Skip to main content
Normal View

SELECT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate -
Wednesday, 24 Feb 2010

Finance Bill 2010: Committee Stage (Resumed).

I welcome the Minister for Finance, Deputy Brian Lenihan, and his officials. The select committee will now resume its consideration of the Finance Bill 2010 on section 39.

SECTION 39.

Question proposed: "That section 39 stand part of the Bill."

I wish to alert the select committee that I may propose an amendment to section 39 on Report Stage. I have not submitted an amendment but the issue at which I am looking concerns claims being made for tax relief under the scheme for capital allowances for intangible assets in respect of expenditure incurred on extinguishing liquor licences.

Is the Minister planning to give capital allowances or is he planning to extinguish them?

No. It is a question of whether there is a restriction that needs to be applied there. I have not finally decided on the issue, so I do not want to suggest that a definite restriction will be imposed.

Question put and agreed to.
Section 40 agreed to.
SECTION 41.

I move amendment No. 39:

In page 68, subsection (1), between lines 21 and 22, to insert the following:

"(e) by inserting the following after subsection (12):

"(13) The provisions of this section shall apply to a sole trader in the same manner as they apply to a company.".".

Last year the Minister extended the relief for start-up companies to a three year corporate exemption. I notice the Commission on Taxation has recommended that a similar scheme should be available to non-corporate businesses. In recent months, as one sees what is happening in the economy, there seems to be a very significant number of unemployed people with real skill bases in professions and technology who are looking at start-up as a genuine option. This is a trend which is certainly worth encouraging. This would be a relatively cheap concession to make. I am not sure that the Minister provided any great cost last year for the scheme. The establishment of a successful business results in savings as well.

This is particularly important because it allows people to retain profits for expansion at a time when credit is very difficult. It is a difficult time to establish a start-up and those looking to set up in the teeth of a recession are courageous people and some effort to support that should be put in place.

This amendment suggests that the provisions of the relief be extended to sole traders in the same way as to a company. It is encouraging that the Commission on Taxation, which obviously combined experts who would police the interests of the Revenue, recommended this. As the Minister knows, the commission was chaired by a former chairman of the Revenue Commissioners. We have pretty good authority underpinning this recommendation and I hope the Minister will look favourably on it.

The scheme was introduced in budget 2009 and in the Finance (No. 2) Act 2008 to provide relief from tax over a three year period for new companies which commenced trading in 2009. The scheme of relief comes under the scope of the EU Commission's de minimis aid regulation which imposes a ceiling for state aid under which assistance to a single recipient is deemed to have a negligible impact on trade and competition.

The intention behind the Deputy's amendment is that the exemption from tax provided by the section should be extended to sole traders. As Deputy Bruton pointed out, this has been recommended by the Commission on Taxation.

The tax relief, as originally introduced, applied to companies incorporated from 14 October 2008 that carried on a new trade in 2009. It has been extended to 2010. The exemption period is for three years from the commencement of the new trade. There is full relief on income and gains relating to the trade where the total corporation tax liability in any of the first three accounting periods does not exceed €40,000. There is marginal relief where the liability falls between €40,000 and €60,000 and where the liability is in excess of €60,000, there is no relief in that year.

It does not apply to sole traders and there are a number of reasons for that. First, it would increase the Exchequer cost, although I do not believe that is conclusive and I agree with Deputy Bruton in that regard. Second, the intention is that this incentive will encourage new entrepreneurial activities in the productive sectors of our economy and provide opportunities for increased employment in those sectors. Most employment in this economy is maintained and created by small and medium sized companies. In addition, it would be much more difficult — this is the real difficulty here — to control the application of the incentive in this respect if it was extended to sole traders where there would be much greater scope for blurring the lines between when a new trade started and who started it.

The incentive in its current form can be more effectively monitored as it only applies to companies registered after 14 October 2008 which commenced a new trade this year or last year. Sole traders who want to start a new trade can incorporate to avail of the relief as many already do for other good reasons. There are costs attaching to a corporation but the discipline of incorporation is a useful safeguard in the context of this relief.

I am not convinced by the Minister's argument. He accepts the Exchequer cost would be small and seemed to say he wanted it in productive sectors which I took to indicate that he considered that, in some way, one should delimit the sectors to which this would be applicable. I have no problem with that in principle if that is a way to achieve his acceptance of the idea. Let us start with certain sectors which are export-orientated or sectors which would pass the criteria being set by agencies for start-ups.

The enterprise boards, for example, have a fairly well-trodden approach. They distinguish between new companies which do not compete with existing ones. Traditionally, they do not allow a person to set up on a street beside someone else. There would be scope to avoid what the Minister describes as blurred lines in terms of the sectors. He also seemed to infer that there would be blurring of eligibility. I presume what he is saying is that some people already in business would pretend they were new start-ups and that would be difficult to control.

Obviously, I do not have the resources to assess this but I am somewhat persuaded by the fact that a commission headed up by a former chairman of the Revenue Commissioners has recommended it. The first thing a former chairman of the Revenue Commissioners would think about would be the sort of blurred lines through which people happily gallop. If the Minister's officials have not had a chance to sit down with the commissioners to tease out how they see it being policed to prevent abuses, I will be more than happy to withdraw the amendment until Report Stage so that the capacity of the system to avoid abuses could be considered.

I accept incorporation has merits but I do not believe it is the case for everyone. I imagine unincorporated businesses are responsible for a very significant proportion of employment creation in the SME sector as well as those which are incorporated. If the Minister is genuinely trying to promote start-ups, which currently is a real objective of public policy, I do not believe we should be too insistent on the corporate discipline.

It is as the Minister said. He is doing it with a sunset clause on it and is not setting this up as an indefinite feature of the tax code. Perhaps the Minister could deal with some of the anxieties he expressed in regard to the potential for abuse and still retain what is the nugget of a good idea which has been put forward by the commission.

Will the Minister or his officials give us some information on the take-up of this scheme now or later? A very significant body of opinion believes that although we have a number of campus companies, for example, which are promoting the development of intellectual and scientific property, knowledge and so on, we are very far behind countries like Israel, places like Silicon Valley and so on. In other countries, companies and corporate structures are the basis of research and development.

Recently, I attended a presentation by Dr. Craig Barrett, the former chairman of Intel, and he was very critical of our inability to develop in this area. He mentioned in an aside that he thought this initiative was good but I got the impression from the people at the presentation that the take-up had been very low. The Minister might not have the information to hand but could he identify the kinds of companies which have taken this up? Are they college campus companies, IT companies, games companies or pharmaceutical companies? It would be very helpful if we could get an idea of the number of applications and of the types of things the companies are doing.

There was an issue two years ago when this was going through, that long-standing companies such as Intel were, to some degree, restricted because this identified new research and development. Will the Minister comment on how this initiative is going?

Start-ups and research will be critical to our economic recovery. Finland is very popular with the left and the right in terms of recovery politics and recovery economics. It is probably the one thing on which the Minister and I could agree. It is fashionable with the left and very much so with the right. All sorts of people are traipsing to Finland to see what it did during its recession.

I was thinking of the banks. I think the Swedes did a better job than the Finns in that respect. However, we might have——

They took decisive action, did not have a zombie decade and did not do what we did. We are a year and a half in and we are worse rather than better.

Let us not start that.

We are far worse. That is not the point I wish to make.

The point I wish to make is that, as did Israel, they took very strong initiatives in regard to research based start-ups. Will the Minister give us an indication of the reception for this initiative? How many companies have taken advantage of it? In what types of areas are they? Are they in IT, games, pharmaceuticals, and so on?

I have much sympathy with Deputy Bruton's amendment because the majority of people putting their toe in the water and starting businesses in these very difficult economic times would probably be required, of necessity, to start off small and perhaps as sole traders or certainly as unincorporated entities. That was my entry into business and it was three years before we were in a position to incorporate or before we felt it would be an advantage to incorporate. I have much sympathy with that sector. Notwithstanding that, Deputy Bruton referred to blurred lines and Deputy Burton spoke yesterday afternoon about how people in the financial services sector are very quick to use those blurred lines. We know everybody will if they can get away with it, but I suspect that it is a small number who would try that on and that the Revenue Commissioners could clamp down on them fairly quickly. Given where the economy is now, it is important to facilitate those sole traders and smaller entities as best we can.

I support this worthwhile amendment. Most people who set up in business do so as sole traders. They do this because if they go down the route of incorporation, it places onerous responsibilities on them as individuals. They become company directors and have to file with the Companies Registration Office and the costs of compliance are far higher than being a sole trader. In many cases, business people need to get a break when they are acting as sole traders. My understanding is that when somebody sets up as a sole trader and is in business for two or three years before deciding to incorporate, this legislation would not apply. Businesses need the break when they are set up in the first instance. It is about the principle of encouraging people to set up as entrepreneurs. If that is by way of being a sole trader or a limited company, then the same principles should apply.

This measure only appears to apply to manufacturing and trading companies. Therefore, it will not apply to professionals such as architects who are coming out of the construction sector and who wish to establish a company. The Revenue Commissioners will not apply the measure to a professional services company because they might be worried that profits will effectively be retained within the company. Under those company rules, they must distribute their after-tax income within an 18-month period, or else face a 20% surcharge. Therefore, I do not think it stacks up.

The principle of the section is to encourage people to become entrepreneurs, so the same principle should apply to a sole trader as it does to a limited company. There is also a strong argument that it should apply to professional services companies as well as manufacturing and trading companies, in order to encourage people to become self-employed entrepreneurs.

I do not want to repeat everything Deputy O'Donnell said. We are living in very difficult times and are suffering mass unemployment. There is a real danger that if we make things too difficult for the ordinary individual, we will end up with a growing black economy. People starting up small businesses do not have large resources available to them. They operate as sole traders, which means they are on their own and they do not have the wherewithal to visit an accountant or a solicitor and examine the idea of incorporation and so on. We have to make life easy to encourage people to start their own business.

If somebody is looking for a carpenter or a plumber to do maintenance in the home, I know from speaking to people in my constituency that it is extremely difficult to find one. However, we are told that there is mass unemployment. If people are encouraged to set up their own little business as sole traders and life is made simple for them for the first two years until they get going, we would improve matters considerably. The principle is to make life easy for people to get legitimately into the system and to give them encouragement for the first couple of years, as opposed to imposing paperwork on them as if they were running a multinational corporation.

I know the Minister is in favour of that sort of thing, and while he is here today, I ask him to think about this issue and come forward with something on Report Stage.

Does the Minister have statistics from the Revenue Commissioners on the number of new start-up companies set up last year? If this relief was to be given, what would the cost be to the Exchequer?

I will start by answering Deputy Bruton. Mr. Daly did a very good job chairing the tax commission, but the opinions of the commission are its collective opinions. They are not necessarily his own personal opinions. He signed the report, as did the other members of the commission. Members of this committee are familiar with EU procedures, and as I understand, the commission proceeded by consensus. I am not sure that Deputy Bruton can claim that because the chairman of the commission happened to be a former chairman of the Revenue Commissioners, this necessarily means that all of the Revenue Commissioners' concerns with this particular amendment have been met, or that I cannot voice the concerns expressed by my own officials and the Revenue Commissioners about the matter.

There is a fundamental distinction between a sole trader and an incorporated business on the incidence of tax, because the company is under a 12.5% rate, while the individual can vary from 20% to 41%. There is a greater Exchequer cost. References were made in yesterday's discussions to dead weight. Tax relief for activity that is likely to happen in any event is dead weight. The requirement that there should be a company in existence for the operation of any tax relief is a valuable safeguard. It allows precision about who is entitled to the benefit from the particular tax relief.

Deputy Burton asked what evidence we have on how many have taken up this relief. There is no requirement to notify the Revenue Commissioners in advance of an intention to avail of the relief, hence we will only be able to provide an assessment of the cost of this relief to date when we receive returns later this year and in 2011. We do not have the data at this stage, so we are not in a position to deal with it. Returns will come in later this year.

There is also a practical problem to Deputy Bruton's suggestion. If we are dealing with a sole trader, it is difficult to ensure it is not a continuing trade. Everybody agrees that the relief is for new entrepreneurial activities. It is far clearer to spell that out in the context of a new company. Deputy O'Donnell reiterated the concerns and made the fair point that in the current climate, people begin as sole traders rather than as incorporators, and this is an issue. On the other hand, we need to encourage compliance and we cannot have a culture developing where a large number of taxpayers believe that they are free of tax obligations. Sole traders are obliged to make tax returns and that is the position.

The Minister makes the argument that it is difficult to figure out when a business is set up as a sole trader, rather than as a limited company, but this does not stand up to scrutiny. People who set up as sole traders are obliged to register with the Revenue Commissioners. I have been in practice for many years, and my experience is that the great majority of people who set up as sole traders do not make a significant income in their first three years. However, if they do and they are taxed on it, a small amount of tax can be a huge burden on them in terms of their survival. The key point is that, realistically, five years is required for any business to be sustainable. I base my argument on my experience over many years. One needs to give people a break in the early years. The Minister is missing the point. If someone sets up as a sole trader a small amount of income tax could put him or her out of business in terms of cashflow.

The Revenue Commissioners are highly efficient in terms of compliance, especially where sole traders are concerned at the smaller end of the scale. If the Minister wants to encourage an entrepreneurial spirit he has to make it easy for people to be compliant. This is simple; if an exception is made for sole traders the cost to the State would probably be at the lower rate of tax, 20%. One is talking about 12.5% in limited companies. It would be worthwhile to look at businesses operating as sole traders over their first three years in terms of commencement to trade for perhaps the past three years and to see how much tax they have paid. If we compare that with newer companies that have started, I expect that the amount of tax they pay as sole traders is relatively low. We have to get an entrepreneurial culture going.

The Minister did not answer the question about professional and service companies. Will he indicate why this section does not appear to apply to them? Abstract talk is pointless. This is about people becoming entrepreneurs, setting up in business and becoming export driven. We have fantastic people out there but we must put the mechanisms in place to encourage people to become self-employed and to become entrepreneurs. A total of 90% of exports come from the SME sector. We need to encourage them with an integrated approach. We have to be bold.

Has the Minister carried out an exercise to ascertain how much tax sole traders pay in the first three years of business? It is not significant and the bulk of it will be at the lower rate. The current situation is inconsistent. I would have encouraged any client starting out in business to set up as a sole trader initially to see how he or she got on and to reduce the cost burden. The Minister is telling sole traders that he will give them a tax holiday but that he wants them to set up as limited companies. They could do that, make little or no profit in the first three years and be stuck in a company from which they will have to extract themselves. People should only start a limited company when they are making money and the business is sustainable. That is the practical reality and the legislation should reflect it.

In case anyone is under any misapprehension, I do not think anyone on this side of the House is advocating a situation where people would not realise their tax responsibilities. What we are talking about is purely psychological. I have practical experience of this area. More than 30 years ago I left a well-paid, pensionable position and started a small business of my own. If one has a small family, there is significant pressure for the first few years to overcome the difficulties and to meet one's bills. Suddenly one realises that no one is sending one a cheque every month or that one does not have automatic life cover and all the other things that go with that. One has to lease a car and pay all one's bills.

In framing laws, if we want to encourage people to start their own business, we have to understand the psychological difficulties they encounter. All the theory about section X, Y and Z does not apply to small businesses. If one does not do it, one will go out of business and be a liability on the State. We better make up our minds about what kind of society we want. We are not asking anyone to forgo tax; we are seeking to incentivise people to take the big step, to encourage them to set up a business and perhaps employ up to three people, for them to get moving instead of being a liability on the State.

