Special Committee Corporation Tax Bill, 1975 debate -
Tuesday, 24 Feb 1976

SECTION 64.

Mr. R. Ryan

With your permission, Chairman, I should like to discuss amendments Nos. 15, 16, 17 and 18 together. I move amendment No. 15:

In page 61, subsection (2), line 57, and in page 62, lines 1 and 2, to delete " such proportion of the amount of the relevant distribution as is represented by the fraction A+B/C of the relevant distribution " and to substitute " an amount arrived at by applying a fraction determined by the formula A+B/C to the amount of the relevant distribution ".

These amendments are drafting amendments to secure clarification. The first, second and fourth are merely drafting amendments and amendment No. 17 is correcting a typographical error.

Mr. Crowley

Is No. 15 not a little more than a drafting amendment?

Chairman

It is a substitute. It is a deletion.

Mr. Crowley

It changes it.

Mr. R. Ryan

No. It does not effect a change; it gives greater clarification. I am not saying that it is clear.

Mr. Crowley

Greater clarification in what way?

Mr. R. Ryan

If you read the original version and the one in the amendment you will see there is clarification. The old wording which we are deleting is " such portion of the amount of the relevant distribution as is represented by the fraction A+B/C of the relevant distribution ". That is not very clear so we are substituting the words " an amount arrived at by applying a fraction determined by the formula A+B/C to the amount of the relevant distribution ".

Mr. Crowley

I want to be quite certain on this one because I am just as confused by the amendment as I am by the original part. I do not see any essential difference.

Mr. R. Ryan

There is no essential difference. It is just more elegant English.

Amendment agreed to.

Mr. R. Ryan

With your permission, Chairman, I propose to take amendments Nos. 15a and 18a together.

I move amendment No. 15a:

In page 62, between lines 35 and 36, to insert a new paragraph as follows:

"(c) where the total amount of the distributions made or deemed under this subsection to have been made for the first accounting period for which the company came within the charge to corporation tax exceeds the distributable income of the company for that accounting period—

(i) the excess shall be deemed to be a distribution for the company's period of account which ended on the accounting date last before the 6th day of April, 1975, or, if there was no such period of account, to be a distribution for the year which ended on the 5th day of April, 1976, and

(ii) the tax credit in respect of the excess which is so deemed shall be an amount equal to the amount of income tax which, under section 410 of the Income Tax Act, 1967, the company would have been entitled to deduct from a dividend of such an amount as after deduction of that tax would equal the amount of the excess and for this purpose it shall be assumed that the dividend was paid on the 5th day of April, 1976, and was in respect of the said period of account or year which ended on the 5th day of April, 1976, as the case may be.".

Amendments Nos. 15a and 18a, which are related, are being made in response to representations which were made by the Consultancy Committee of Accountancy Bodies, Ireland, who recommended that that section 64 (3) should provide a definition of " distributable income " to cater for the case where on or after the 6th April, 1976, a company makes its distribution out of income which was earned before the company came within the charge to corporation tax, and which therefore was charged to income tax and to corporation tax.

Amendment agreed to.

Mr. R. Ryan

I move amendment No. 16:

In page 62, subsection (4), lines 39, 40 and 41, to delete paragraph (a) and to substitute the following paragraph:

"(a) the income of the company charged to corporation tax for the accounting period as defined in section 28 (8) less the amount of corporation tax payable by the company for the accounting period which is attributable to that income, and".

Amendment agreed to.

Mr. R. Ryan

I move amendment No. 17:

In page 62, subsection (4), line 46, to insert " 25 or 26," after " section 15 (4),".

Amendment agreed to.

Mr. R. Ryan

I move amendment No. 18:

In page 62, subsection (4), to delete lines 49 to 52.

Amendment agreed to.

Mr. R. Ryan

I move amendment No. 18 (a):

In page 63, lines 8 to 14, to delete subsection (7) and to substitute the following subsection:

"(7) Where the income of a company for an accounting period includes a dividend from which income tax was deducted under section 456 of the Income Tax Act, 1967, then for the purposes of this section the amount of tax so deducted shall be deemed to be a tax credit in respect of a distribution of an amount equal to the amount of the dividend reduced by the amount of tax so deducted.".

Amendment agreed to.

Question proposed: " That section 64, as amended, stand part of the Bill."

