interests of everyone being treated equitably, the answer I have given is probably the best in the circumstances.

Mr. Bruton

I am surprised that counties Laois, Offaly and Roscommon do not have bypasses and that this is not an issue that has come to——

Mr. Cowen

Objective transportation policy dictates the alignment of the roads and I abide by experts greater than myself. Deputy Bruton asks me to do that all of the time, almost to the point where I am supposed to suppress my own judgment on every issue.

Mr. Bruton

I always like to hear the Minister's judgment.

Mr. Cowen

I will try to retain my own discretion where necessary, which will remain in the vast majority of cases.

Mr. Bruton

Is this an informed conscience?

Mr. Cowen

Absolutely. It is as pure as can be.

Chairman

Is the amendment being pressed?

Mr. Bruton

Yes.

Chairman

In accordance with the order of the Dáil, any division claimed on the proceedings of the Bill must be postponed until immediately before the time set for the relevant guillotine.

Sections 63 and 64 agreed to.

SECTION 65.

Question proposed: "That section 65 stand part of the Bill".

Mr. Cowen

I wish to inform the committee that I will be making a technical amendment on Report Stage.

Question put and agreed to.

Sections 66 to 68, inclusive, agreed to.

SECTION 69.

Chairman

Amendment Nos. 135 and 136 are related and may be discussed together.

Mr. Cowen

I move amendment No. 135:

In page 171, line 20, after "effected" to insert the following:

"or within such longer period as the Revenue Commissioners may on request allow".

These amendments are to section 69 and 70 respectively. Each of these sections requires certain information to be supplied to the Revenue Commissioners on the demutualisation of an insurance company in section 69, and a building society in sections 70. The sections, as drafted, required this information to be supplied within 30 days of the demutualisation. In order to give more flexibility, these amendments allow an extension of the period to such a period as is agreed with the Revenue Commissioners. I commend the amendments to the committee.

Mr. Boyle

The amendments seem somewhat anticipatory. I can appreciate that the Minister wants to have something on statute that might occur later in the year with the passage of other legislation. However, I am not too sure whether it is a particularly sound principle. I presume that both of the sections, along with the submitted amendments, are a consequence of the building societies Bill which is to come before the House later this year. I also presume that the building society in question that is seeking the change in legislation also has an assurance company arm, although I may be wrong.

There are now two mutual building societies left. If the building societies Bill become law — it is being presented by the Department, Heritage and Local Government — the likelihood is that one of those companies will make use of the new law and demutualise, leaving only one building society remaining in the country. Is that healthy for consumer choice?

The array of different financial institutions and structures seems to be diminishing. Does the Minister think that his amendments encourage or discourage that kind of practice? I am not so sure about the situation regarding assurance companies. The insurance market seems to be fairly well stocked and I may be wrong in assuming that this is an arm of the same company that is also a building society. However, I imagine that the same principle applies and that there will be a diminution in choice for consumers as a result of pending legislation. It is not the best type of legislation to anticipate what the Oireachtas may or may not decide later in the legislative session.

Mr. Cowen

Any prospective legislation in this area can be examined should the Bill come before the House. The members of a mutual building society decide the direction the organisation takes. If demutualisation should occur and involve the issue of free shares or under value shares to members, those shares should be treated for capital gains tax. That is the purpose of these amendments. The section is being amended so that any company is required to provide the Revenue Commissioners details of such share issues and the members to whom they are issued. It is on a prudential basis that we should proceed with these sections.

Mr. Boyle

I can understand the principle of the amendments. However, they seem to anticipate what is likely to happen due to upcoming legislation and due to business decisions being made by a particular company. Is the Minister able to confirm that such is the intent behind the amendments?

Mr. Cowen

Scottish Provident is already demutualising. Legislation needs to be in place in advance of further instances later in the year, should they occur. Other companies have indicated that they may be interested in demutualising.

Mr. Boyle

Is Scottish Provident the insurance company?

Mr. Cowen

Others are not interested in demutualising. These are matters for the members of those companies. The question is whether we can have a legislative framework that facilitates such democratic decisions within these societies. The principle underpinning that can be debated should such a Bill come before the House. A demutualisation is currently taking place at Scottish Provident and we need to make sure that any shares issued free or at under their true value are subject to capital gains tax legislation. In the case of non-demutualisation that issue did not arise hitherto. However, on the basis that it has arisen in one instance and could arise in others, it is a matter for which we must make prudent provision.

Mr. Boyle

I accept that. I would like to know the Minister's opinion on the diminution of consumer choice in terms of the availability of mutual societies, both in the fields of assurance and building societies.

Chairman

That is not the subject of this amendment or section.

Mr. Boyle

The section is about building societies and assurance companies.

Chairman

The Deputy should stick to the amendment. He has strayed far from the legislation.

Mr. Boyle

Both amendments concern the demutualisation of assurance companies and building societies. I seek the Minister's opinion on whether allowing this to happen will mean there will be a diminution of consumer choice.

Chairman

That is not the subject of the amendment.