It annoys me at times when people say that because one advocates a particular type of approach one is in some way encouraging people not to pay tax. If people come off the dole to start a business or make space for someone else to take up their job, it is all about job creation. FÁS spends billions of euro training people but the entrepreneur gets nothing from anyone. That is what we are talking about. We spend fortunes on various courses and types of training but if one leaves one's place of employment to start a small business, one needs encouragement and for the State to clap one on the back and say, "Well done old son, keep going." The first thing we should do is send people a letter from the Department of Finance congratulating them on registering a new business and saying that the Department looks forward to the day when the business will be in a position to pay taxes.

We are talking about individuals who are starting businesses from this year on. The provision is not retrospective. I agree with the contribution from this side of the room. The vast majority of those businesses will earn very little profit, certainly in the first two to three years. I understand the Minister's reservations about policing it and why he would have some concern about abuse, but the core group of honest people who would be affected, who will take their chances in what I call garage industries and try to put their ideas into practice, need a bit of a break in the formative years. I hope the Minister will reconsider.

This is a last throw of the dice. If the Minister is worried about the scale of it, I would be content for him to cap the concession that he is giving in corporate tax, 12.5% to €60,000, which is €7,500. That would overcome his concern that this could be at a marginal rate and that the expense would get out of control. If he wants to avoid what one might call churning of the self-employed with phoenix companies he could put it through the county enterprise board network, which has a tried and tested system for screening such start-ups. We could adapt the scheme and put restrictions in place for year one so that next year if it was seen to be abused at least it would only be abused in a very narrow range and then if it is successful we could see whether it should be extended in 2011.

In reply to Deputy O'Donnell, I should have dealt with professional companies or practices. The purpose of the relief is to encourage new entrepreneurial activities in the trading sectors of the economy and provide for increased employment in those sectors. We all agree on that.

Most employment in the economy is created and maintained by small and medium-sized companies. The scheme does not apply to a new company which is set up to undertake a business previously carried on by another person. Thus, for example, a partnership carrying on professional services that decides to conduct its business through a newly-formed company would not qualify, as it is not a new business as such and it would not be in accordance with the aims of the scheme to include such a business. Likewise, it is not in accordance with the aims of the scheme to include new business practices set up by newly-qualified professionals through a company structure. There would be significant dead weight costs if the scheme were extended in that way and it would not have the desired incremental effect of stimulating new enterprises. Deputy O'Donnell was correct to point out that I had not dealt with his query in that regard.

We then come back to the merits of the measure itself. The one great difficulty is policing it. Once one lets in sole traders, one is letting in a vast category of persons. There are generous tax reliefs for former employees who set up new incorporated businesses and invest their savings in those businesses in the seed capital scheme. That involves repayment of PAYE tax previously paid in proportion to savings invested in the new company. For example, an investment of €100,000 a year in a new business can be set against previous PAYE income to obtain repayment of PAYE that has been paid. The overall cap on relief on an investment by a former employee is €600,000 and it is not fair to say the State is not providing incentives in this area. The State is providing generous incentives in this area.

Deputy Bruton proposed the introduction of a capped relief for sole traders as a class but my difficulty is this is a large category and the policing of this will inevitably be difficult. Deputy O'Donnell referred to compliance costs for sole traders but these are in line with the law of the land. There are thresholds below which persons do not pay VAT but the difficulty is this could create a culture where people do not believe they should pay VAT in any event. I have a reservation about going down the road of suggesting that a sole trader should in some way be exempt. If we are prepared to provide this tax exemption, it is not much to ask people to incorporate themselves. If the Deputy is a serious entrepreneur setting up a serious business, we are prepared to let him take a tax holiday if he incorporates the business. That is not an unreasonable position for a state to take.

This is a fundamental issue. There is little incentive for someone to set up as a self-employed sole trader in the morning. Many people who will set up will be coming off social welfare. There is an opportunity for the Minister to encourage new businesses. This does not affect the existing pool of sole traders. I would like people who are sitting at home with no work to be encouraged to set up as self-employed. There is no great encouragement for them. Has the Department examined how much income tax has been paid as a group by those who set up in 2006 as sole traders over their first three years? It is probably relatively low.

The Deputy is repeating himself.

The Minister has not addressed this issue.

The tax is on profits and clearly if the profits are low, there will not be tax in any event.

The Minister is missing the point.

The most important thing is to have them registered.

If they are registered and up and running, they are making a contribution to the State. They are no longer claiming social welfare and there is no cost to the State, although there may be a short-term cost to get people up and running. This will generate activity in the economy and credit will flow. This reflects the basic laws of commerce.

The Government needs to think about how the economy operates on the ground when someone sets up as a sole trader. The Minister is looking at something theoretical where one sets up a limited company which is easy to track from a Revenue and legal viewpoint. He needs to encourage people to set up as self-employed in order that they can be removed from the live register and can make a contribution. The Minister's measure is not holistic enough to provide that. He is correct that the majority of people set up as sole traders but they should be encouraged to do that. We need to get an entrepreneurial spirit going. I do not see it in this measure.

Nobody is discouraging anyone from setting up as a sole trader. The law of the land is if one makes profits, one must make a return on them to the Revenue. That applies to every sole trader and it is not a discouragement.

It is about encouragement. What has the Minister, in principle, against people paying relatively——

Is Deputy Bruton pressing the amendment?

If the Minister was providing tax shelters or tax free schemes, we would normally have a go at him for such endeavours but this is the opposite because we are trying to recognise a category and this is about stimulating enterprise and job creation at the coalface such as in garages and so on. We all share the Minister's concern about abuse of the system but Deputy Bruton's suggestion to run this for 12 months before reviewing it would address that. The Minister is running with his advice and not his head but he should run with his head and his own entrepreneurial spirit given the situation we are in economically.

Is Deputy Bruton pressing the amendment?

Yes. Perhaps on Report Stage we will tighten the amendment to accommodate the Minister's concerns.

Amendment put and declared lost.
Section 41 agreed to.
SECTION 42.

Amendment No. 41 is related to amendment No. 40 and both may be discussed together.

I move amendment No. 40:

In page 68, subsection (1), lines 24 and 25, to delete all words from and including "Schedule" in line 24 down to and including "9DA in line 25 and substitute "Schedule 24—".

This is a technical amendment.

The section provides for a reduction in the rate applied to royalty receipts from 25% to 12.5%. What is the cost to the Exchequer of this measure?

The Forfás estimate is that the cost of extending unilateral relief to all trading companies will be approximately €1.5 million. The estimate is based on a number of assumptions, including no change in behaviour and that the current levels of royalty receipts will be maintained.

Amendment agreed to.

I move amendment No. 41:

In page 68, subsection (1), between lines 25 and 26, to insert the following:

"(a) in paragraph 4(5)(a) by substituting “paragraphs 9D and 9DB” for “paragraph 9D”,

(b) in paragraph 4(5)(b)—

(i) in subclause (iii) by deleting "and", and

(ii) in subclause (iv) by inserting ", and" after "that paragraph)",

(c) in paragraph 4(5)(b) by inserting the following after subclause (iv):

"(v) the amount of income of a company treated for the purposes of paragraph 9DB as referable to an amount of relevant royalties (within the meaning of that paragraph),", and

(d) by inserting the following after paragraph 9DA:”.

Amendment agreed to.
Section 42, as amended, agreed to.
Section 43 agreed to.
SECTION 44.

I move amendment No. 42:

In page 70, line 28, to delete "Where" and substitute "Notwithstanding subsection (9)(a), where”.

This is a technical drafting amendment.

Has the Minister a table of estimated costs associated with the different changes provided for in this group of sections?

I can speak to each section.

No, there is no need.

It is not possible to quantify the exact cost of the measure in this section. It is not anticipated it will be significant. If the Deputy would like a consolidated table of the costs, I can arrange for that to be forwarded to him.

Amendment agreed to.
Section 44, as amended, agreed to.
SECTION 45.

Amendments Nos. 44 to 46, inclusive, are related to amendment No. 43 and all will be discussed together.

I move amendment No. 43:

In page 71, to delete lines 23 to 52 and in page 72, to delete line 1 and substitute the following:

" "129A.—(1) (a) In this section ’profits’, in relation to a company for a period of account, means the amount of the profits after taxation as shown in the profit and loss account or income statement for that period as laid before the annual general meeting of the company.

(b) For the purposes of this section—

(i) any question whether a company is connected with another company shall be determined in accordance with section 10 (as it applies for the purposes of the Tax Acts) and subparagraph (ii),

(ii) where a company is party to a scheme or arrangement, the main purpose, or one of the main purposes, of which is the avoidance of the whole or part of a distribution being treated as a taxable distribution, then the company shall be treated as connected with any other company which is a party to that scheme or arrangement.

(c) For the purposes of subsection (5) ‘control’ shall be construed in accordance with subsections (2) to (6) of section 432 as if in subsection (6) of that section for ‘5 or fewer participators’ there were substituted ‘persons resident in the State’.

(2) Where—

(a) a company receives a distribution from another company (in this section referred to as the ‘paying company’) resident in the State with which it is connected, and

(b) the paying company became resident in the State in the period—

(i) beginning on the date—

(I) 10 years before the date the distribution was made, or

(II) of passing of the Finance Act 2010, whichever is the later, and

(ii) ending on the date the distribution is made, then, subject to subsection (5), section 129 shall not apply to such amount of the distribution as is paid out of profits arising before the paying company became resident in the State and that amount shall be treated as income chargeable to tax under Case IV of Schedule D.

(3) (a) For the purposes of this section, where the amount of a distribution made by the paying company on or after the date (or the last such date if there was more than one date) it became resident in the State exceeds the distributable profits of the company for the period (in this subsection referred to as the ‘specified period’)—

(i) beginning on the date (or the last such date if there was more than one date) the company became resident in the State, and

(ii) ending on the last day of the accounting period of the company immediately preceding the accounting period in which the distribution is made, then the excess shall be treated as paid out of profits arising before the company became resident in the State.

(b) For the purposes of this subsection—

(i) the distributable profits of the paying company for a specified period shall, subject to subparagraph (ii), be taken to be the aggregate of the profits of the periods of account (in this subsection referred to as 'corresponding periods') which fall wholly or partly within the specified period, as reduced by the aggregate of so much of the amounts of any distributions made in the specified period as were amounts to which section 129 applied,

(ii) where a corresponding period falls partly within a specified period, the amount to be included in the distributable profits for the specified period in respect of the profits of that corresponding period shall be the profits of that corresponding period reduced by applying the fraction—

A—B

where—

A is the length of the period common to the specified period and the corresponding period, and

B is the length of the corresponding period.".

The section is an anti-avoidance provision designed to deny any existing tax exemption for distribution of profits between Irish resident connected companies where the profits of the paying company were earned while it was resident outside the State. The provision, as drafted, has a number of unintended impacts which these amendments will rectify. There is an unintended impact on companies that have recently or intend to redomicile in Ireland to take advantage of the holding company regime the State has been developing since 2004. These redomiciliations take place and can involve such companies changing tax residence to Ireland and these distributions will be caught by the section, as drafted.

In addition section 129(A) provides that distributions in excess of distributable profits arising while the company is resident in the State shall be treated as distributions paid out of profits arising while the company was not resident in the State. Currently these distributable profits are defined by reference to the measure of those profits for corporation tax purposes rather than for accounting purposes. However, a company may pay a dividend out of domestic source profits to its Irish parent but may not have profits for corporation tax purposes. For example, an aircraft leasing company may have no profits for tax purposes due to capital allowance write-downs on its aircraft but it may not have distributable accounting profits because of depreciation policies. Section 129A will be amended to provide that dividends paid by companies, which were not controlled by Irish residence before becoming resident in the State, will not come within the scope of the new section 129A. To ensure companies that may not have redomiciled to Ireland or are in the process of doing so are not affected, the provisions will only apply where the paying company became tax resident here following the enactment of the legislation. In addition, the amendments provide that distributable profits for the purposes of the section will now be defined by reference to the accounting profits of the company rather than the profits for corporation tax purposes as heretofore.

Amendment agreed to

I move amendment No. 44:

In page 72, line 2, to delete "subsection (1)" and substitute "subsection (2)".

Amendment agreed to.

I move amendment No. 45:

In page 72, to delete lines 17 to 33 and substitute the following:

"(5) Subsection (2) shall not apply where the paying company was at all times before the date it became resident in the State (or the last such date where there was more than one date) not controlled by persons resident in the State.".".

Amendment agreed to.

I move amendment No. 46:

In page 72, lines 34 and 35, to delete subsection (2) and substitute the following:

"(2) This section shall apply to distributions made on or after the passing of this Act.".

Amendment agreed to.
Section 45, as amended, agreed to.
Sections 46 to 48, inclusive, agreed to.
SECTION 49.

Amendments Nos. 47 and 48 are related and they will be discussed together.

I move amendment No. 47:

In page 79, line 49, after "in" where it firstly occurs to insert "an accounting period arising from".

The section deals with the computation of relief for capital expenditure and losses in a foreign currency. These are technical drafting amendments, which are designed to provide greater clarity.

Amendment agreed to.

I move amendment No. 48:

In page 80, line 25, after "period," to insert the following:

"in respect of a loss arising from a leasing activity in such period,".

Amendment agreed to.
Question proposed: "That section 49, as amended, stand part of the Bill".

With regard to these technical amendments, there is information in my speaking notes that would be of value of tax practitioners, which should be put on the record. I do not know whether the committee has a procedure to allow that to happen.

If we request the notes and the Minister is kind enough to yield to that request, they can become available without having to be read into the record. That has been the practice in the past and that is what his officials did last night regarding the charity note, although I am still waiting on the trust note.

It would be of value if there was some way of incorporating it into the record. I can appreciate students of corporation tax looking in on this debate will not yield much profit from the spoken record. It is important that these matters are put on the record because these are substantive changes, albeit they are technical.

We will get the nuts and bolts of that checked out by the clerk to the committee.

Question put and agreed to.
SECTION 50.

Amendments Nos. 51 and 60 are related to amendment No. 49 and all will be discussed together.

I move amendment No. 49:

In page 80, subsection (1), after line 50, to insert the following

"(b) in subsection (1)(a) in the definition of “group expenditure on research and development” by inserting the following after subparagraphs (i) and (ii):

"(iii) expenditure (in this section referred to as ‘relevant expenditure') on research and development incurred by a company which is a member of a group in developing intellectual property within the meaning of section 291A that is transferred to a company incorporated in the State that complies with section 495 shall not be included in group expenditure on Research and Development in relation to that group. The relevant expenditure will be treated as a separate Research and Development activity distinct from all other R&D activities carried on by the group for the purposes of this section.",".

This issue was brought to my attention by my colleague, Senator Paschal Donohoe. His point is if we want to encourage commercialisation of innovation, we need to encourage spin-off companies that engage in the commercial exploitation of research. That will lead to jobs and positive benefits. People looking at our expenditure on research and development, particularly in the State sector, are critical of the lack of spin off commercial activity. The proposal is to use the research and development tax credit to provide a financial incentive for Irish-based firms to create spin off companies, which would commercialise technologies that were originally developed within these firms for their own use, and the spending on intellectual property that is transferred to the spin-off company would be made allowable for a research and development credit claim. It is a way of encouraging a particular weakness in the Irish system, which is moving from research and development spend to commercialising projects and get companies into job creating mode. I am sure Senator Donohoe will pursue this in the Seanad but it seems to be a valuable way to encourage a sector in which we are weak.

The purpose of the amendments is to provide an additional incentive to companies engaged in research and development by providing a capital gains tax exemption on the disposal of certain intellectual property arising from research and development. Legislation provides for a tax credit of 25% of incremental expenditure on certain research and development activities over such expenditure in the base year of 2003. That incentive is to encourage companies to increase their research and development activities by reducing the costs of such activities in so far as it is possible over the time those costs are being incurred.

Deputy Bruton proposes that when a company has incurred expenditure on research and development in developing certain intellectual property, it may exclude such expenditure in calculating the tax credit for the relevant period and when it disposes of the intellectual property at arm's length, the gain arising on the disposal would not be chargeable to capital gains tax. In such circumstances the company that developed the intellectual property could either claim an exemption from capital gains tax on any gain arising on the disposal or, where it did not result in a commercially valuable intellectual property, submit a retrospective claim for the research and development tax credit in respect of the expenditure incurred.

I appreciate the motivation behind the amendments. However, concerns and difficulties arise and, taken in the context of the existing range of research and development incentives, I am not convinced they will provide an effective incentive to increase research and development activity or to represent the best use of resources because instead of incentivising further research and development, the effect of the amendments is to reward commercialisation after the research and development has been undertaken. The commercialisation of the fruits of the activities in such circumstances should be its own reward and a further tax break at that point is unlikely to stimulate fresh research and development. Given the risk and costs incurred involved, this research and development tax relief is, in general, better focused on encouraging further investment in research and development leading to the development of intangible and other assets that can be commercially exploited.

As Deputies are aware the tax relief was extended last year. Further enhancements to that scheme are proposed in the Bill. Generally companies that invest in research and development and develop intellectual property as a result are likely to want to retain the item and commercially exploit it within the company or group rather than sell it on to a third party. The proposed amendment seems to be aimed particularly at companies undertaking research and development which are not in a position to commercially exploit their research and development. From that perspective it may have some merit to it. However, it may encourage companies to dispose of intellectual property arising from their research activities and make a once-off windfall gain rather than take the commercial risk of developing and exploiting the process themselves.

I am not inclined to accept the amendments at this stage, but they are of interest.

I am not expert in this field. In response to what the Minister has said, the amendment is couched in such a way that the spin-off companies will be Irish-based. While the originator might gain something from the disposal and the Minister is saying we do not want to encourage disposal of a commercially viable idea, the idea is getting a spin-off company to establish that. Helping that spin-off to be viable is a worthy objective where the existing company, either because its core business is elsewhere or for other reasons, is not in a position to commercialise it. I am not entirely convinced by the Minister's argument that the disposal of a commercially viable innovation is something to be discouraged. If the disposal leads to successful commercialisation that is a win-win for Ireland Inc. It seems to be an area in which we are particularly lacking. Craig Barrett from Intel, who was here, indicated that when Intel considers how countries are doing this is one item it focuses on. It looks at whether the activity of research and development, which the Government is generously supporting, is delivering the goods.

The Minister is saying this would be an additional reward for commercialisation after the research and development are done. Of course commercialisation itself can always be presented as being the reward. On that argument no incentive or breaks should be needed. The reality is that we have recognised this is a risky territory. It is hard to get venture capital and it is an area in which the capital markets are poorly developed. There is what the economists call a market failure which is why the Minister for Finance and his predecessors have come into this space and said there is a social benefit over and above what the market might recognise in this sort of commercialisation of research and development. While I am glad the Minister recognises the thinking behind it, I am not entirely convinced that his briefing note has honestly faced up to the constraints on commercialisation. Clearly there are real constraints. Something is going wrong here in Ireland. The Government is spending a large amount of money and we are not getting the bang out of it.

I shall certainly consult further and if there is a need to modify this amendment in some way I would be willing to do that on Report Stage. I am not convinced by the Minister's argument, which could equally be advanced against many of the existing breaks we give in the research and development space. However, we give those because this is risky territory where things can go wrong. If for every three, one is successful there is a social interest in getting that. As Ireland Inc. tries to be competitive in a really tough environment, if we aspire to high living standards it will need to be in this territory. We need to be able to exploit the educational advantage we have created for ourselves. This area deserves more thought. I know the departmental officials have it on the agenda every year. This amendment is worthy of more thought before it is consigned to oblivion as I fear is the direction in which it is heading.

It is not the intention to consign it to oblivion. It is the intention to consign it to oblivion for this year, but it is certainly not the intention to consign it to oblivion. I do not mechanically read out the official notes — I edit them.

I am sure the Minister does.

The arguments with which I agree, I recite to the Deputy and the arguments with which I do not agree I do not recite to him. That is generally my practice and if I have some arguments of my own I advance them.

First, this is a matter we need to examine. Perhaps I did not make that clear in my reply; it is an issue worthy of examination. It would be a fundamental change in the current regime because it would extend the scope of tax relief to the disposal of the asset and hence to the capital gains tax regime as well as to simple corporation tax, which is a very big change in research and development. Introducing a relief of that kind has knock-on implications for the tax code. For that reason, while I am willing to consider the amendment in the medium term, I am not prepared to accept the amendment this year because I cannot stand over its consequences as they would work themselves out in the tax code, were I to accept it this year.

When the Minister is considering research and development expenditure and Deputy Bruton's amendments, could it be considered in the context of job creation potential? The Minister is giving a 25% tax credit for incremental expenditure by a company. Research and development activity could lead to job creation potential in Ireland. The work would end up in an Irish incorporated company that could be considered in the context of job creation potential. The Minister may be missing an opportunity to create jobs and a sustainable future. We need to move to an environment where we are doing the work in Ireland itself. Within group companies depending on where their staff are located ultimately it could create jobs in Ireland, which needs to be considered.

Perhaps the Minister might consider certain areas of activity in which to commence this exercise. In energy production there is great need for research and development, including in the areas of wave power, geothermal, etc. We need to establish a centre of excellence whereby the research takes place and the ongoing activity remains in the country afterwards. The Minister should confine it to certain areas of activity to promote research and development and retain the ongoing benefits in terms of manufacturing and job creation in this country. The Oireachtas committee that I chair is inundated with people coming forward with ideas. However, they do not have the wherewithal to follow through afterwards to a manufacturing or further development stage. It is a missed opportunity and even at this stage if he were to confine it to certain areas of activity it might be the beginning of something very substantial in the future.

Unless the Minister is persuaded by my colleagues, I would propose withdrawing the amendment with a view to resubmitting it on Report Stage. On our side we will work to see if there is any way in which we could persuade the Minister that the medium term could be somewhat sooner than he envisages.

The research and development tax credits have been enhanced in every Finance Bill I have introduced. I am receptive to this but we must be careful to get it right in terms of how it fits into the symmetry of the tax code. That is the core issue.

On qualifying companies, why is there a restriction on a group company? Some companies must be based in locations less than 20 km apart to qualify for this relief.

That is being dealt with in the next amendment that I have tabled.

Amendment, by leave, withdrawn.

Amendments Nos. 52 to 55, inclusive, are related to amendment No. 50 and they will be taken together by agreement.

I move amendment No. 50:

In page 81, to delete lines 4 to 7, and substitute the following:

" " ‘research and development centre' means a fixed base or bases, established in buildings or structures, which are used for the purpose of the carrying on by a company of research and development activities;",".

These amendments relate to section 50 of the Bill, which deals with tax credits for expenditure on research and development. They are technical amendments and include an amendment to the definition of a research and development centre to provide that two or more fixed bases established in buildings or structures may be treated as one research and development centre.

Amendment No. 52 is a technical drafting amendment, amendment No. 53 is a technical amendment related to the claw-back provided for in the Bill, amendment No. 54 also provides for claw-backs while amendment No. 55 relates to commencement provisions. It deals with the issue raised by Deputy Flanagan a moment ago.

Will the Minister advise us of the context in which this arose? The way this is drafted, it sounds as if it applies to a specific instance of a specific company. Is that the case? There is a suggestion that a multinational that had a number of bases on a campus closed one or more of those bases while wishing to still qualify for the research and development credit without the claw-backs. The way the section is written, it is tailor-made for a specific instance. As we are debating general investment policy, it would be interesting to know if this was drawn up specifically for one company or a small group of companies.

What is the Minister's intention regarding research and development tax credits? He signalled that the consideration of a research and development tax credit against social insurance was a possible measure he was reasonably positively disposed to.

No, I have never indicated I am well disposed to that proposal.

I see. That was one issue.

The other issue I note comes from the Commission on Taxation's proposal on research and development credit.

We are not discussing this on the section just yet, we are still discussing the amendments.

Deputy Burton's query related to the amendment and the changes impacting on companies with separate research and development facilities in different locations. The difficulties of a particular company were brought to the attention of the Department. The changes in the Bill, however, are included to deal generally with circumstances where a company group has two or more research and development facilities and must take a decision to irrevocably close one of them. In the absence of a change, the real danger in these positions is that all of the research and development facilities of such companies could be lost to Ireland, so the changes that are being made are in recognition of the changing economic reality facing many companies. The officials of my Department met representatives of various companies to discuss issues relating to the tax system that affect them, including the research and development tax credit scheme.

I can guess the company referred to.

A freedom of information request has been submitted by Deputy Bruton on this matter.

Deputy Bruton should be sure he knows what is being sent out in his name.

I am told that precludes me from naming names. I do not know if that is correct parliamentary practice.

I presume it is a large multinational that employs a lot of people not too far from here. There is, however, a wider issue. In the pharmaceutical sector, there is a huge number of takeovers under way and many of the companies involved employ between 3,000 and 5,000 people, with many of them in our constituency. There is apprehension about the fallout when mergers are put in place and whether or not it has a downside for Ireland. We also have the situation in Cadbury's, where there are 1,200 jobs between Dublin and Kerry.

This seems so specifically written that I must ask if there was no opportunity for the Minister or the IDA to look at this in a more generic sense. When major changes take place in multinationals through takeovers, and Dr. Barrett was very specific about this in his lecture, pointing to the game plan people like him work to, does the IDA or the Department of Enterprise, Trade and Employment brief the Minister?

This amendment is very company-specific. I do not object to that because I do not know the cost of it for the company but there is a broader issue of how to retain jobs in multinationals where those companies may reduce some of their Irish activities.

We talked about cross-departmental issues last night. Is there a cross-departmental approach to this? Unlike the IFSC, where there is a very active lobby for any tax avoidance scheme one could imagine, the older companies with large numbers of staff do not seem to get the same attention in terms of competition from other locations and whatever policy we desperately need for job retention. Why was a more general section, with a broader approach, not inserted, or is Revenue just dealing with these on a case-by-case basis where, if we hear there is to be a major change for a company, at that point negotiations will start about the tax implications that might legitimately be presented to keep the company, or a large element of it, in Ireland?

There are two points. First, there is a highly strategic approach taken in the Department regarding liaison for tax planning for enterprises that attract large-scale employment. There is constant engagement with the IDA, Enterprise Ireland and the Department of Enterprise, Trade and Employment. I am often brought to meetings with some of the key businesses involved at the conclusion of discussions and examination of the issues involved or when representatives of these companies happen to be visiting the State where they have a particular interest in the employment or tax side. There is a constant level of engagement in the Department and a highly strategic approach is taken.

Although the amendment is drafted in wider terms and does not simply go over the circumstances of this particular company, it covers the general circumstance were it to emerge in other companies in the future. It is not correct to suggest this is simply for this company, it provides a specific precedent for other companies that find themselves in the same circumstances. It is important that we take a strategic approach and it is not the case that legislation is prompted because of dealings between the Revenue Commissioners and particular companies. There is a far more intensive level of engagement at all times between my Department, the Revenue Commissioners and the relevant enterprises.

Does the Minister have a figure for the cost to the Exchequer?

Because this relates to one company I would prefer not to divulge that information.

How many jobs are involved?

There are 600 positions.

That amounts to a lot of jobs.

Amendment agreed to.
Amendment No. 51 not moved.

I move amendment No. 52:

In page 83, line 21 after "that" to insert "subsequent".

Amendment agreed to.

I move amendment No. 53:

In page 83, to delete lines 28 to 33, and substitute the following:

"on an amount equal to the aggregate of the amounts by which the qualifying group expenditure on research and development has been increased, as a result of a reduction in the threshold amount by virtue of subparagraph (ii) of the definition of threshold amount, for relevant periods, taking account of each relevant period in respect of which the qualifying group expenditure on research and development was so increased.".

Amendment agreed to.

I move amendment No. 54:

In page 83, to delete lines 54 to 58, and in page 84, to delete lines 1 to 3 and substitute the following:

"under Case lV of Schedule D on an amount equal to the aggregate of the amounts by which the qualifying group expenditure on research and development has been increased, as a result of a reduction in the threshold amount by virtue of subparagraph (ii) of the definition of threshold amount, for relevant periods, taking account of each relevant period in respect of which the qualifying group expenditure on research and development was so increased, as reduced by any amount charged to tax in accordance with paragraph (b ).”.”.

Amendment agreed to.

I move amendment No. 55:

In page 84, lines 4 and 5, to delete subsection (2) and substitute the following:

"(2) (a) Paragraph (g) of subsection (1) applies to accounting periods commencing on or after 1 January 2010.

(b) Paragraphs (j) and (k) of subsection (1) apply and have effect from 1 January 2010.

(c) Except where otherwise provided by paragraphs (a) and (b), subsection (1) applies to relevant periods (within the meaning of section 766 of the Principal Act) commencing on or after 1 January 2010.”.

Amendment agreed to.
Question proposed: "That section 50, as amended, stand part of the Bill."

Is the Minister satisfied that if the whole revised company leaves the country, there is an effective clawback mechanism?

The Minister is not supportive of the proposal made by the Commission on Taxation that a research and development tax credit be set against certain payroll taxes. Will he elaborate on his view in that regard?

The term "sceptical" rather than "negative" would characterise my position. I am sceptical of the proposal. It would involve a major erosion of the social insurance base in the State. Let us be clear what we are talking about. We are talking about the social insurance fund being depleted. If it was not, the corporation tax base would be. That would be the effect of the proposal. It is an attempt to suggest the social insurance obligations of the State should be discharged as a tax relief in the case of these companies. That is the substance of the argument. We must ponder that proposition long and hard.

I am not prejudging the outcome of that discussion. However, my understanding is that the Commission on Taxation which the Minister appointed to review the tax code came out in support of this proposal. Presumably, the argument is that if a company is not profitable, a research and development tax credit is of no value. This was an effort to enhance the value of the research and development credit scheme.

On the other side, the commission has been somewhat sceptical of patent royalty relief. The Department of Finance commissioned a study by the Revenue Commissioners a couple of years ago which was, at best, agnostic. The commission suggested the resources expended on that relief scheme which ran to significant amounts of money might be better devoted to research and development credit relief. Its argument is that research and development investment is of particular value. While the Minister might see the inclusion of a reference to social insurance as an erosion of the social insurance fund, the commission also indicated the potential to save money on patent royalty relief in order to promote it. It seems to be offering a package of measures and I wonder what is the status of that offer. I know the Minister picked out some of the reliefs proposed by the commission and has incorporated them but he appears to be unenthusiastic about others. Is an evaluation of the other reliefs taking place? The Minister has signalled that each Department will report by June. Might these reports look at the relative merits of patent royalty relief and research and development credit relief extensions?

The Minister dealt with this issue recently. The credit applies to a finite amount based on the level of corporation tax a company pays. Would the Minister consider allowing credit to the value of a company's corporation tax payments against payroll taxes and make a transfer from corporation tax receipts to compensate the social insurance fund? We are seeking mechanisms to encourage research and development in an effort to create employment. Perhaps we need to think outside the box. I would like to hear the Minister's thoughts on the matter.