Mr. Cowen

I have no problem giving my opinion. If, in order to protect their interests, members of any society wish to demutualise or change their current arrangements through proper procedures, this can be facilitated. We have a range of choice in our banking and mortgage sector compared to five or ten years ago, as a range of new entrants have come into the field. I respect the choice of members of any society on whether to change their status. We are in a situation where if a mutual society wishes to demutualise, we should allow it to do so, but if not, it should be allowed remain a mutual society. We do not decide it; it is the members who dictate the situation.

Mr. Bruton

I have no great difficulty with the principle behind the amendment. However, where a public limited company issues shares that might become subject to capital gains tax, does the Minister have or has he sought a similar power requiring that the Revenue Commissioners be notified? These are, essentially, self-assessment taxes, but because the Minister knows the issue is coming up the track he is trying to ensure they will be assessed rather than self-assessed. Does imposing this provision on self-assessment taxes raise any issues of principle? Is the Minister treating all groups equally in taking this type of power in respect of this type of company but not others?

Mr. Cowen

I am informed that dividend withholding tax returns perform the function in respect of Plcs or the type of company mentioned by the Deputy.

Mr. Bruton

Does it apply to free or additional shares?

Mr. Cowen

There would be a withholding tax requirement and one would know the shareholders involved. Dividend withholding tax returns would perform the function the Deputy is talking about.

Mr. Bruton

How?

Mr. Cowen

We would have a list of the shareholders who are getting the new shares.

Mr. Bruton

The information would already be public.

Mr. Cowen

Yes, through company law requirements.

Amendment agreed to.

Section 69, as amended, agreed to.

SECTION 70.

Mr. Cowen

I move amendment No. 136:

In page 171, line 45, after "company" to insert the following:

"or within such longer period as the Revenue Commissioners may on request allow".

Amendment agreed to.

Question proposed: "That section 70, as amended, stand part of the Bill."

Mr. Cowen

I advise the committee that I may bring forward a Report Stage amendment to address a possible abuse of section 812 of the Taxes Consolidation Act 1997.

Question put and agreed to.

Chairman

As we have now completed section 70, in accordance with an order of the House we will now take the two postponed divisions.

On amendment No. 112 in the name of Deputy Burton, the division will be taken now.

Amendment put.

The Committee divided: Tá, 4; Níl, 7.

Tá

• Bruton, Richard.
• Burton, Joan.
• McGrath, Paul.
• Murphy, Catherine.

Níl

• Cowen, Brian.
• Cregan, John.
• Finneran, Michael.
• Fleming, Seán.
• McGuinness, John.
• Nolan, Michael.
• O’Keeffe, Ned.

Amendment declared lost.

Chairman

On amendment No. 134 in the name of Deputy Bruton, the division will be taken now.

Amendment put.

The Committee divided: Tá, 3; Nil, 7.

Tá

• Bruton, Richard.
• McGrath, Paul.
• Murphy, Catherine.

Níl

• Cowen, Brian.
• Cregan, John.
• Finneran, Michael.
• Fleming, Seán.
• McGuinness, John.
• Nolan, Michael.
• O’Keeffe, Ned.

Amendment declared lost.

Chairman

I am required to put the following question in accordance with the order of the Dáil of 16 February: "That the amendments set down by the Minister for Finance to Chapters 3, 4 and 5 of Part 1 of the Bill and not disposed of are hereby made to the Bill and that in respect of each of the sections undisposed of in the said Chapters, the section or, as appropriate, the section, as amended, is hereby agreed to."

Question put and declared carried.

Sitting suspended at 5.15 p.m. and resumed at 6.20 p.m.

NEW SECTIONS.

Ms Burton

I move amendment No. 137:

In page 173, before section 71 to insert the following new section:

"71.—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.".

This is one of a number of amendments the Labour Party has tabled in regard to charities. It follows the arguments I made last year and previous years.

Mr. Bruton

On a point of order, are we dealing with sections 71 and 72?

Chairman

We are on amendment No. 137. The amendment seeks to insert a new section before section 71.

Ms Burton

There are a couple of points that arise. We still do not have charities legislation and as a result it is difficult to discern, with any degree of accuracy, the effectiveness of the arrangements for charities and taxation. I do not know if the Minister has a view of when, if ever, that legislation might be forthcoming but it makes the operation of the current systems extremely difficult. I shall give a few examples. I have a later amendment which probably will not be reached but which reflects a case where, for example, a GAA club is not a charity for the purposes of stamp duty and, therefore, for the purchase of grounds it has to pay stamp duty. I understand the club involved was in contact with the Minister. In practice, the State will probably significantly assist the grounds purchase. It ought to be possible to defer the payment of stamp duty provided the grounds are used wholly and exclusively for GAA games purposes and for the liability to stamp duty to crystallise and arise only if the grounds are sold for development purposes. That appears to be a sensible route.