That is the issue under discussion. It is suggested there should be a credit in the payment of PRSI contributions. If one looks at the challenges facing this and other western European countries in providing for the elderly in the years ahead, given the diminishing numbers in the workforce who will be available to make that provision, one encounters very big questions. It is all too easy to represent this as a simple proposal on which we should roll over and with which we should agree but it is not as simple as that. We should reflect long and hard before we go down this route. Pay-related social insurance is a fiduciary tax, the purpose of which is to maintain a fund to ensure the meeting of certain insurance obligations relating to pensions and other matters. This is of fundamental importance. Are we to segregate a particular section of the workforce and say their employers, uniquely, do not have to participate in meeting this obligation, unlike other employers in the State? In substance, that is what is being proposed, as distinct from the nuanced language of tax practitioners.

The abolition of the patent royalty exemption was also proposed by the Commission on Taxation. That matter is under consideration in my Department. We are also seeking the views of the Department of Enterprise, Trade and Employment on the matter. It will be dealt with as part of the process to which the Deputy referred.

Does the Minister have a figure for the amount spent on research and development last year by companies in Ireland and for the amount given in tax relief?

I ask the Deputy to bear with me.

Does Deputy Burton have a question?

Mr. Brendan Hayes who was a member of the Commission on Taxation presented a minority report. He strongly defended the need to have a social insurance system. In the United States, under the Obama Administration, there has been a change of view of offshore activity. We should not ignore the clear evidence that jobs in Ireland are actually created and that they contribute tax and PRSI receipts. Therefore, we are in a slightly different position than other countries where economic activity is seen purely as an offshore tax avoidance mechanism. A review of the proposal should look at the matter in the round. The minority report of the Commission on Taxation deserves to be considered. The country's social obligation to meet pension and unemployment payments is very important.

In response to Deputy Terence Flanagan's question about the value of claims submitted, for the period from 2004 to 2007 the total value of tax credit claims under the scheme amounted to approximately €475 million. The annual cost of corporation tax reliefs amounts to approximately €1.2 billion. In comparison with the other tax incentive schemes available, the cost of the research and development tax credit has not been excessive to date. It is worth noting that the cost of the research and development element has increased each year.

For what percentage of the research and development expenditure was no tax credit received?

I can supply the figures for each year. In 2004——

The Minister expressed reservations about the offset against PRSI. Some companies were not able to avail of the offset against corporation tax. What would be the cost to the taxpayer of introducing a scheme to allow companies, which are not making a profit, to get some form of offset for their research and development credit? It is not totally correct to say that such companies are not paying towards social insurance. They are getting a credit for research and development expenditure against their contribution. Again we are talking about employment. It should be viewed in the overall context. I ask the Minister to quantify it.

The Deputy's argument needs to be formulated in the context of international comparisons as to where we go as a country on this argument.

We need to talk in terms of euro. What was unclaimed last year from research and development expenditure by way of tax credit?

What is the Deputy's question?

The Minister said €475 million was claimed by way of research and development tax credit relief last year. Of the research and development expenditure, on how much of it was no tax relief claimed? That would quantify the amount of expenditure that might be offset against PRSI.

It was all given by way of relief. That is the point; is it not?

It is not all given. If a company is not making profits in a particular year then it obviously will not get the relief.

That is the point. It is a tax credit.

Can they get it by way of a refund?

Yes. That is the point.

What is the objection to offsetting it against PRSI?

PRSI is a basic social obligation. The Deputy is advocating a race to the bottom.

No, I am not. I am saying that if they are getting it by way of a credit they should be able to offset it against another form of tax in terms of the overall cost to the State.

It is precisely the point. PRSI is not just another form of tax. It sustains a fund that pays State pensions. That is the point. This is a credit.

Are they not getting a refund for this?

So what is the problem?

They are already getting a refund for research done. The Deputy is advocating extending it to cover their PRSI obligations.

That is what it amounts to.

I am saying that instead of getting the refund they could offset it against PRSI.

That is the substance of it.

It is the same thing.

The point is that it is paid in any event. The Deputy's proposal would deplete the insurance fund in order to make Ireland an attractive international destination.

Question put and agreed to.
SECTION 51

Amendments Nos. 56 and 59 are related and may be discussed together by agreement.

I move amendment No. 56:

In page 84, to delete lines 6 and 7 and substitute the following:

51.—(1) Part 8 of the Principal Act is amended—

(a) by inserting the following section after section 242:”.

Amendment No. 59 inserts text into section 51, which provides relief from corporation tax for a number of payments, including patent royalty payments. The amendment ensures that the exemption from withholding tax and royalties as provided for in section 51 of the Bill will not result in the paying company being denied corporation tax relief in respect of the payment.

Can the Minister clarify the matter? Some concern was raised over the royalty system here compared with the Netherlands. Has the Minister had a chance to assess that? It is an issue of whether we remain competitive in this area. I am not very familiar with the territory. However, I received a note that some sectors have raised a concern in this field. I am sure it has been brought to the attention of the Minister. It was only brought to my attention today. I ask the Minister to comment on that concern.

On that matter, Chairman——

Does the Deputy wish to speak to the amendment or the section?

He can speak to the amendment so.

As a follow up to what Deputy Bruton has said, I can deal with it now or on the section. Rather than having the Minister——

We shall deal with the amendment first and then discuss the section.

The key point in Ireland compared with, for example, the Netherlands, is the 12.5% corporation tax rate. It is a general rate that fully complies with our EU and international requirements. At first glance the abolition of withholding tax could seem an attractive option. However, the complete removal of withholding tax would allow payment flows to be routed through Ireland in order to avoid withholding tax in other countries. For example, a company that wished to make a payment from country A to country B, but wanted to avoid withholding tax in country A, could arrange to have the payment routed through Ireland if Ireland had a tax treaty with country A that provided for no withholding tax on royalty payments but we did not impose the withholding tax. That would undermine that country's tax base and that outcome could be damaging to Ireland.

Ireland's current system of royalty withholding is seen to be uncompetitive relative to other EU member states and other destinations for direct foreign investment. The current Irish law creates a significant administrative burden on both the multinational companies and Revenue in processing treaty clearances regarding withholding taxes. I understand from the American Chamber of Commerce and from firms across the country — particularly some in Galway — that they are very concerned about the issue. As I am sure the Minister is aware with impending legislation in the US, that a large number of multinationals are evaluating their current intellectual property ownership structures. I ask the Minister to reflect on this. I take the point he makes that the complete removal could undermine withholding royalties in cases where they are paid into the country. I understand and accept that fact. However, I ask the Minister to consider reviewing this on Report Stage with a view to clarifying the situation with respect to royalty payments. I ask him to consider broadening the exemption as outlined in section 51 or to consider the scope of section 238 of the 1997 legislation. Perhaps he could consider aligning the policy for royalty withholding tax with dividend withholding tax. The proposed changes could be based on the existing legislation in the Taxes Consolidation Act 1997.

If there were to be a change in American legislation, where would that leave the large number of American multinationals in this country? Would it not be better to be proactive than perhaps have to be reactive at a later stage? This is a big issue for many American multinationals in this country and I would like it to be considered again, notwithstanding the point the Minister made, which I totally accept and which had been explained to me. There is an issue and I believe it is important to deal with it at this stage.

I thank Deputy Fahey for his intervention, which is very well informed. The US changes have been dropped. The section allows patent royalties to be paid free of withholding tax in certain circumstances. Under the current law, the payments must be made subject to the deduction of tax. It has been put to me, as Deputy Bruton mentioned, that withholding tax is a burden on business and a barrier to the development of a knowledge-based economy and should be removed wherever possible. However, the complete abolition of withholding tax is not possible, as it would have adverse implications for our relationship with tax treaty partners and foreign tax authorities generally. The EU code of conduct group is examining the issue of withholding taxes. For us to make a unilateral change in advance of this discussion would be seen, therefore, as very tax aggressive by our EU partners.

The section changes the law in order that, subject to certain conditions, royalty payments can be made free of withholding tax where they are made to residents of relevant territories or to permanent establishments in relevant territories. A relevant territory is an EU member state other than Ireland or a country with which Ireland has a tax treaty. In general, the payments will also be exempt from Irish tax in the hands of the recipient. We are addressing part of the problem in this measure but there is a limit to how far we can go. To qualify to be paid free of withholding tax the payment must be tax relieved in Ireland and made for a bona fide reason and not part of a tax avoidance arrangement. In addition, the recipient must be liable to tax in respect of the royalties in the country of residence or the country in which the permanent establishment is situated.

Deputy Fahey mentioned the dividend withholding tax approach. A number of representations have been received by the Department suggesting we should align the exemption of withholding tax in the case of royalties with the exemption from dividend withholding tax. In both cases, payments to residents of treaty countries or EU member states are exempt from withholding tax. However, in the case of the dividend withholding tax, an exemption also applies to a dividend where residents of a tax treaty country or EU member state control the recipient.

There is a significant difference between dividends and royalties. Dividends are paid from income that has been taxed; consequently, they cannot be used to erode the tax base of a country. Even if the dividend is not taxed in the hands of the recipient, the profits from which it is paid will have been taxed. Royalties which are deductible in calculating taxable income reduce taxable income because they are part of income and can be used to erode the tax base. If royalties are not taxable in the hands of the recipient and result in a tax deduction in the case of a payer, there is the potential to erode the tax base. If an exemption from withholding tax were to apply where residents of tax treaty countries or EU member states control the recipient, the exemption could apply to royalties paid to a tax haven. This could facilitate the use of Irish companies to undermine the tax base of Ireland or other countries. That would not be appropriate. I do not think we can go down that road.

Is the Minister stating we are not uncompetitive in respect of other locations?

I am. I am satisfied we have gone a distance in the measure before us. In the light of EU discussions, we will monitor how much further we can go.

Were particular cases of tax avoidance brought to the Minister's attention to cause the change in the law in this area or is it a matter of good practice?

There were no particular cases but we are anxious to ensure our reputation will not be compromised by developing facilities that could easily be used for tax avoidance.

Amendment agreed to.

I move amendment No. 57:

In page 84, to delete lines 14 to 31 and substitute the following:

"(a) made by a company in the course of a trade or business carried on by the company,

(b) to a company (in this subsection referred to as the ’receiving company’) which—

(i) is not resident in the State, and

(ii) is, by virtue of the law of a relevant territory, resident for the purposes of tax in a relevant territory which imposes a tax that generally applies to royalties receivable in that territory by companies from sources outside that territory,

and

(c) which is made for bona fide commercial reasons and does not form part of any arrangement or scheme of which the main purpose or one of the main purposes is avoidance of liability to income tax, corporation tax or capital gains tax,

except where the royalties are paid to the receiving company in connection with a trade or business carried on in the State by the company through a branch or agency.".

Amendment agreed to.

I move amendment No. 58:

In page 84, to delete lines 35 to 40 and substitute the following:

"(4) A company shall not be chargeable to corporation tax or income tax in respect of a royalty payment to which this section applies where—

(a) the company—

(i) is not resident in the State, and

(ii) is, by virtue of the law of a relevant territory, resident for the purposes of tax in a relevant territory which imposes a tax that generally applies to royalties receivable in that territory by companies from sources outside that territory,

and

(b) the payment is made for bona fide commercial reasons and does not form part of any arrangement or scheme of which the main purpose or one of the main purposes is avoidance of liability to income tax, corporation tax or capital gains tax,

except where the royalty payment is made to the company in connection with a trade or business which is carried on in the State by the company through a branch or agency.",".

Amendment agreed to.

I move amendment No. 59:

In page 84, subsection (1), between lines 40 and 41, to insert the following:

"and

(b) in section 243(5)(c) by substituting “section 246A or 267I” for “section 267I”.”.

Amendment agreed to.
Section 51, as amended, agreed to.
SECTION 52.
Amendment No. 60 not moved.
Question proposed: "That section 52 stand part of the Bill."

I thank the Minister for making this change. It was most unfair to suggest at any stage that land which was the subject of a compulsory purchase order could be subject to the tax levels being proposed. It caused much difficulty for farmers, in particular, whose lands were being purchased for the construction of motorways.

Question put and agreed to.
SECTION 53.

I move amendment No. 61:

In page 85, line 28, to delete "(a)”.

Amendment agreed to.
Section 53, as amended, agreed to.
Section 54 agreed to.
SECTION 55.
Question proposed: "That section 55 stand part of the Bill."

Will the Minister circulate the speaking note on this section which deals with losses? I presume a number of people have suffered significant losses and will not pay capital gains tax for decades. Does the Minister have any figures for the likely level of capital losses whooshing around the economy?

Is the Deputy referring to losses of capital gains?

Losses for capital gains purposes.

We do not have a general figure for such losses. This anti-avoidance provision targets aggressive capital tax avoidance schemes that generate artificial losses where no real economic loss has occurred. It provides that, for the purposes of the capital gains tax Acts, a loss will not be treated as an allowable loss if it accrues to a person directly or indirectly as a result of these arrangements. The anti-avoidance provisions deal specifically with a particular scheme that has come to light involving gilt futures contracts.

Is this the scheme that was closed in the United Kingdom a number of years ago? How much money did we lose? Was it €40 million?

An attempt was made to shelter capital gains tax of more than €85 million.

Therefore, we will have to vote for this.

Recently information was supplied on difficulties arising in the transfer of properties from banks to NAMA because title was not clear owing to transactions that had taken place involving licensing rather than disposal. Does this have capital gains tax implications for the previous disposal of these properties? How does it affect the transfer of these assets to NAMA?

There is a stamp duty issue but it is not related to capital gains tax.

Is no capital gains tax paid on the transfer, even though it was a licence?

There would not have been a capital gains tax exposure on the issue.

The issue of stamp duty avoidance arises.

We are debating two different issues. There are no capital gains tax implications for the transactions mentioned. Deputy Burton referred to a United Kingdom precedent, of which I am not aware, but the matter came to the attention of the Revenue Commissioners in the past year and was dealt with on that basis.

In regard to the Sharia finance initiative, are anti-avoidance measures being introduced? We did not have an opportunity to discuss this issue yesterday because we ran out of time. Given that we are discussing capital losses which can accrue in Sharia finance and the grave difficulties that can arise in this form of finance when there is disagreement among partner structures, anti-avoidance mechanisms are relevant. Those involved in creating some of these structures have very fertile minds when it comes to maximising tax efficiency and costs to the State as opposed to revenue collection.

Recognition of Sharia finance law involves recognising instruments, not tax avoidance or evasion measures. The general provisions dealing with anti-avoidance measures which are extensive apply to such instruments.

The briefing material for last night's debate which we did not have an opportunity to discuss makes no mention of what will happen in a case where there is a breakdown between parties once we recognise Sharia finance law in Ireland. Normally in countries where there are Sharia finance mechanisms in place, disputes or failures are subject to a separate court mechanism which is consistent with Sharia law. We do not have that provision.

I will provide a note for the Deputy on the matter.

We are introducing a new principle in Irish law. No one in the Oireachtas has been given a detailed briefing document on it. Has anyone in the Department investigated what would happen in the event of a dispute or failure, which can occur in every kind of financing arrangement? We are introducing an element of law to the financial services sector without protections.

We are recognising certain transactions for tax purposes. That is not the same as facilitating them for the purpose of tax avoidance. The general provisions prohibiting tax avoidance endure in the legislation. For example, section 267U is an anti-avoidance provision which states new legislation shall not apply to a transaction unless it is undertaken for a bona fide commercial reason; it should not form part of a wider arrangement for the avoidance of tax liability. That covers stamp duty, as well as VAT and capital acquisitions tax.

We have no information on this major new initiative in Irish law, which is clearly designed to attract Sharia law compliant funds to the IFSC. We have had no briefing in the Dáil on the matter. Members have not had the benefit of a White Paper or even attending a seminar on what this important new approach to tax and business law involves. As someone who lived in a country which operated this type of legal structure, I recognise it is very complex. We are introducing it to Irish law in the absence of public discussion.

We are on section 55, the terms of which would apply if Sharia law possessions gave rise to artificial losses for capital gains tax purposes.

The Minister may have to prove that.

I am saying it as Minister and based on the advice I have received. That is the position on capital gains tax, for example. If the Deputy or others want more detailed information on the measures because they consider they were not sufficiently discussed yesterday, I can arrange an official briefing.

I do not understand the extent to which the Revenue Commissioners or other authorities will be seeking to interpret Sharia law as opposed to simply regulating back office activities within an existing structure which is well understood and tested. Do we know exactly what we are getting into in a regulatory context? Will it pertain solely to back office functions, not Sharia law compliant funds which have their own rules and regulations? Can that distance be created?

How Sharia law deals with complex financial instruments such as derivatives is completely unknown. I understand they are neither banned nor encouraged. The €85 million lost through the loophole being closed includes losses incurred through derivatives and other forms of financial engineering. Sharia law is not clear on the role of derivatives but they play an important part in complex financial transactions in the IFSC and other centres. All I am saying is that we have no information on our potential exposure under Sharia law-based tax structures. Alternative legal structures are unavailable to us to manage this change. For example, the Constitution does not recognise Sharia law. Thanks to the United Kingdom's larger Islamic population, Sharia law-type courts have been established in that jurisdiction.

That is a much wider issue. We are entering matters which were discussed yesterday. We are not establishing Sharia law courts. If an issue arises in our courts pertaining to the recognition of Sharia law provided for in this legislation, it will have to be established as a matter of expert evidence. The crucial point is that section 55 can apply equally to Sharia finance transactions as to any other type. I do not want to send the message that somehow because we recognise Sharia finance transactions, the full rigour of tax law does not apply to them.

How will it apply to complex derivative transactions?

As in any complex transaction, derivative transactions are governed by our revenue laws and subject to proof of the nature of the transaction. There is no suggestion in anything being brought before theOireachtas that a separate or parallel system of courts will adjudicate on the nature of the transaction.

Question put and agreed to.
SECTION 56.

I move amendment No. 62:

In page 87, line 12, to delete "cost" where it secondly occurs and substitute "proceeds".

This is a technical amendment to correct a drafting error.

Amendment agreed to.
Section 56, as amended, agreed to.
SECTION 57.

Amendments Nos. 63 to 65, inclusive, are related and may be discussed together.

I move amendment No. 63:

In page 87, subsection (1)(a), lines 31 and 32, to delete “and the National Museum of Ireland,” ” and substitute the following:

", the National Museum of Ireland and the Friends of the National Collections of Ireland, and".

Amendment agreed to.

I move amendment No. 64:

In page 87, subsection (1)(a), between lines 32 and 33, to insert the following:

"(iv) a local authority or a joint body within the meaning of section 2(1) of the Local Government Act 2001 and any university in the State,",".

Amendment agreed to.

I move amendment No. 65:

In page 87, subsection (1)(b), line 34, to delete “paragraph (a)(iii)” and substitute “subparagraphs (iii) and (iv) of paragraph (a)”.

In amendment No. 63, why did the Minister change the description from the National Museum of Ireland to the National Museum and the Friends of the National Collections of Ireland? Is there a significance in that?

The friends were in the 1931 Act and have reappeared.

Is the Minister interested in selling off the treasures?

No. The purpose of this section is to specify that the public bodies in question are the national cultural institutions that are funded by grant-in-aid, grant or funded directly by the Department of Arts, Sport and Tourism and therefore that capital gains tax does not apply to them.

The question Deputy Burton asked is why the body is referred to as the National Museum of Ireland and the Friends of the National Collections of Ireland rather than the National Museum of Ireland. The reason is that it is the proper name of the entity and that we put in the erroneous name originally.

Amendment agreed to.
Section 57, as amended, agreed to.
Section 58 agreed to.
SECTION 59.

I move amendment No. 66:

In page 88, lines 10 to 12, to delete subsection (1) and substitute the following:

"59.—(1) Part 1 of Schedule 15 to the Principal Act is amended by substituting the following for paragraph 4:

"4. A local authority or a joint body within the meaning of section 2(1) of the Local Government Act 2001.".".

Amendment agreed to.
Section 59, as amended, agreed to.

We have now completed the second tranche of amendments.

Sitting suspended at 1 p.m. and resumed at 3 p.m.
SECTION 60.

Amendment No. 67 is next.

Before we resume, people have been raising with me the Oireachtas committee report on primary care centres. I do not know whether it has been brought to the Minister's attention that the Oireachtas all-party committee reported two weeks ago on the potential for the development of primary care centres. There is an interest in exploring this but perhaps it is more appropriate to discuss this on Report Stage rather than on Committee Stage. There will be arguments about the merits of the various proposals. Some may look closer to being property incentives rather than care provision incentives. However, it would be desirable if the Minister had an opportunity to comment on the report during the debate.

In addition, Deputy Reilly is keen for a licensing regime in respect of head shops to be considered under the legislation.

That is surely an issue for the Department of Justice, Equality and Law Reform, as it is related to public order.

Apparently there are those who say a golden opportunity is being presented to the Minister.

To take in money.

Is Deputy Bruton making a proposal or is he asking the Minister to consider these issues for Report Stage?

Deputy Reilly would like an opportunity to raise this issue with the Minister and we may table an amendment on Report Stage regarding the licensing of head shops.

The group of doctors promoting the primary care centres were up in the hall this morning presenting——

We have all met them. We are moving on to amendment No. 67.

The Chairman gave Deputy Bruton a facility. Do I get——

The Deputy is agreeing with him.

No, I am not, but I am entitled to the same courtesy. Am I not entitled to the same courtesy?

No. Does the Deputy wish to table an amendment for Report Stage?

Sorry, I would like to raise a point.

The Deputy is not raising a point.

Then I will table an amendment on Report Stage. Can I be afforded the same courtesy offered to Deputy Bruton by the Chairman?

Deputy Bruton gave notice of raising the question on Report Stage.

The Deputy was given an opportunity to raise two issues and I require the same facility from the Chairman.

Deputy Bruton raised a question about whether he would be in order to support——

I raised the same question. Doctors were in the hall this morning representing a group that wants to explore the issue of various tax breaks for primary health care centres based on the committee's report. Has the Minister received the report from the medical practitioners regarding these centres?

That is not in order.

Does the Minister intend to bring forward a Report Stage amendment or is the Minister minded to accept Report Stage amendments regarding the matter?

The last part of the Deputy's question is in order.

I have received submissions and have no current proposals on the matter.

Amendments Nos. 68 and 69 are related and alternative to amendment No. 67. If amendment No. 67 is agreed to, amendments Nos. 68 and 69 cannot be moved.

I move amendment No. 67:

In page 91, to delete lines 6 to 14 and substitute the following:

" "(1A) (a) Without prejudice to any other relief that may apply and subject to paragraphs (b) and (c), a relief from the carbon charge shall apply to biofuel.

(b) From 10 December 2009 until 30 June 2010, where biofuel has been mixed or blended with any other mineral oil, the relief under paragraph (a) shall only apply where the biofuel content of the mixture or blend exceeds 10 per cent of the total volume of the mixture or blend.

(c) From 1 July 2010, where biofuel has been mixed or blended with any other mineral oil, the relief under paragraph (a) shall apply to the biofuel content of any such mixture or blend.”.

Section 60, as published, provided for a conditional relief from the mineral oil tax carbon charge for bio-fuels. In the case of blended fuels, that is, bio-fuels mixed with conventional transport fuels, the relief was conditional on bio-fuel accounting for more than 10% of such a blended product.

However, I have given further consideration to the matter following representations from the industry and from the Minister for Communications, Energy and Natural Resources. This amendment will extend the relief from the carbon tax charge to the bio-fuel in all mixtures and blends, with effect from 1 July this year, to coincide with the commencement of the bio-fuels obligation scheme. This preferential treatment of bio-fuels will assist the sector, which faces additional production costs to those involved in the production of conventional oil.

Amendment No. 68 in my name is, to all intents and purposes, the same as amendment No. 67. Consequently, I am happy to withdraw my amendment if the Minister intends to proceed with his. The amendment makes sense and represents a compromise with regard to the important area of bio-fuels. It recognises an issue for Irish growers involved in supplying materials for bio-fuels. I have been contacted, as have other parliamentary party members of the Labour Party, to outline the amendment in my name as an appropriate response to an issue that arises from the mid-year date pertaining to the blend. I am delighted the Minister accepts this amendment regarding the 10% blend. I will withdraw my amendment and will support the Minister's.

From a technical perspective, the Deputy is unable to withdraw her amendment because she is unable to move it.

I understand this issue arose in respect of the industry. With the setting of a lower standard, it effectively could be met from outside markets and would undermine the capacity of the domestic market to operate. Consequently, I am content.

I seek clarification. I understand that an Energy (Biofuel Obligation and Miscellaneous Provisions) Bill is forthcoming. Is that correct? Is it correct that it will set a limit of 4%?

As I understand it, it will set an obligation of 4%.

In other words, the carbon tax would be relieved on anything between 4% and 10%.

No, I understand that under this proposal, all bio-fuel mixes will have full relief.

Will this be the case regardless of whether the proportion is 4%, 7% or 10%?

Yes, that is correct in respect of the bio-fuel part of it.

Does a genuine conflict arise in this regard between fossil fuels and renewable fuels? I have to hand a note to the effect that imposing a carbon tax on bio-fuel mixtures of less than 10% will guarantee there will be no further investment in the indigenous sector. This is the reason the Minister has opted for the 10% figure.

Yes, I am addressing that.

Amendment agreed to.
Amendments Nos. 68 and 69 not moved.
Question proposed: "That section 60, as amended, stand part of the Bill."

In the original budget resolution, the relieving measure only covered the proportion of bio-fuel, whereas in effect, the financial resolution that introduced the mineral oil tax carbon charge on budget night provided for relief from that charge for bio-fuel, but only where the bio-fuel content was more than 10%. This requirement now is being dropped.

Will there be an incentive to have twice the bio-fuel content? Is there any reason to have a bio-fuel content of 10% as opposed to 5%? In other words is there an incentive to have a higher bio-fuel blend?

No. By definition, by acceding to this amendment, one cannot factor in such an incentive.

There appear to be arguments on both sides of this case.

There are but the view we took——

Both are arguing from the perspective of environmental advantage.

Yes, that is correct and that is the difficulty. The Deputy has got it.

I must consult further.

I would advise the Deputy not to.

It might be useful were the Minister to incentivise it, because it then would be easier to police where I come from.

The point is that I am incentivising it.

Question put and agreed to.
SECTION 61.

I move amendment No. 70:

In page 92, subsection (3), line 4, to delete "the Minister" and substitute "the Minister for Finance".

Amendment agreed to.
Section 61, as amended, agreed to.
Section 62 agreed to.
SECTION 63.
Question proposed: "That section 63 stand part of the Bill."

It has been represented to me by people from the larger companies within the trading system that the manner in which the Minister is treating the carbon tax will militate against them and that they will not get recognition for already being within the trading system. They have circulated amendments to Deputies seeking changes in this regard. Effectively, they argue that this would represent a double taxation of those who participate within the trading system for carbon credits. Has the Minister received such representations and has he had a chance to assess the argument?

A decision was taken at budget time to limit exemptions from the carbon tax, with the exemption only applying to the ETS installations. Since then, various sectors have pressed to be exempted from the carbon tax or to be treated more favourably than is provided for in the Finance Bill. I understand the Deputy is referring to the cement sector and part of the combined heat and power sector. At budget time, it was specified that the carbon tax would have general application and that only ETS installations would be exempt. While it was signalled that ETS companies would fall outside the carbon tax, the European Union energy tax directive allows the minimum European Union rates to be applied. Furthermore, non-application of minimum rates may be viewed as state aid. It is important to note that a minimum rate is being applied to the sector, rather than the full rate.

Why would the Minister apply such a rate at all if those affected already are paying within the trading system?

Non-application of minimum rates may be viewed as a state aid. I refer to a recent Commission decision on a Danish case.

Why is it deemed to be a state aid? Is it because the existing carbon credits are being grandfathered?

At present, emission credits are provided free of charge.

Consequently, it is only at the margin.

Yes. I have to hand a highly detailed note in this regard and rather than labouring through it, perhaps I might provide it to the Deputy.

Question put and agreed to.
Sections 64 to 70, inclusive, agreed to.
SECTION 71.
Question proposed: "That section 71 stand part of the Bill."

Are there provisions for the Revenue Commissioners to interact with the Department of Communications, Energy and Natural Resources concerning carbon tax? Revenue's job is to collect the money from the carbon tax whereas the Department's role concerns behaviour and carbon emission levels. What is the co-ordination, if any?

The Commissioners and my Department have been in contact with the Departments of Communications, Energy and Natural Resources and the Environment, Heritage and Local Government in respect of this legislation. The Deputy may be anticipating section 73, on which I assume she will intervene. It deals with the solid fuels carbon tax. There is a great deal of discussion between the respective Departments.

On section 71, in so far as the carbon tax is a tax, it is within the care and management of the Commissioners, but they are in regular discussions with the energy sector in that regard.

The principle of a carbon tax is to try to change human behaviour to a lower level of carbon activity. It is possible to argue that, in most sectors, a carbon tax could have that effect. One sector particularly disadvantaged by the proposal, though, is agriculture. There are no alternatives inside the farm gate, particularly to the use of agri-diesel. During the past two years, the sector has seen a cumulative drop of more than 40% in income. The estimated cost to the sector of a carbon tax on agri-diesel is approximately €12.5 million.

I debated this matter in the Chamber on budget night, but there is a strong case to exempt the agricultural sector on the basis that there are no alternative energy sources to which the people involved can switch. It is not a runner. While this is the 11th hour, will the Department consider exempting agricultural diesel from the carbon tax on the basis that the amounts of money involved are small? The overall yield is approximately €400 million, of which agricultural diesel accounts for €12.5 million. We should take into account the body blows already suffered by the sector in terms of the collapse of incomes in recent years. It has no alternative energy sources.

As Deputies are aware, a carbon tax at the rate of €15 per tonne was announced in the budget. A decision was taken to limit exemptions from the carbon tax, so only participants in the EU emissions trading scheme in respect of fuels so covered are exempt. Many other groups are seeking exemptions. I considered the IFA's case carefully. It asserted that the marked gas oil — green diesel — used by farmers should be exempted from the carbon tax or have a reduced rate applied to it.

It should be recognised that the existing excise duty on green diesel is 4.7 cent per litre. This compares with an excise duty rate of 41 cent per litre in the case of auto diesel. A large differentiation is already applied to this green diesel as against, for example, auto diesel. The excise duty on the latter is almost ten times higher than that on MgO. It is a significant concession. Green diesel is also used for heating and other off-road purposes.