Charities are unhappy with regard to the VAT scenario. Essentially, charitable organisations here are not registered for VAT purposes and, therefore, are not in a position to claim VAT refunds. There are two ways of approaching this matter. We could find a mechanism within EU law which is not capable of being abused by outfits masquerading as charities, and I understand the Minister's concern to find a mechanism where they could have some arrangement, such as zero rating, that would enable them to claim refunds. Alternatively, an arrangement could be made where the amount of money they pay for VAT purposes is recoverable by way of the various grants in aid and grants the Government makes to charities. All of us recognise that people are involved in significant fund-raising initiatives. For example, in my constituency there has been an enormous community effort for the past three years to raise funds for a hospice. While the State is providing the site nonetheless the building of that development will incur significant VAT liabilities. When the hospice is open and providing services it will incur VAT liabilities and there is no refund mechanism. As the Minister is aware, the hospice movement is not fully funded by the State but it assists. The same applies to other care charities, for example, charities that provide facilities for people with intellectual and physical disabilities.

I understand the Minister has problems in regard to potential abuses and loopholes. There should be a way in which to provide relief or to set out a scheme for providing relief for genuine charities, bone fides charities, that provide facilities, relief and care that would not otherwise be provided. I think the Minister had to go and listen to Professor Putnam on bowling alone. As a socialist and a paid-up member of the third-way club, I know the Taoiseach knows the whole question of not-for-profit organisations which allow people to come together and which are not simply provided in a hands-down way by Government is an essential feature of that approach. It differs from our traditional approach. Traditionally, charities originated in religious organisations or in not-for-profit organisations like the trade union movement. Nonetheless, there must be a way of addressing some of those issues while at the same time ensuring abuses are eliminated as far as possible. I am aware EU regulations and tax rules must apply on an EU-wide basis. I would be happy if the Minister were to even set up some form of study. The previous Minister, Mr. McCreevy, told us that when he visited the United States he was so impressed by the work of philanthropic organisations and foundations he decided to throw open the door, so to speak. As a consequence, there has been an enormous increase in the number of bodies now registered as charity, not-for-profit organisations. I understand the figure is in excess of 30,000. Perhaps the Minister would consider dealing with that issue.

I want to raise another issue. My understanding, and the Minister can correct me if I am wrong, is that currently there is a period of two years before a charity can be recognised for tax purpose by the Revenue Commissioners. A specific representation was made to me on the Irish Holocaust Foundation, which is dedicated to commemorating the Holocaust and to providing information and education on it. At the 60th anniversary last year of the liberation of Auschwitz, President McAleese and the Taoiseach were present, along with a large number of Members of the House from all parties. I understand there is a problem, however, in regard to the time it takes this body to qualify to accept tax efficient donations. Perhaps the Minister would examine that and advise us how we might best proceed.

Mr. Cowen

Charities and non-profit 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 which charge VAT are able to recover VAT. Refund orders of the kind put forward have been, in the past, used in a limited way to provide refunds of VAT on certain aids and appliances for the disabled and on medical equipment donated voluntarily to hospitals. These orders are focused and are designed to target particular sectors. However, it would not be possible to introduce new schemes that would allow for VAT refunds to exempt bodies or non-taxable persons. I understand it is the European Commission's view 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 state aid rules are observed. Given that Exchequer funding is made available to charitable organisations, this is, in effect, already happening.

I understand charities have cited the recent grant provided to the Band Aid Trust as a precedent for introducing a refund of VAT to charities on their inputs. However, giving a grant is not the same as giving a refund of VAT on costs incurred. In the case mentioned it was the consumers who had paid the VAT on the purchase of the Band Aid 25th anniversary CD or DVD. A decision was made to give a grant equivalent to the amount of VAT raised from the sales of the CD and DVD to the Band Aid Trust through overseas development aid administered by the Department of Foreign Affairs.

The Exchequer already provides grants and subsidies to many charitable and not-for-profit organisations. The Irish Charities Tax Reform Group indicated in its pre-budget submission that of the €18 million VAT it believed the 140 bodies it represents suffer, almost half of that is already funded directly or indirectly by the Exchequer. It is likely, however, that the estimate of €18 million put forward is a considerable under-estimate as more than 6,600 charities registered with the Revenue Commissioners are not covered by the Irish Charities Tax Reform Group. I should add that the tax code currently 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.

Aside from the legal obstacles to the introduction of refund orders for registered charities, such a system would undoubtedly lead to other exempt bodies such as schools and hospitals seeking registration as charities to benefit from such a system of refund orders. In most cases these are 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 these sectors would add significantly to Exchequer costs. Even if funds were available for grant aiding charities and other voluntary groups, I am not that the most appropriate use of the fund would be to relieve them of the VAT paid on inputs as opposed to grant aiding their activities using other criteria.

On a related matter, there is already an exemption from stamp duty in respect of a conveyance transfer or lease of land made for charitable purposes to a body of persons established for charitable purposes only. It is open to all organisations to apply for charitable status provided they meet one of the necessary tests. These are the relief of poverty or the advancement of education and-or religion or other purposes that are beneficial to the community.

Where an organisation meets the charitable status tests, there are also generous income tax and capital gains tax reliefs available. These include the ability to benefit from tax top-ups from the donation scheme as well as exemption from income tax and capital gains tax. Even where a community based sporting organisation has not obtained charitable status, there are very generous capital gains tax exemptions where it disposes of property and uses the proceeds to acquire a replacement property. In that situation capital gains tax is not payable. Sporting organisations can also avail of the special donation scheme.