The new carbon tax charge must be based on the emissions that arise from the fuel used. To ignore these emissions would undermine the rationale for the tax in the first place. Consequently, the carbon tax rates charged in respect of agricultural diesel and auto diesel, which are almost identical fuels, are approximately the same at 4.1 cent and 3.9 cent per litre, respectively, excluding VAT. The carbon tax charge is marginally higher for agricultural diesel because it is a slightly denser fuel than auto diesel. At face value, one could argue that agricultural diesel has seen a disproportionate increase compared with auto diesel due to the difference in the percentage change in price, but this is a function of the fact that agricultural diesel has a lower base line due to the considerably lower level of excise duty on that product. Exempting diesel used in agriculture from the carbon tax would cost approximately €12.5 million in a full year. The excise duty rate on agridiesel has not increased since 1988. Since that time, there have been regular increases in respect of petrol and diesel.

I appreciate the Minister's indulgence. An old adage says that, when one is explaining, one is losing. Nonetheless, this tax is an additional charge on a sector that is reeling from a number of body blows, many of which were delivered by the Minister. To a degree, this is special pleading, but the agricultural sector is on its knees. An additional cost will feed its way through. One could argue that the transport sector has alternatives, but there are none inside the farm gate. The principle of a carbon tax is encouraging change in human behaviour, but that option is not available to the farming sector. An amount of €12.5 million might seem like small change in the overall scheme, but it is another cost that this sector, which is reeling and has experienced below cost selling in all commodities, cannot afford to carry.

In explaining this, I do not believe I am losing by pointing out that the excise duty on this form of agridiesel has not been increased since 1988. This has been a substantial concession by the State, given the overall balance of taxation in this area.

Will the Minister consider this matter before Report Stage?

I will. On balance, however, I am inclined to the view that it is not disproportionate when one examines the overall arrangements in regard to the taxation of fuel.

Question put and agreed to.
Sections 72 and 73 agreed to.
SECTION 74.
Question proposed: "That section 74 stand part of the Bill."

The Minister recognised that solid fuel will not be included until there is some way of dealing with the risk of importing substitute fuels from Northern Ireland that are greater pollutants. Will he indicate whether a model has been developed that he is reasonably confident will allow him to introduce this provision on a date of his choosing? As he will be able to make the provision by order, we will not get another opportunity to discuss the arrangements he is putting in place to deal with the risk of legitimate traders being undercut when the scheme is introduced. Can he offer the committee the bones of what is in mind or does he intend to revert to the House in some shape or form before an implementation date is triggered?

I anticipate reverting to the House in some shape or form. I announced on budget night that the application of the tax on coal and commercial peat would be subject to a commencement order to allow a robust mechanism to be put in place to counter the sourcing of coal and peat from Northern Ireland, where lower environmental standards apply. I do not propose to introduce the tax on coal and peat until that issue has been addressed appropriately, which is why I am not prepared to signal a specific date yet. Work has begun on this matter in the Department of the Environment, Heritage and Local Government and I understand the Department has met the solid fuel trade group in this regard.

The big issue in regard to carbon taxes and traditional fuels, such as coal and peat, is fuel poverty for people on a social welfare income. As I recall, no arrangements were made in the budget in regard to fuel poverty alleviation measures, in particular for people such as pensioners. One must bear in mind that pensioners suffered a 2% decrease in income last year as a result of the loss of the Christmas bonus and that other social welfare recipients suffered, on average, a 6% decrease. If the Minister is to introduce this whenever he issues the commencement order, is he minded to address the fuel poverty issues that arise?

Perhaps the Minister could refresh our memories on what he expects from the rise in the price of a bag of coal, a quarter tonne of coal, a bale of peat briquettes or 20 bales of peat briquettes which many older people, in particular, get a couple of times in the winter from their suppliers. If they qualify, they get the winter payment but given the appalling summers of recent years and the appallingly tough winter this year, most people, in particular those living in older houses, have had fires going day and night to stay warm. That is particularly important in the case of older people who are at significantly increased risk of getting infections and then getting more serious conditions which could end up requiring hospitalisation.

This is a very important issue which is raised continually by organisations such as the Society of St. Vincent de Paul and others which make very detailed pre-budget submissions. Perhaps the Minister will inform us of his thinking at this point, what he expects the impact of the levy on traditional fuels will be when the section is commenced and whether his Department and the Minister for Social and Family Affairs have devised any fuel poverty strategy.

I appreciate the Minister will not impose the carbon tax until this problem is sorted out. There is a price difference in respect of this illegal coal which I understand is coming in from Scotland via Northern Ireland. Not only are there environmental issues but it is creating a market because it is coming in at a much reduced price. Therefore, we have a double problem.

The Minister will recall that smoky coal was banned in the late 1980s or early 1990s but it is now coming in from Scotland. It is cheaper and, therefore, a market is being created. There is an urgency as regards dealing with this illegal import, leaving aside the carbon tax. That is vitally important not only from an environmental point of view but from the point of view of keeping genuine traders here in business. They deal solely with non-smoky coal but are being priced out of the market.

I am pleased the Minister is determined not to impose this carbon tax until this matter is resolved but I stress there is another aspect to this besides money. A market is being created which is also environmentally unfriendly.

I agree with Deputy Barrett. We faced a third risk that the entire sourcing of this market would be based outside the State in a suitable depot in the event that the carbon tax had been applied immediately to peat and coal on budget night. It was important to give time for a lead-in for peat and coal. I mentioned that one of the issues I want addressed in the lead-in period is the issue of illegal or substandard material being sourced outside the State.

I refer to the other issue raised by Deputy Burton. I should have made it clear in my reply that it is not my intention to commence the provisions in regard to peat and coal until the fuel poverty issues have been examined and dealt with. One possible option, which the Department of Communications, Energy and Natural Resources is examining, is having some form of card which is linked to a high quality supplied product in order that enforcement of the quality of the supply is guaranteed by the fuel poverty measure at the same time. These matters will have to be addressed prior to commencement. We cannot have an irregular or illegal trade in substandard or illegal items facilitated by the introduction of this measure.

Will the Minister also consider the impact of a carbon tax on Bord na Móna products? As he knows, Bord na Móna is a huge employer in my region of Tipperary and in the mid-west region. Will he consider the impact this carbon tax will have on Bord na Móna products, making it anti-competitive and jeopardising jobs in the future? Will the Minister consider that in the lead-in to making regulations and exempting some of these peat products from a carbon tax for that reason?

In regard to the idea of a card, as the Minister probably knows, in many of our cities, there are coal merchants who have one or two lorries and are relatively small suppliers but they supply legitimate products. I suggest that any scheme introduced should provide for the continuation of that type of supplier. Obviously, they go to the big suppliers every day or whenever, stack up a lorry and then go around the estates. They do that for coal and briquettes.

The idea of the card is to relate it to the product and not the supplier——

——so that one can prevent the outsourcing of substandard or illegal products. It is not designed to differentiate between suppliers, whether a petrol station or——

I suggest that the Minister advise the Department of Communications, Energy and Natural Resources to liaise with the Society of St. Vincent de Paul on how that might operate. It is a complicated industry in which there are many people with one or two lorries. They provide a very personalised service to many elderly people who know and trust them. I am concerned that they should not be lost sight of in these arrangements and that the whole industry should not shift to the bigger suppliers in the big depots.

I will draw it to the Department's attention.

Taking the case of peat, which was identified by Deputy Lowry, the implication would be that properly sourced Bord na Móna peat would qualify for the cards but not necessarily substandard, sub-peat products or imitation products imported from other jurisdictions.

Section 76 requires solid fuel suppliers to register with the Revenue Commissioners. That could be a very important way to deal with this issue.

We have not come to section 76 yet.

There is a requirement on solid fuel suppliers to register with the Revenue Commissioners, which is very important. It could be used to deal with this issue.

I might make a comment while the Minister is checking section 76.

Deputy Barrett is correct. Suppliers are requested to register with the Revenue Commissioners.

I support Deputy Burton's point that it is extremely important to facilitate small suppliers. They deliver fuel weekly to older people who cannot afford to stock up with a half tonne or more of fuel. They purchase a few bags of fuel a week. It is essential those suppliers be accommodated.

Question put and agreed to.
Sections 75 to 82, inclusive, agreed to.
SECTION 83.
Question proposed: "That section 83 stand part of the Bill."

Section 82 places solid fuel carbon tax under the care and management of the Revenue Commissioners. I understood there was an attempt to ensure the proceeds of the carbon tax would be used for the purposes for which it was intended to be charged — namely, to reduce emissions — and for the revenue accruing therefrom to be ring-fenced for environmental purposes.

The Green Party members have let us down.

Is this simply another tax?

They are writing a letter about it.

The proceeds of it go into the Central Fund and then go out of it.

They should not go into the Central Fund. They are supposed to be ring-fenced.

Governments can make political commitments——

The Green Party was——-

The Minister should canvass his partners in Government.

Commitments were made.

That is a new one.

This is a very important issue for them.

It is a recycling one.

Someone has to have care and management of a tax. There is only one body I know of that ends up in that position.

Question put and agreed to.
SECTION 84.
Question proposed: "That section 84 stand part of the Bill.".

What has been the impact of this measure on tax returns? Has it been successful as an incentive to deter people travelling to the North to shop?

It is too early to say. It is difficult to make an assessment with the exchange rate differentials at this stage of the year. Prices certainly have dropped.

Various supermarket retailers have run promotional offers, including offers on alcohol products, to attract customers. This is also a health issue related to that. As the Minister said, it is probably too early to gauge the success of this measure.

To assist the Deputy, I will cite some price comparisons with Northern Ireland. Prior to the 2010 budget, the cost of a bottle of table wine was between €2.44 and €2.50 dearer here. The cost of a bottle of table wine is currently between €1.20 and €1.57 dearer here. Those are the figures as of 3 February. On spirits, a 70 cl bottle of whiskey was €8.82 more expensive in this State and a similar bottle of vodka was €9.25 more expensive here. Currently the differentials are €4.53 and €5.54, respectively. A 50 cl can of beer was between 52 cent and 69 cent dearer here prior to the budget and currently is it between 24 cent and 50 cent dearer here. That is a broad indication of how prices have shifted. Some of this has also been influenced by euro-sterling exchange rate movements in the interim.

Does the Minister believe this measure has decreased the number of people travelling to the North to shop?

I do not expect this measure will have an immediate dramatic effect on cross-Border trading but over the course of the year I believe it will be a helpful one. There are welcoming noises from traders in Border areas and further afield regarding this section.

Question put and agreed to.
NEW SECTION.

Prior to dealing with amendment No. 71, I draw members' attention to the following typographical error in the numbered amendment list. In amendment No. 71, the lead-in should read "In page 99, before section 85, to insert the following new section:" instead of "In page 100, before section 85, to insert the following new section:".

I move amendment No. 71:

In page 99, before section 85, to insert the following new section:

85.—Section 98A of the Finance Act 1999 is amended—

(a) in subsection (1) by substituting “a relief from mineral oil tax shall, subject to such conditions as may be imposed by the Minister or by the Commissioners, apply to such biofuel” for “a relief from mineral oil tax shall, subject to such conditions as the Commissioners may impose, apply to such biofuel”,

(b) by inserting the following after subsection (1):

"(1A) The power of the Minister under subsection (1) to impose conditions includes the power to impose such conditions as the Minister considers necessary or appropriate for the purpose of ensuring that an approved project is conducted in accordance with the terms of its approval.",

(c) by inserting the following after subsection (3):

"(3A) Where the total quantity of biofuel specified under subsection (3)(a) in the approval for any particular project exceeds 50 million litres, relief under subsection (1) shall not be granted in respect of any quantity of biofuel, produced or supplied (as the case may be) during the period from 1 July 2010 to 31 December 2010, that exceeds 20 per cent of that total quantity.”.”.

This relates to the relief from mineral oil tax for the bio-fuel concerned in certain projects approved by the Minister for Finance. The relief scheme began on 23 November 2006 and terminates at the end of this year. The amendment provides that any relief under this scheme is subject to conditions that may be imposed by the Minister and, in particular, to conditions for ensuring an approved bio-fuel project is conducted in accordance with the terms of the approval. The amendment also restricts the relief that may be granted for any project during the last six months of the operation of the scheme to 20% of total quantity of bio-fuel approved for the project when the new bio-fuel obligation scheme is in operation. These changes are required at this time to limit the potential Exchequer exposure to a large overhang of unused allocations by some projects under the scheme, which have used little or none of their allocations to date. Members should remember that not all of this bio-fuel is produced in this country. In fact, very little of it is produced here. A substantial quantity of it is traded.

The most important point is to ensure we encourage the development of the sector here.

There is one producer here, as I understand it. Many of these allocations were purchased by traders. We are anxious to limit the loss to the Exchequer through this device of a large overhang of unused allocations.

Did the Department examine how those were allocated at the time? It seems it was not a very satisfactory system. I recall there were competition issues that were not properly addressed at the time. I do not have the details to hand, but the manner in which domestic producers did not get a chance to enter the scheme seemed strange.

The competitive process was conducted by the Department of Communications, Energy and Natural Resources.

Amendment agreed to.
Sections 85 to 95, inclusive, agreed to.
SECTION 96.
Question proposed: "That section 96 stand part of the Bill."

This issue of tobacco smuggling seems to be of truly enormous proportions. We have heard of successes in recent days but the scale of the smuggling is in the region of €400 million lost to the Exchequer. Have the Minister and his advisers developed a strategy to confront this problem? Not only is it an issue of loss to the Exchequer but to some degree the public policy which the Minister and his predecessors have been pursuing of discouraging smoking through a price regime is being frustrated by this problem. It is a double whammy in public policy of losing revenue and the gains which are hoped for in less smoking and better health outcomes. Does the Minister see a need to develop a new strategy to confront this?

As I understand it, the vast majority of these illegal cigarettes which are coming in are from countries where there is not the same enforcement with regard to nicotine levels. People who use these cigarettes are probably putting themselves in considerably worse health than people who smoke cigarettes manufactured under the strict controls within the EU. There is a significant health issue involved that people are insufficiently aware of and it is important at some stage for the public to be made aware of that.

I did not increase the excise on tobacco in the December budget because the high price has clearly given rise to increased cigarette smuggling. My responsibility is to protect the tax base. I indicated in the budget that I had full confidence in the effectiveness of the current multi-agency approach and I have discussed the matter with representatives in my own Department, the Irish Cancer Society and relevant officers at the Revenue Commissioners.

I indicated at budget time that I would explore what further measures we may need to stem the illegal flow of cigarettes into the country. With that in mind, my officials have since met with the various interested parties in the cigarette industry, retailers, health and anti-smoking organisations and official agencies, including the Revenue Commissioners, the Departments of Health and Children and Justice, Equality and Law Reform, and the Garda Síochána.

An issue raised was the level of maximum fines provided for in the customs and excise legislation. Consequently, some of the sections we have discussed in the last few minutes — sections 90, 91 and 94 to 96, inclusive — provide for increases in the maximum fines available to the courts upon conviction of a person on indictment of a range of offences under both customs and excise law. Where the current maximum fine is €12,697, it is being increased to a fine not exceeding €126,970.

One of the difficulties is that cigarette smoking has traditionally been fairly far down the criminal scale but has now gone up the scale dramatically in terms of the character of those involved in it. This will allow judges to impose fines which reflect the seriousness of these offences and should create a greater deterrent.

The sections also provide that in future, where a case relating to the offences covered is dealt with under section 13 of the Criminal Procedure Act 1967, which allows a guilty plea, and the DPP consents to the case being heard in the District Court, the fine to be applied will be that which applies under the relevant customs or excise provision for summary convictions, rather than that applicable under the 1967 Act. Currently, the 1967 Act has a maximum fine of €1,269 but there will be an increase in the fine to €5,000.

To give a general context and assistance to Deputies on this area, it is worth noting that Ireland's €8.50 per packet of 20 premium brand cigarettes has the highest tobacco tax content and price for cigarettes in the EU. Currently, a packet of cigarettes is approximately €1.44 dearer in this State compared to Northern Ireland and total cigarette clearances for 2009 were 6.7% down on 2008. Clearances for January 2010 are 38% below the same period last year.

Concerns have grown regarding smuggling and over 218 million illegally imported cigarettes were seized last year alone. The very substantial increases in tax bring us to a position where the law of diminishing returns comes into effect. The overall increase in tax, VAT-inclusive, on cigarettes since the 2007 Budget Statement — in the past four budgets — has been considerably in excess of inflation. The total tax increase of €1.05 per packet of 20 cigarettes is an increase of almost 20% compared to the CPI increase of 0.6% in the same period.

A wide range of measures is being adopted by the Revenue Commissioners on the matter, including a combination of cargo and passenger profiling, intelligence gathering, mutual assistance with other customs authorities and, where appropriate, the use of X-ray scanning technology to detect and seize contraband in maritime and air transport. A second mobile container scanner was purchased last year and it is expected to increase the overall level of detection in major ports. A second Revenue Commissioners cutter, Faire, was introduced in October 2009 and the Revenue Commissioners and An Garda Síochána carry out multi-agency operations involving international law enforcement agencies.

Intelligence-driven random checks are mounted at retail outlets, markets and other distribution centres to seize illicit tobacco products. The Revenue Commissioners also engage with the work of the European Anti-Fraud Office, which co-ordinates international operations.

The combined approach has resulted in the seizure, as I indicated, of 218 million cigarettes last year. These must be stored for prosecution purposes. Included in this amount is a seizure of 120 million cigarettes at Greenore on 27 October last year in the course of a multi-agency operation code named Operation Samhna. Given the size of this seizure and the brands involved, a large proportion of the seizure was likely to be destined for the UK market.

I am not an expert in the area but the Irish Heart Foundation put forward proposals which the Minister should consider. The Minister said that 218 million cigarettes have been seized and I presume their value is no more than €20 million. If there is €400 million of a loss to the Exchequer, it seems one fortieth of the amount being smuggled is being detected. If the detection rate is as low as 2%, raising the penalties will not have the required effect.

The list of enhanced enforcement measures read out by the Minister is welcome but the figures quoted do not suggest they are anything close to being effective. Even in the drugs area it seems one in ten drugs shipments is detected. The Minister's figures for cigarettes seem much lower with regard to the detection rate. The detection of drugs does not seem to be discouraging the drugs trade. It might be worthwhile for the Minister to convene a fresh look at the strategy.

I have been having a fresh look at the strategy since the budget. We must bear in mind that persons are entitled to import cigarettes into the State as well. There is a relatively liberal judgment from the European Court of Justice which permits importation of cigarettes for personal use, so quite an amount are imported. We have two distinct problems. We have the illegal importation of cigarettes, which has become a serious criminal racket. This has gone up the menace chain, given the types of criminal who are engaged in it. With the assistance of the Garda, the Revenue Commissioners are fully engaged in confronting these gangs. By pitching our cigarette duty at such a high level, we have made it lucrative for the most talented criminals to engage in this trade. That is the reality which the Revenue Commissioners and the Garda Síochána must now confront.

This type of operation was traditionally dealt with exclusively by the Revenue Commissioners, but there is an increasing Garda involvement in confronting those involved in the trade, and the changes in the Bill will reflect the seriousness of the matter. I hope that in enacting these increased penalties, the Oireachtas sends a clear signal to the courts that stiffer sentences will be required here in future.

Importation for personal use also accounts for a substantial amount of the loss of duty, according to the Revenue Commissioners. We know that it has become popular for individuals who travel to other countries to avail of their rights to import cigarettes from them. Those who advocate further increases in cigarette duty must face up to the realities of what that entails.

Is there a trend developing in respect of the country of origin for cigarettes that have been recently confiscated?

Some of these cigarettes are manufactured in a disguised way, through the design of imitation packets. We believe the Far East is one particular source, but we do not have precise information about the ultimate location of the manufacture of these cigarettes. The trade became so lucrative that the Revenue stamp was imitated and replacement arrangements for the duty stamp have since been put in place by the Commissioners. That had never happened before and it is a sign of how lucrative the trade had become due to the very high levels of duty.

This has become a European problem. Other member states must be experiencing the same difficulties.

They are not applying the same tax. That is the difference. We have the advantage of being an island state.

If there is an indication that these are coming from one particular source in one particular country, surely the help of the European Commission could be acquired for inter-governmental contact. The country of origin that is allowing this illegal trade to continue should be approached and asked what it is doing about allowing these cigarettes to be manufactured, some of which have dangerous contents. That creates a health problem as well as a loss of revenue.

We have raised the matter through diplomatic channels. The Deputy is right that some of these cigarettes have dangerous contents.

Like other committee members, I have received material from the Irish Cancer Society and from ASH's cardiologist, Dr. Angie Brown. ASH suggested a number of amendments, the second of which deals with on-the-spot fines and confiscations of what are known as weekend smugglers. These are the people who bring in around 10,000 cigarettes personally. These fines are used successfully in Norway and the UK, but are not used here at all. ASH also proposes that the tax on loose tobacco be brought into line with the tax on cigarettes, because there are cases of people manufacturing cigarettes in Ireland having brought the loose tobacco into the country.

A debate on the role of cigarette companies has been taking place all over the world for a long time. A number of major international cigarette companies have been found to be complicit in facilitating operations in other countries where cigarettes were later smuggled back into countries like Ireland. Only two tobacco companies signed up to the memorandum of understanding on the anti-contraband and anti-counterfeiting agreements, yet these arrangements enshrine into Irish law responsibilities for the tobacco industry.

Raising the level of fines and other measures taken by the Minister are very welcome, but this is an enormous health issue. It is suggested that up to one third of the tobacco products smoked in Ireland are smuggled in here. That means there are street sellers in open air markets selling contraband, often under the noses of nearby gardaí. There is a need for a significant ramping up of the measures and on-the-spot fines would be an improvement. These fines seem to have worked in other jurisdictions. Would the Minister look at the submission from the cardiologist and consider incorporating some of that into amendments on Report Stage? That would be a positive way to proceed.

There is much evidence to suggest that some of the products manufactured for smuggling out of the Far East are highly carcinogenic, as there are no controls over the contents of those cigarettes. That is not just a tax issue. It is also a public health issue. Ireland seems to have become a major staging post for cigarette smuggling into Europe.

There is also a proposal that the capacity of customs be beefed up. The proposers suggest this would be more than self-financing.

There is a vote in the Dáil, so we will suspend for a while.

Sitting suspended at 4.10 p.m. and resumed at 4.35 p.m.

There were two issues raised about this. One was the question of on-the-spot fines. The limits on personal importation are indicative only; they cannot be seen or applied as maximum limits for importations from other EU countries. An individual can still prove to the satisfaction of the EU that amounts in excess of the indicative limit are solely for personal use and therefore can be legally brought into the State. In 2009, the Commission commenced infringement proceedings against Ireland over our enforcement of the limits, both in regard to the level of the limits and the penalties applied for breaching them. Taking into account the issue of the burden of proof and due process, it is not clear that on-the-spot fines would advance our cause.

The other question related to the open illegal selling of tobacco outside markets.

We want to move on to section 97.

I apologise; I was replying to questions that had been raised. Both the Garda and the Revenue Commissioners maintain that when the man in the white van is intercepted, they do not get many cigarettes. We must go back to the source of the supply.

Was the pursuit of Ireland by the Commission for being out of line on foot of a complaint from the tobacco companies?

No, it came from an individual.

A person seeking to import cigarettes for his personal use.

It is the same as the provision for alcohol for personal use.

It is the same as the stallion complaint about Rock of Gibraltar and the fall-out between John Magnier and Alex Ferguson.

Question put and agreed to.
SECTION 97.
Question proposed: "That section 97 stand part of the Bill."

Has the Minister a note on section 97? What is the real effect of the VRT changes?

Section 97 amends the Finance Act 1992 to provide for the introduction from 1 January 2011 of a revised classification system for VRT. It will align our VRT categories with those used for classification of vehicles under the EC directives at European level. A more detailed note on the categories can be provided to the Deputy.

Does it have any effect on someone purchasing a car in 2010? Will he or she find in 2011 that the VRT rate has changed downwards?

No. There is a different classification system. The EU uses five groups: category M — passenger cars and buses; category N — commercial vehicles; category L — motorcycles; category T — agricultural and forestry tractors; and category O — various types of trailers. There are then a number of subgroups. Category M1, is similar to our category A for passenger cars.

Does it affect in any way the amount of money people are charged in respect of VRT?

Not in a particular year. However, it may affect matters in 2011 as against 2010 in the event that someone purchases a car in 2011.

That is my point.

At present, luxury models can be manipulated with a view to evading VRT through conversion of the vehicle in order to avail of taxation at a more attractive commercial rate of €50 rather than the correct emissions rate base. These conversions can involve something as simple as seat removal. An amount of activity takes place in that regard. This gives rise to safety concerns, particularly where extensive work is carried out on a vehicle's chassis or where weight is added in order to transform that vehicle from one category to another. The changes will have very little impact on current category A vehicles.

Question put and agreed to.
Sections 98 and 99 agreed to.
SECTION 100.

I move amendment No. 72:

In page 139, between lines 16 and 17, to insert the following subsection:

"(2) Subsection (1) comes into operation on 1 January 2011.”.

This is a technical amendment. Section 100 amends section 132 of the Finance Act 1992 to make provision that where the documentary evidence presented with a vehicle at registration is not sufficient to determine conclusively its category for the purposes of assessing its liability for VRT, the Revenue Commissioners will have power to determine the category.

Amendment agreed to.
Section 100, as amended, agreed to.
Section 101 agreed to.
SECTION 102.

Amendments Nos. 73 and 74 are related.

I move amendment No. 73:

In page 141, line 14, to delete "purpose."." and substitute "purpose.".

Section 102 introduces a new section 135BA into the Finance Act 1992, providing the legal basis for the car scrappage scheme. Amendment No. 73 merely involves a technical correction. However, amendment No. 74 is more substantive in nature and is being introduced in response to representations from Deputies on all sides. Since the inception of the scrappage scheme, it has become clear that, in many cases, vehicles acquired within households for use as family vehicles are frequently registered for VRT purposes in the name of one spouse but insured in the name of the other spouse. Accordingly, the scope of the scheme is being extended to provide that a reference to "person" may, in the application of the provisions, be construed by the Revenue as a reference to the person concerned or that person's spouse.

I wish, on behalf of the car hire industry, to refer to something that is an unintended consequence of the scrappage scheme. As the Minister is aware, the scrappage scheme does not apply to rental cars because they are leased in the first instance. They are viewed as second-hand cars, even though they are returned for sale in the first year after they come off the production line. This is having a major impact on the number of cars being made available by car dealers. As a result, there is now a huge under-supply of cars. When cars used for hire during the year are returned to the forecourt for resale, they cost more than new cars.

Following the budget, the vehicle registration rebate that was available in respect of cars used for tourism purposes is being abolished. The car hire industry is, therefore, facing a double whammy. Two years ago there were 25,000 rental cars available. Last year the figure was 18,000 and this year it will be between 10,000 to 12,000. This represents a catastrophic fall in the level of supply. I discussed this matter with the Minister for Arts, Sport and Tourism, Deputy Cullen, and discovered that he shares my concern in respect of it. I understood he was to speak to the Minister about it.

I am glad Deputy Mitchell raised this issue, which is under examination in my Department in order to discover whether a suitable amendment can be devised for Report Stage. I am not committing to introducing such an amendment at this point. We are merely exploring the issues involved. The Deputy is correct that there has been a reduction in the number of these vehicles.

I welcome the Minister's reply. I will submit an amendment for Report Stage. It would be even better, however, if the Minister drafted his own amendment.

I welcome the change the Minister is introducing in respect of people and their spouses. I dealt with a case — I may have brought it to his attention — where someone died and where the 12-month requirement could not be fulfilled, even though the spouse continued to drive the vehicle. I take it the amendment will, in the event of someone dying, allow his or her spouse to continue to qualify under the scheme.

Yes. However, we did not extend it to children because cars might be traced to various locations.

More often than not, I am at odds with the Minister. However, I warmly welcome these amendments and the relevant section.

Amendment agreed to.

I move amendment No. 74:

In page 141, between lines 14 and 15, to insert the following subsection:

"(5) For the purposes of subsection (2)(c) and (h), any reference to ‘person’ may, in the application of those provisions, be construed by the Commissioners as a reference to the person concerned or to that person’s spouse.”.

Amendment agreed to.
Section 102, as amended, agreed to.
Sections 103 to 105, inclusive, agreed to.
SECTION 106.

I move amendment No. 75:

In page 144, lines 12 and 13, to delete subsection (2) and substitute the following:

"(2) Subsection (1) applies to policies of insurance (within the meaning of section 142A (inserted by subsection (1)) of the Finance Act 1992) issued on or after the date of the passing of this Act.”.

This is a technical amendment, designed to clarify the meaning of a policy of insurance.

Amendment agreed to.
Question proposed: "That section 106, as amended, stand part of the Bill."

The problem relating to foreign-registered cars may not be as bad now as it was in previous years when there were many more foreign nationals living here. These people imported their vehicles from and paid their insurance and motor tax in their home countries. Was a clampdown ever carried out in respect of such behaviour or does it remain a problem?

It is a problem and I indicated in a previous budget that I intended to clamp down on it. As a result, there were over 22,000 vehicle challenges last year and written warnings were issued in 2,763 cases. I do not agree with Deputy Terence Flanagan that this problem is exclusive to foreign nationals resident in the State.

It is indigenous as well.

Yes, there is an indigenous dimension to this difficulty which relates to the use of a jurisdiction within the island of Ireland. Registration charges and VRT were subsequently paid in 1,486 of the 2,763 cases in which written warnings issued. Five vehicles were detained pending further investigation, 151 cases involved transfer of residence relief, temporary exemption occurred in 64 cases, exportation occurred in 771 cases, 79 vehicles were scrapped and 68 were not traceable. There are a further 139 cases pending and a number of other cases have been reported for prosecutions and court fines. The figures I have provided are relevant to the period up to the end of 2009. We are continually monitoring this problem.

A more serious problem is that many of these people with no insurance cover. That is the significant problem in this area. Whatever about motorists evading tax, if they have an accident and are not insured, all motorists have to pay for that.

That falls to the Motor Insurers Bureau of Ireland.

That cost is carried by the rest of the insurance industry.

That is right. Action should be taken by members of the Garda Síochána to ensure that motorists have insurance cover. It is a bit late for the Garda to discover that a motorist does not have insurance cover when he or she is involved in an accident.

That would be a matter for the Department of Justice, Equality and Law Reform.

What is required is a combination of tracing whether the vehicle is legally registered in the State and if the owner has motor insurance cover. The fall-out in such circumstances could be a double whammy. I do not believe one arm of the State can ignore another arm of it if there is a problem in this respect. A real problem is that many such motorists do not have insurance cover.

Question put and agreed to.

Now that we have completed the sections set out for this tranche of work, sections 60 to 106, inclusive, I propose that we move on to the next section, section 107. This Part relates to value added tax. I advise members that we will suspend the sitting at 5.30 p.m.

SECTION 107.

Question proposed: "That section 107 stand part of the Bill."