The Deputy will appreciate that stamp duty is a significant contributor to the Exchequer. Stamp duty receipts allow for a broader tax base than would otherwise be possible. Any change for a particular group would inevitably lead to calls for special arrangements by other groups and organisations. In addition, the reduction in yield would have to be made up from increased payments elsewhere. Those are the real problems that attend consideration of any of these matters.

On the question of the time period required before someone can achieve charitable status, we all know the reason for that is to avoid fly-by-night outfits being set up. It is a question of control, and no one is suggesting there should be no controls. I would point out that I reduced the period from three to two years in the Finance Bill last year, recognising the difficulties the rule caused for charities. That was a general amendment rather than a specific one in any particular circumstances. We all know that in the absence of a regulatory regime for charities this rule is a necessary safeguard.

On the possibility of any further amendments to the move I have made already, I will give it consideration for Report Stage but I do not have available to me at the moment, and given my consideration to date, a way to deal with the various aspects of supporting charities further in regard to the VAT code or stamp duty exemption. Given the situation as it stands and the impact it would have, sequentially or consequentially, on other areas, we could make the same line of argumentation.

On whether any amendment of the three to two year rule could be contemplated by way of a discretion being left to the Revenue Commissioners, that would have to be carefully considered in the context of the period between now and Report Stage.

Ms Burton

I thank the Minister for his reply. I understand and accept the Minister's valid concern regarding abuse. Is it possible to put in place a review mechanism whereby it would be possible to validate beyond doubt the status of the group applying? While an element of discretion is given to the Revenue Commissioners, such a mechanism would put in place a procedure providing for fairly strenuous vetting to ensure that such abuse, about which the Minister is rightly concerned, does not occur. Is that a possibility?

Mr. Cowen

We would have to consider that. I made a move on this matter last year and having done so, I am being asked to make another move this year. I changed a long-established procedure of three years being regarded as the period in which the bona fides of a charity could be established because the accordance of charitable status could involve such charities obtaining considerable sums of money in a short period, and in that respect we would have to be certain about them. Basically, the establishment of the three-year rule track record enables people to decide whether the charitable status would be accorded. It involves a request to modify an established policy position. The good faith test ensures that in all circumstances money is given to charities which seek to achieve the objectives for which they were set up. They are audited by Revenue within the first two years and they need 18 months to produce a set of accounts. That is another reason we reduced the period from three years to two years in an effort to keep the time from the production of first set of audited accounts and the accordance of charitable status within a certain period and in that respect there may be little room to manoeuvre in terms of going further without compromising the safeguards in place at present. It is not an easy to move further on that. All I can do is undertake to consider this proposal given that it has been brought to my attention this evening.

Ms Burton

I appreciate what the Minister said. Charities are caught up in the capping arrangement the Minister has placed on tax allowable investments. A case has been made that while capping tax relief is entirely correct and, some would argue, long overdue in respect of some of the capital allowances, where the donations are essentially of no benefit to the person making the subscription and are entirely for charitable purposes, a question has been raised as to whether the Minister could exempt charitable donations. I did not hear the Minister comment on that specific aspect of the capping arrangement.

The Arts Council made the case for exemption from VAT levied on fees paid to non-resident artists when they perform for non-profit organisations. The Minister's predecessor considered that proposal but it did not find favour with him. It is strongly hoped that with this Minister there will be a new policy in this respect for performing artists.

The provision of home care packages is being developed by Government as a way of caring for people in the community. In that respect, liability to VAT seems to be an obstacle, similar to the position applying to donations of medical equipment. Does the Minister consider there is scope for identifying areas of that nature where some VAT changes might be appropriate?

Mr. Cowen

The Deputy's first point brings us back to the question of trying to achieve the objectives for which we made the changes in the first place. If one modifies a change, one could end up whereby a tax contribution might not be made by individuals, if the exemption of the charitable relief is used in a particular way. While the horizontal measure is in place it is open to each taxpayer to use the 50% reckonable income and include the charitable donation as part of his or her use of the tax code in a legitimate way, while still making the contribution to the State on a yearly basis. That is an argument on that aspect.

The question of a charitable donation being made subject to the availability of a tax relief is not necessarily the sole criterion for the making of the charitable donation in the first place. We introduced this change to the tax system in this Bill. As to whether one should monitor what is happening in the light of experience and consider in what way it would be possible to accommodate such a provision in the future or whether one would try to accommodate it at this immediate remove having just brought in the provision is something to which we would have to give further thought. I am aware of these issues arising.

The benign purposes of these reliefs are known at present and, in many cases, the motives of those who wish to avail of these reliefs are to be applauded and I do not intend in any way to denigrate the use of these reliefs for those purposes. However, the fact is that we have to see what are the wider policy implications of the initiatives we have taken to try to ensure there is confidence among the public that a contribution can be made by everybody in every year in which a tax liability arises — a contribution commensurate to the provisions we are putting in place would be expected. It is not an easy issue to accommodate given the policy statements that have been clearly outlined since the budget and incorporated in the Bill. The Deputy will have to leave it with me to see whether I can finalise consideration of the matter.

Ms Burton

May I ask a brief question?

Chairman

No, a vote has been called in the Dáil.

Ms Burton

Perhaps the Minister could give me a note in response to my question.

Chairman

No, a vote has been called.

Ms Burton

Briefly, is the tax relief that a charitable donation would attract capable of being rolled over in the same way that unavailed-of tax beaks are rolled over? The Minister might advise me on that position.

Mr. Cowen

Yes.

Chairman

I advise members that a vote has been called in the Dáil and we are obliged by order of the Dáil to call a guillotine vote not later than 8 p.m. to dispose of sections up to section 94. There will probably be a number of votes in the Dáil and when we resume we will have to conclude section 94 by way of guillotine vote . It is unlikely we will reach section 94 by that time in which case we will have to conclude that section by guillotine vote by order of the Dail not later than 8 p.m.

Ms Burton

At what time will we resume?

Chairman

We will resume following the vote.

Mr. Boyle

A vote was called 6.55 p.m. and a second vote will be called at 7 p.m..

Chairman

We will resume after the second vote that will probably be called at 7 p.m.

Ms Burton

At, say, 7.10 p.m.

Chairman

After the votes are concluded. There will be a number of them.

Sitting suspended at 6.50 p.m. and resumed at 7.25 p.m.

Chairman

We are dealing with amendment No. 137. Deputy Boyle indicated he wished to speak.

Mr. Boyle

The Minister cited the precedent of the Band Aid Trust, which was a grant that equalled the amount of VAT collected on a charity record. Perhaps he would consider a mechanism whereby instead of an automatic refund the charities, which need to be properly defined due to the absence of charities legislation, might apply for similar grants if they can show that the VAT payment they are liable to is a significant part of their outgoings. That is not to guarantee that it would be automatic but that it would be given consideration. It is an alternative mechanism in view of the precedent established by the Department's decision on the Band Aid Trust.

I accept the Minister's comments about opening the floodgates to other organisations that operate on a voluntary basis. However, given that he has let in a glimmer of light with this action, would it not be worth considering constructing a mechanism whereby people can apply, be assessed and be either accepted or rejected? The VAT burden is heavy for many charitable organisations but I accept that the bigger problem is arriving at a proper definition of charities and the need for legislation on charities. The Minister might not be able to do this until such legislation is passed.

With regard to how we are dealing with other sections and charities, two amendments I have tabled are due to be discussed at tomorrow morning's meeting. How does the Chairman plan to proceed after 8 p.m.? Both amendments apply to section 95 and are related to charities.

Chairman

We will deal with sections 95 to 122 tomorrow morning. If I thought there was a good chance of completing tonight, I would continue the meeting a little longer but I do not see any prospect of that. We will not even complete this section by 8 p.m.

Mr. Boyle

Okay. I have outlined my suggestion to the Minister with regard to the amendment. It might not be possible to do it in this Bill but perhaps consideration could be given to such a mechanism at an administrative level, in view of the precedent set with the Band Aid Trust.

Mr. Cowen

I will have to study what the Deputy has said and see if it has wider application.

Ms F. O’Malley

My question is about VAT and whether nursing home services can be rendered VAT exempt. In a reply to a parliamentary question, the Minister gave an indication that it is possible that a nursing home would be exempt from VAT. Am I straying into an area that is not related to this section?

Chairman

The Deputy may proceed.

Ms F. O’Malley

It is Government policy to encourage and facilitate people to remain in their homes and the Minister for Health and Children has prioritised home care services. I am aware of a company in my constituency that is in danger of not being able to provide the services if it does not obtain a zero VAT rate. I am taking this opportunity to ask the Minister if that can be provided, particularly in light of his reply to Deputy Carey's parliamentary question on 31 January which would indicate that he might be positively disposed towards this. I would be grateful if we could get a firm answer.

Ms C. Murphy

I want to hear the Minister's answer to that point concerning a global exemption from VAT for nursing homes. There is often a significant amount of investment in capital grants by way of tax breaks. Quite a lot of developers see the opportunity to develop a nursing home in a location that would not, for example, survive the planning test for building an individual house because of its location. We are building up numerous problems for which we will pay a price in the future. I am concerned about giving additional benefits to providers. Were such benefits to be created, they would have to fulfil the criteria of the UN principles on the accommodation of older people. If projects fit into that kind of proviso that is an entirely different thing — where people live within communities but not off in the countryside where there are no footpaths or buses and people are totally isolated. It should be possible to have separate criteria where an advantage is given to those that fit the criteria for sustainable development and where people live within communities. That is an entirely different proposition than some of the developments I have seen. One would not even see a bungalow on some of the proposed sites.

Mr. Finneran

I do not want to be talking at cross purposes but I feel I understand the points being made by Deputy Fiona O'Malley. I am not talking about nursing homes but about the provision of a home service.

Mr. Cowen

A home care package.