I wish to raise an issue that was raised with me by the building materials association, namely, the huge loss of revenue to the Irish State due to the illegal use of VAT numbers in Northern Ireland and its recommendation to the Minister that an investigation into this practice be carried out by Revenue officials on both sides of the Border. I do not know whether this matter has been brought to the Minister's attention and whether he considers there is a significant leakage as a result of that. If he has not been briefed on the matter, perhaps he could provide me with a note on it at an appropriate time.

I will obtain a note for the Deputy on the matter. Did the Deputy table a parliamentary question on this matter recently?

No, I did not. It was suggested as an amendment, but it was not in order because it would pose a charge on the Exchequer. Therefore, I did not table an amendment on it.

A question was tabled by Deputy Healy Rae, the reply to which provides some of this information, which I will forward to the Deputy.

Question put and agreed to.
SECTION 108.
Question proposed: "That section 108 stand part of the Bill."

This section deals with the area of definition and I am not sure if this is the right section to raise the matter of the charging of VAT on local authority services. While people would understand the charging of VAT for off-street parking and waste services, local authorities have concerns about some items that will come under definition of proposed measure. There are also concerned about the proposed implementation date, which is 1 July. A VAT change is normally introduced at the beginning of a year or some transitional arrangements would be made to provide that any money spent on the provision of it could be offset. Has the Minister received representations on these matters and is he considering them with a view to tabling amendments in this respect at a later stage?

Issues arise about definitions in this respect. The Minister mentioned that not-for-profit organisations will not pay VAT. In that context, can a local authority be a public body and also be a not-for-profit organisation? Some of the activities in which they are involved do not come under the normal for-profit sector. Perhaps none of their activities come under that sector, although they accept the proposed charge for some items. Issues have been raised concerning services that will be subject to VAT. For example, if a person has been granted a waiver for refuse charges, is that service still subject to the charge of VAT? Will the payment charged for the renting of a football pitch be subject to VAT? I understand discussions on this matter are taking place in the background, although I am not sure if Minister is aware of that.

Local authorities seek definitions on what comprises normal markets and social markets. In terms of the services delivered by local authorities, there is no commercial market for their provision or the normal commercial market has failed to deliver them. Local authorities seek to make a distinction between basic services, which we are aware would be subject to VAT, and sport, recreational and cultural activities, which come under the not-for-profit sector, and to which the charging of VAT should not be extended. The only reason local authorities engage in such activities is that there is no market for such provision or the market has failed in such provision. Is there a prospect that the Minister will table amendments on this area on Report Stage?

I will try to assist the Deputy but I anticipate there will be a similar discussion on another section. I am not sure if we have reached that section.

Not quite. As Deputy Noel Ahern has spoken about this matter, I wish to state that I understand the Minister intends to ensure local authorities will charge VAT of 13.5% on waste services, 13.5% on leisure services and 21% on off-street car parking with effect from 1 July. Perhaps he will confirm that. Having regard to inflation and given that most people's incomes are going down rather than up, these VAT charges will impose a significant increase in costs for those services for ordinary families and for community-based organisations such as sports clubs and organisations that use community halls provided by local authorities for a number of hours in the afternoon.

The Deputy has tabled an amendment on this matter.

I have, but I want to establish a principle because, as Deputy Bruton said, it is technically very difficult to offer an amendment to the Finance Bill which can be accepted. The first question the local authorities have asked, as Deputy Noel Ahern said, is whether the Minister can change the implementation date to the year end, bearing in mind that local authorities have struggled to prepare budgets and are now in the middle of budgetary year. In the case of elderly people who have been granted a waiver for bin charges, perhaps worth more than €100, changes will have to be made.

They are not being charged; therefore, the charge does not arise.

People who pay the service charge element may have already paid €100 or €150. They will have to charged VAT for that service for half a year, from 1 July. In most local authorities people pay for bin lifts. Under the arrangements for brown bin lifts, those charges have been advised for the year and are provided for in local authority budget. In practical terms, it is quite an imposition on the local authorities to have to make a change mid-year and to re-bill customers.

If the Minister has to implement this measure — we are aware of the European Court of Justice ruling in this area — could he postpone the implementation date until the end of the year? Will the Minister give an answer on the issue? A number of local authorities have pointed out with respect to some services, such as the letting of football fields or halls to community associations or individuals, that they are not-for-profit activities. Such organisations generally seek to simply break even.

It would be helpful if before Report Stage the Minister would advise us on whether there is merit in distinguishing between a local authority as a service supplier and activities of the local authority which are essentially not-for-profit services and are therefore not appropriate to the VAT charge. There is a problem because private organisations let out pitches and there are private tennis, golf and gym clubs, etc. They supply sports services and in many cases charge 13.5% VAT. The rate is very high.

With regard to off-street car parking, the private multi-storey car parks have big tax breaks. This is particularly relevant to city rather than suburban areas. The price of off-street car parks will now go up by 21% if the VAT is to be passed on by the local authority. That will mean the notion of shopping using off-street parking in the city centre will only be for the very rich while the multi-storey private car parks will still have the advantage of the very generous construction-based tax breaks which have been enjoyed to date and which helped to build the structures.

Has the Minister had the opportunity to consider this and can he do anything to address the issue? When I raised this earlier, the Minister suggested that local authorities could reclaim VAT on their inputs. I discussed how this could work with several people and short of completely privatising the bin services, which may the nub of the Minister's suggestion, I cannot see how a local authority could achieve it. It could be achieved by creating a special purpose vehicle or company and siphoning the inputs for bin services into the company.

How often do local authorities buy bin lorries in large volumes to create a recovery base for VAT on inputs? I know the Minister made the suggestion in good faith but having examined it and asked others to look at it, I am not convinced it is an easy runner.

This basically relates to section 111 and I do not know if the Minister wishes to respond now or wait until we get to the section.

We will have a discussion on this when we get to section 111 in any event.

We will postpone further discussion and answers until then.

Could they be taken together now?

The earlier section includes a provision to introduce the concept.

We will postpone the discussion.

What section are we dealing with?

It is section 108.

We want to raise the matter now because it relates to the VAT treatment of public bodies. It would be better to raise it in the context of sections 111 and 112 but the first mention of the issue is in section 108.

There is a decision of the European Court of Justice on this. It was not suddenly raised by my Department or me in the preparation of the Finance Bill. The judgment was handed down on 16 July 2009 in case C 554/07. Our advice is that we should act on the judgment within a reasonable period and a year is appropriate. That is why we are constrained to have some implementation in the matter during the course of this year.

The substance of the matter, as Deputies are aware, is that VAT legislation applies to public bodies, including local authorities. The ruling of the court originated in a Commission infringement issued against Ireland in December 2004. The complaint was by a Dublin-based private off-street car park operator complaining of a distortion of competition as a result of the obligation to charge VAT while car parking facilities operated by Dublin City Council were exempt. The Commission considered the Irish legislation and determined it was lacking in regard to the interpretation of those aspects of the VAT directive dealing with VAT treatment of services delivered by local authorities, where distortions of competition may arise due to the exempt status.

Deputy Burton raised the question of tax breaks for private off-street car parks but there are substantial Exchequer subsidies for car parks provided by local authorities as well. It is very difficult to adjudicate the competitive market in that context.

In the implementation of this directive we are anxious to assist the local authorities as much as we can but we must comply with obligations under the EU decision. That is our difficulty, which requires some degree of expedition in the implementation of our obligations. There are different implications for different sectors, which I presume will be highlighted in the discussion on the particular section.

Question put and agreed to.
SECTION 109.

I move amendment No. 76:

In page 145, line 32, after "supply" to insert the following:

"(in this Act referred to as a 'joint option for taxation')".

This amendment clarifies the meaning of the term "joint option for taxation", which is used throughout the VAT legislation.

Amendment agreed to.
Section 109, as amended, agreed to.
NEW SECTION.

I move amendment No. 77:

In page 146, before section 110, to insert the following new section:

110.—Section 4C of the Principal Act is amended by substituting the following for subsection (10)—

"(10) In the application of section 12E to immovable goods and interests in immovable goods to which this section applies, subsections (4), (5) and (6) of that section shall be disregarded in respect of the person who, on 1 July 2008, owns those immovable goods or holds an interest in those immovable goods, but—

(a) if that person develops those immovable goods and that development is a refurbishment, within the meaning of section 12E, that is completed on or after 1 July 2008, subsections (4), (5) and (6) of that section shall not be disregarded in respect of that refurbishment;

(b) if, on or after 23 February 2010, that person—

(i) first uses those immovable goods (in this subsection referred to as the ‘first use'), or

(ii) changes the use of those immovable goods (in this subsection referred to as the ‘changed use'),

and the first use, or the changed use, as the case may be, is a use of those immovable goods for a purpose other than the provision of a letting of the type referred to in paragraph 11(1) of Schedule 1, then subsection (6)(a) of section 12E shall not be disregarded for the remainder of the adjustment period applicable to those immovable goods.".".

This amendment is required to ensure that capital goods schemes apply where the owner of a transitional property changes the use of the property after 23 February 2010. It is a VAT measure and is designed to protect the Exchequer. A case has recently come to light where a construction company built a nursing home and deducted input tax on the basis that it would sell the property. The company did not sell the nursing home but instead intends to operate it. The case is ongoing but the VAT at risk in this case alone is in the region of €1.7 million so we are anxious to plug that hole.

Amendment agreed to.
Section 110 agreed to.
SECTION 111.

I move amendment No. 78:

In page 147, between lines 33 and 34, to insert the following subsection:

"(2) The Minister shall within one month from the passing of this Act prepare and lay before Dáil Éireann a report on the estimate of the VAT likely to be charged by local and public authorities annually under this section and an estimate of the amount such authorities will be likely to recover in respect of their inputs.".

We drafted this in a way as to be in order and consider the issue. The amendment proposes that the Minister would prepare within a month from the passing of the Act and lay before the Dáil a report of the estimate of the VAT likely to be charged by local and public authorities under this section, as well as an estimate of the amounts such authorities would be likely to recover in respect of their inputs. That follows from the suggestions made by the Minister but which I am at a loss to understand as to how the issue can be easily managed.

The matter is pressing for local authorities as they will require a significant number of increased charges because of the charge of VAT to customers. They will have to do it mid-year, which is particularly problematic, although not impossible. It brings about much extra administration.

We can consider the leisure facilities. The 13.5% increases in that area will bring particular hardship for many community, sports and voluntary organisations which hire facilities from local authorities. Proposals have been circulated to mitigate some of this in respect of services provided to not-for-profit bodies such as local sporting clubs and voluntary organisations. I would like to see the Minister's officials address this. As the Minister made a reference to the recovery of VAT on inputs, perhaps he could enlighten us as to whether his officials came up with some scheme which was applicable in the short term and which would represent some mitigation for local authorities on this situation.

I support the sentiment of Deputy Burton's amendment. I wonder sometimes whether our negotiations with the EU are tough enough, or if we let the Commissioners off too easily. Should we be taking a harder line on these issues like the French? I regard the VAT imposition on all local authority services as equivalent to the carbon tax that we dealt with earlier. It is a fund-raising measure, albeit directed by the EU, but we are going about this in a different way. If it is going to be captured, then we should deal with it constructively rather than just have it as a revenue raising measure.

Whatever VAT is raised from the local authorities should be ring fenced and given directly back to them. I will be moving an amendment to that effect on Report Stage. Perhaps that would allow local authorities to readjust the cost base of their charges to the public and would alleviate some of the difficulties that will inevitably arise.

I can understand the Minister's point that he wants to be seen by the European Court of Justice to have taken note of its ruling. I would have thought that once the legislation is passed and the rules start from next January, then this would suffice.

Other issues relate to whether a local authority can be a not-for-profit organisation for VAT purposes. Can this be done? We do not want a situation where VAT is placed on everything they do. VAT for the main categories is understood, but we do not want to have VAT on everything, such as hiring pitches and so on. Can the local authority be both a public body and not-for-profit organisation that would not be liable to VAT?

I can understand what the Minister is saying in that there has been a court case. The issue is to use the maximum flexibility within that court case. It clearly was a ruling on the distortion of competition. The Minister may be throwing his net a bit wide, because some of the areas in which he refers to enacting these rules might not represent a distortion of competition, as Deputy Ahern pointed out. Housing rents and certain licences appear not to be caught by the provision, and I am wondering whether there could be some flexibility for the local authority to use licensing arrangements as an alternative way of legitimately dealing with this. A licensing arrangement to use a pitch seems to be a reasonable way of doing it without attracting VAT.

Deputy Morgan's suggestion to give local authorities some breathing space with the Revenue Commissioners to sort out the impact of this tax is not a bad idea. I imagine that it will be quite disruptive as the Minister tries to bring in the charges and tries to settle this system down. Perhaps he could grant a temporary relief to the local authorities to get this up and running, because it will be quite an adjustment for some families who already are put to the pin of their collar. It comes at the same time as the Minister's decision to withdraw the tax relief for some of these charges. There may be a need for the Minister to use maximum flexibility in the transitional arrangements and in the definition he applies to allow the local authorities introduce this charge in a way that does not cause hardship.

I am listening to everybody with great attention and I understand the many practical concerns which Deputies have raised. I have to work within the framework of this European judgment. This discussion is useful and I will reflect on the issues raised in it, but I would like to identify some of the "no-go" zones as well.

Services that become liable to VAT include services such as waste collection, landfill and recycling services, off-street parking — which was in the judgment itself — toll roads, the operation of leisure facilities, rent from certain lettings of commercial property and the supply of staff and data. It should be noted that such services are already subject to VAT if provided by a private operator. In the bulk of those cases, there is not much argument about it. However, the argument has been made by Deputies in some cases that the nature of the service provided is more connected with the body performing functions in the public interest, rather than providing a private interest. Leisure facilities represent a rather interesting example of this. There are some cases, such as the provision of municipal golf courses, where private operators are at a competitive disadvantage due to the element of public subsidy in the provision of the course. There are other examples, such as the provision of Gaelic football or soccer pitches, where there is no private provider, and I accept that we must reflect on such issues.

Other services operated by public authorities may not be subject to VAT because they are otherwise exempted. For example, the supply of water, education, health and passenger transport are not subject to VAT, even if they are provided by a municipal authority, because they are otherwise exempted from VAT. There are also activities carried out by public bodies where a charge applies which will remain outside the scope of VAT, including parking fines, driving licences, development levies, casual trading licences, compliance certificates and so on, but these are purely regulatory functions.

Business customers who charge VAT will not be affected by this change, as they can claim a deduction for any VAT charged. The impact on private individuals, VAT exempt entities and other non-registered bodies will vary and could create an increased cost.

While yield will accrue from the VAT being applied to services that were up to now exempt, any VAT charged to business customers will be reclaimed by them. Public bodies will now be in a position to claim VAT input credit. For a waste collection service, the input credit would not just include the purchase of a waste lorry, but would also include an apportionment of part of the administrative overhead represented by light and electricity in the building which administers the waste service. There is quite a lot of scope for inputs to be claimed by providers of services. I am not narrowly restricted in particular contexts. It is an issue for local authorities to assess. It is realistic to bring this in half way through the year but I will reflect on this and such further points as Deputies wish to make on it and revert on Report Stage.

Is there not a VAT refund arrangement for farmers as a flat rate that might give a break to local authorities in dealing with the adjustment?

There is such an arrangement but it is important that local authorities go on a proper arrangement and work through the difficulties with them.

Amendment, by leave, withdrawn.
Section 111 agreed to.
Sitting suspended at 5.35 p.m. and resumed at 6.30 p.m.
Top
Share