Mr. Finneran

They were put in place recently by the Minister, although not every Health Service Executive area has them. They constitute a welcome development, nonetheless. Prior to those being provided, private operators were providing a wonderful service in somewhat similar situations. People paid €10 or €11 an hour for what was a very good service. I understand it was zero VAT rated, although I may be mistaken. If it is not zero VAT rated, it should be because it is in line with Government thinking. Many people feel it is the right approach to support the opportunity for people to stay at home, whether it is done through a home care package that an individual or a family may take out, or an organised system such as the Roscommon home care service which provides effective services in five counties. It is run pretty well on a shoestring. The HSE areas provide money for so many clients but many people avail of it privately as well. It takes up an area that might otherwise be the responsibility of the HSE and Departments. I am not sure if we are on the one line but I understood that the area was zero rated for VAT.

Ms F. O’Malley

If it is helpful I will give the quote from the answer. It states that officials from the Revenue Commissioners and the Department of Health and Children are examining this issue. In particular, they are trying to ensure that services provided under the home care packages are exempt from VAT. I wonder if there will be a distinction between those provided by the State or those provided by private individuals.

Mr. Cowen

The application of VAT is governed by EU law. Therefore, one is dealing with a whole series of VAT issues which are applicable and govern this situation. What is being talked about here is not the nursing home situation but a question of home care packages. People are in the business of providing these packages which attract a VAT rate. Since 1991, it has not been possible to apply a zero rate to a new provision of any goods or services. We continued on with ones that were exempt beforehand, for example, concerning food.

This is an EU issue and we are examining whether there is a way around it. It is not a question of the government in any EU member state deciding to exempt VAT from something as a policy issue. Under EU law, the VAT directive governs this situation. We are examining whether a mechanism can be devised which would be in keeping with EU law while allowing these services to be exempt from VAT. That is what we are inquiring into to see if it is possible to come up with a solution.

Mr. Bruton

The health services are generally VAT-exempt, are they not?

Mr. Cowen

They are, generally speaking.

Mr. Bruton

Can the Minister not operate under that exemption?

Mr. Cowen

Discussions are taking place at official level to see if there is a way around this problem. Regardless of whether the provision of home care services can become part of how we deliver this home care package idea, the addition of 21% VAT can make it an uneconomic proposition for people who otherwise may be interested in its provision. All health care is exempt from VAT when provided by a medical practitioner. We are looking to see if there is a way around it but we are not being definite because we have not yet found a solution.

Ms F. O’Malley

If it is available in another member state, would it not automatically be available here?

Mr. Cowen

No. Different VAT rates apply to different services in different countries. The VAT directive is about trying to devise the application of VAT law in a way that is consistent with the internal market. Where we had zero ratings before the directive came into being, we retained them but that does not mean that one can create new zero ratings. The question of ratings must be in compliance with EU VAT directives. Historically, there are some goods and services in the country which are exempt from VAT, such as food. That was because, before we made arrangements to take on these directives, we were in a position to exempt them if that is what we wanted to do, and we did. Other countries had zero rates and forewent them, so they are no longer part of their arrangements. VAT is a complex issue. It is not simply a question of saying that the Government is refusing to use its discretion to solve this problem. The Government can only deal with this matter in a way that is consistent with EU law. Given that there is some merit in the proposal, we are working at an interdepartmental level to see if there is a way around it.

Mr. Finneran

In most of these cases, home help or a home care package is provided as a result of medical certification. Sometimes the individual or a family may top that up for extra hours. That is what I am talking about. My understanding of the existing service, which covers approximately three counties, is that it is not currently subject to VAT.

Mr. Cowen

Was that service being provided pre-1991?

Mr. Finneran

I would not think so. However, it is provided as a result of the HSE area in each county giving a particular amount towards it. There is a medical backup to it, therefore.

Mr. Cowen

There are various rates of VAT depending on what service is being provided. The administering of medication by a medical professional is exempt, as is medical treatment by a medical professional. A 13.5% VAT rate applies to things like meals-on-wheels, therapy and personal care, including hygiene. A 21% rate applies for other aspects of assistance. Anything provided by the State is outside the scope of VAT and this is where the different treatment applies. The provision of private services attract VAT whereas services provided by the State do not.

Mr. Finneran

Is State subvention excluded?

Mr. Cowen

Yes. Anything provided by the State is exempt from VAT. The problem with trying to incorporate provision of similar services by the private sector is that this obviously puts such services at a competitive disadvantage. There are areas where this is provided in other jurisdictions and it works well. We are trying to see whether, based on the quality service provided, there is a way around it. It is a question not of us refusing to do it but of us having to make it compliant with EU law. We are working on it to see whether there is a solution. We just do not have a solution. We are aware of the issue and we are examining it positively. If there is a solution we will find it but at present we do not have it.

Amendment put and declared lost.

Ms Burton

I move amendment No. 137a:

In page 173, before section 71, but in Part 2, to insert the following new section:

"71.—Where a vehicle not already registered in the State is brought into the State for a continuous period of more than 42 days and relief is claimed under section 135 of the Finance Act 1992, the vehicle shall be presented to the Revenue Commissioners within 7 days of the expiration of that period, and at such further or other times as may be directed by them, together with proof of compliance with the provisions of the Road Traffic Acts regarding road tax, insurance and driver licensing, and relief shall be allowed only if and to the extent that the Commissioners are satisfied that the use or proposed use of the vehicle is or would be in compliance with those provisions.".

I ask the Minister to address this issue. Vehicles not registered in the State can be brought into the State for up to a year, the consequences of which is that they may be exempt from Irish regulations and laws such as road tax, insurance and the national car test where they are over a certain age.

While I understand that section 135A of the Finance Act 1992, when Ireland was introducing a VRT regulation, provided this exemption because clearly in our case there are many cars from the North of Ireland and from the UK which are in and out of the Republic continuously, there is widespread concern that there are significant numbers of quite elderly vehicles being imported into Ireland by some of those coming to work here. While we all wish such people well in trying to make a living, in my constituency there has been unfortunately quite a number of fatal accidents because many workers from eastern Europe, certainly in Dublin West and Dublin North, are travelling very late at night and very early in the morning to work in horticulture. People do not think there is still a countryside in Dublin but north Dublin and what is left of undeveloped west Dublin are rural areas with narrow roads and heavy traffic, including many four-wheel drive vehicles, and there have been quite a number of fatalities.

In the context of the current spate of road deaths, it is inappropriate to disregard vehicles which come into the State from outside our system. Three or four weeks ago the Joint Committee on Finance and the Public Service was given a presentation from the Revenue, which indicated surprisingly that no note is taken of cars that come into Ireland, for instance, on the ferries. I had thought there would be a screening or photographic system but apparently that is not the case. The Revenue Commissioners have an ordinary rule to which everybody in Ireland is subject, which is that one who imports a vehicle must pay the VRT within 24 hours or risk seizure of the vehicle. The Revenue informed us that they carried out approximately 11,000 inspections last year. If my memory serves me correctly, in 1998 they carried out approximately 21,000 inspections to ensure that cars on the road were in compliance with our regulations.

It seems that if the vehicle can avoid the VRT system, it consequently is in a position to avoid road tax and Irish insurance obligations. I presume that the vehicles are insured, and possibly also are road tax compliant, in the countries of origin. If one has an accident with such a vehicle, the insurance taken out in a country perhaps 2,000 miles away may be extremely difficult to negotiate. While the Motor Insurance Bureau handles such claims, in my experience of dealing with a number of constituents who experienced this problem, this is a nightmare. The Motor Insurance Bureau is a facility of last resort with which one really must go through the hoops. It is extremely stressful, for instance, for an Irish driver with a no-claims bonus who is not at fault in an accident to find that he or she has limited recourse and the process through the Motor Insurance Bureau can be extremely difficult and stressful for such people.

The matter of most concern is that when somebody brings a vehicle into the State, if he or she is not subject to our regulations amid the unfortunate culture on Irish roads — our record of driving risks, including drink driving, is bad — where anything goes, the risk of being stopped by a garda after hours is limited. In my constituency one is extremely likely to be stopped on the dual-carriageway, where the speed limit is 40 miles per hour, going from Blanchardstown into the city at 4 o'clock on a Saturday afternoon by a garda with a little device. While I realise I sound like an irate male motorist, and I ask the committee to forgive me, it would be most unlikely that one would see the same garda at 4 o'clock in the morning when most of the dreadful accidents occur.

In addition to allowing many new cars into our poor road safety culture and not bringing the people to whom I refer into the system, such imported vehicles, if not Northern Ireland or UK vehicles, are also likely to be left-hand drive cars. If one has driven in France or elsewhere on the Continent, one will be aware that there is always a period of acclimatisation to driving on the other side of the road.

For all these reasons, this loophole needs to be addressed. My party has put forward this proposal because I do not want to interfere with the rights of people coming back and forth from the North or from the UK, which is a slightly different scenario. It is worth looking at any measure that can be taken to quickly integrate people coming here, who intend either to stay for as long as work is available and to live in Ireland, into our system of road regulations and to impart to them the changes of behaviour in the climate of safety to which we are trying to adjust — anything that can reduce, however fractionally, the carnage on the road is helpful. I would be interested to hear what the Minister feels might be done. Committee members were extremely shocked by the scenario laid out in the Revenue presentation to the committee a few weeks ago. The Minister, like all Members, will have received numerous complaints from constituents about cars, which are not always in good condition and which do not display tax, insurance or NCT discs while the rest of us are hounded correctly by the authorities if we do no have them. I seek a level playing pitch. I hope a review in this area might also help to support measures to change the climate on road safety issues.

Mr. Cowen

This area is governed by EU law. Vehicles registered outside the State by a minority of non-nationals who come to work in Ireland and bring cars with them are subject to roadworthiness criteria outlined in regulations under the Road Traffic Act 1961. The Minister for Transport will introduce a road safety Bill shortly in which he will address a number of issues such as the Garda impounding uninsured vehicles registered outside the State, which will involve an amendment to section 41(1)(b) of the Road Traffic Act 1994 and an amendment to section 69(6) of the Road Traffic Act 1961, as inserted by SI No. 463/2001 to allow gardaí to demand insurance certificates from drivers of vehicles from designated territories. This change will make it an offence for such drivers to refuse to produce a certificate of insurance. The Minister is seeking to define ways people can be confronted because if we were to rely solely on the EU legislation, we would not be able to so do. It is a question of incorporating into domestic law practical police initiatives that will enable us to deal with this problem as best we can.

The issue is best resolved in an EU context and we will bring it to the attention of the relevant EU committee. A Council directive of March 1983 provides for tax exemptions within the Community for means of transport temporarily imported into a member state from another. The purpose of the directive is to ensure the proper functioning of the internal market and our legislation must conform with EU legislation. The imposition of requirements on citizens of other member states that are not imposed on our own citizens almost certainly will be contrary to the freedom of movement provisions of the treaty. We are trying to find a way to address the problems raised consistent with the legislation. We will bring the operation of the directive and how it might be improved to the attention of an EU committee.

The Motor Insurance Bureau deals with accidents involving vehicles registered outside the State. A total of 881 cases were referred in 2005, of which one third related to vehicles registered in the UK, one third to vehicles registered in EU states prior to enlargement and the remaining third related to vehicles registered in the new EU member states. UK and pre-enlargement country registered vehicles are as much as a problem as vehicles from new accession states. The best way to proceed is to make changes in the new road safety Bill to enable the Garda to deal with cases as they arise and to raise the issue at the EU committee so that the EU directive is improved in a way that does not compromise free movement provisions in the treaty.

Ms Burton

Why is it not possible to reduce the one-year period? The Labour Party amendment proposes to reduce the period to 42 days with the vehicle having to be presented within seven days of that deadline. I do not understand why that is contrary to the EU directive. It would significantly enhance the power of Revenue and former customs staff. When they appeared before the committee, one got the feeling their capacity to act was very restricted because the one-year deadline for presenting a foreign registered vehicle in Ireland is too long and no entry data are kept of people coming into the country through our ports. It is extremely difficult to police this area. The Labour Party proposal to reduce the period does not affect the treaty.

Mr. Cowen

The directive states the period must be a minimum of six months where the vehicle owner's primary residence is outside the state. A temporary worker has a right under the directive to a period of longer than six months and, therefore, the proposal to reduce the period to 42 days is not in compliance with the directive. The principle of the freedom of movement of workers overrides national legislation. We must return to the relevant EU committee to discuss how this provision operates in practice and to ascertain whether there are ways and means to overcome it. The problem is we are governed by EU law regarding the rights of temporary workers and the free movement of labour. We do not have discretion under the directive.

Mr. P. McGrath

If I work for a UK company and I am deployed in Ireland for six months, can I use a UK registered car to conduct my business for that period?

Mr. Cowen

Yes.

Mr. P. McGrath

I came across a case where the excise office precluded a company from doing that. The free market results in significant in-built discrepancies. If an Irish company is competing with the UK company, for example, there is a dramatic difference between the costs they face for vehicles, insurance and so on.

Mr. Cowen

These are temporary workers. When trying to understand the rationale, the right of freedom of movement is the dominant dynamic in the legislation. Temporary workers are allowed to stay in Ireland for a period and national law cannot provide impediments such as variations in road traffic law to deny them free movement. This has been always the case in terms of trying to uphold the integrity of the internal market. EU jurisprudence will always give precedence to this. While the presumption is to facilitate free movement, it can cause some of the problems the Deputy raised. We must try to find practical ways of overcoming that issue while complying with the directive.

We have good reason to revisit the directive which was drawn up in 1983. We must take into account the problems that arise now as a result of what is happening.

Mr. P. McGrath

Is "temporary" meant to be six months or less?

Mr. Cowen

No, it can be longer.

Mr. P. McGrath

If I am selling toilet rolls throughout the country from a UK-registered company, can I bring the UK-registered vehicle into this country for a period if the company is operating temporarily within this State?

Mr. Cowen

Yes, if one is a temporary worker. If one's primary residence is in this country, one is not a temporary worker. The Deputy would have to move from Mullingar to Middlesex.

Mr. P. McGrath

That is some choice of phrase.

Mr. Cowen

I now know what the Deputy's retirement plans are.

I wish to inform the committee that I will be tabling minor technical amendments to sections 92 and 97 on Report Stage.

Chairman

As it is now 8 p.m., I am required to put the following question in accordance with an order of the Dáil of 16 February: "That the amendments set down by the Minister for Finance to Parts 2 and 3 and not disposed of are hereby made to the Bill and, in respect of each of the said sections undisposed of in the said part, other than section 93, that the section or, as appropriate, the section, as amended, is hereby agreed to."

Question put and agreed to.

Chairman

The committee will now adjourn its consideration of the Bill. I propose to resume consideration at 11 a.m. tomorrow and complete proceedings by 1.30 p.m. at the latest.

Progress reported; Committee to sit again.

The select committee adjourned at 8.05 p.m. until 11 a.m. on Thursday, 23 February 2006.