Mr. R. Ryan

This section provides for a reduced tax credit in respect of a distribution made by a company wholly or partly out of income which has attracted export sales relief or out of distributions received from other companies whose profits had been wholly or partially relieved from tax under the export sales relief. It corresponds broadly with section 410 of the Income Tax Act, 1967, which provides for the deduction of income tax at a reduced rate from dividends paid out of export-relieved profits. However, the section contains a provision which has no counterpart in the existing export sales relief provisions which will secure that where the distributions exceed the distributable income of the accounting period the tax credit in respect of the excess will be calculated having regard to any export sales relief for the immediately preceding accounting period. Where the profits of the latter period are insufficient, the balance of the excess will be treated, for purposes of computing the tax credit, as coming out of the profits of the next immediately preceding accounting period and so on. What we are doing is incorporating in law what has been the practice but putting it beyond any doubt.

Mr. Crowley

It does not basically change what has been in effect——

Mr. R. Ryan

No, it is providing an improved version of section 410 of the Income Tax Act, 1967.

Chairman

It is not to the detriment of the taxpayer?

Mr. R. Ryan

No.

Mr. T. J. Fitzpatrick (Dublin Central)

The explanatory memorandum states:

Section 64 contains a new provision to deal with the situation where a dividend was paid for a period for which there were no taxable profits.

Is that where there were no profits for a year or no exports?

Mr. R. Ryan

There were no profits, therefore there is no export sales relief.

Mr. T. J. Fitzpatrick (Dublin Central)

If there was a dividend paid?

Mr. R. Ryan

Yes, you could have dividends paid without profits.

Mr. T. J. Fitzpatrick (Dublin Central)

Would they be allowed for tax relief, even if there were no profits for the year?

Mr. R. Ryan

You look at the preceding year to get a measure of export profits.

Mr. T. J. Fitzpatrick (Dublin Central)

Is it for one year?

Mr. R. Ryan

The preceding year.

Mr. T. J. Fitzpatrick (Dublin Central)

Of what period?

Ruairí Brugha

The Minister said the next preceding year, if necessary.

Mr. T. J. Fitzpatrick (Dublin Central)

I would like to know how far back it goes.

Mr. R. Ryan

What it is necessary to ascertain here is the underlying pattern of profits. You go back to the immediately preceding year. That might give you sufficient to reveal the true picture or you could go back further.

Mr. T. J. Fitzpatrick (Dublin Central)

Could you go back for a period of eight or nine years?

Mr. R. Ryan

You could, but it would be unlikely that you would assume the pattern——

Mr. T. J. Fitzpatrick (Dublin Central)

The reason I am saying that is that when a company starts in the export trade, if they are granted this concession, it is very desirable that they should not distribute any dividends at all, that they should be put back into essential machinery, that that should be done for eight or ten years, and that this credit be carried forward. If it acts the other way, the profits would be distributed to qualify for the tax relief.

Ruairí Brugha

Do the profits that are held not hold the credit?

Mr. T. J. Fitzpatrick (Dublin Central)

Do they?

Ruairí Brugha

On distributed profits.

Mr. R. Ryan

The credit is not related to the distribution. It is related to the underlying profits.

Mr. M. E. Dockrell

They do not care whether they distribute profits or not. It is the making of the profits that they are concerned with.

Ruairí Brugha

It is the deduction from the dividends that we are dealing with.

Mr. T. J. Fitzpatrick (Dublin Central)

Where a shareholder is concerned it is on the ordinary dividend that he will get his tax rebate. If it is handled in the company and it is ploughed back into plant and machinery, then he gets no rebate from his export reliefs. I want to know if that is carried forward for at least eight or nine years. At that time the company can say: " Now we are going to make up the losses and distribute the profits ".

Mr. R. Ryan

We are only dealing here with cases where the distributions are actually made.

Ruairí Brugha

Deputy Fitzpatrick is asking about where they are not made.

Mr. M. E. Dockrell

They will be able to plough more back into the business because they would not get the same amount of taxation.

Mr. T. J. Fitzpatrick (Dublin Central)

The undesirable factor of that is that there is a tendency to distribute profits every year.

Mr. R. Ryan

The tax credit which we are dealing with here will only arise when there is distribution.

Mr. Crowley

But you could have a distribution without making a profit.

Mr. R. Ryan

Yes, that is the point.

Mr. Crowley

Deputy Fitzpatrick asked how far back do you go——

Mr. R. Ryan

You go back over a sufficient period to cover the distributions actually made. Supposing you are distributing £1,000 and there is £500 made one year, you go back to the earlier year when the £500 was paid and that would be two years. If on the other hand, it is £300 or £400 you would go back three years.

Mr. P. Belton

There is no limit?

Mr. R. Ryan

No. You go back sufficiently far to get what covers distribution.

Mr. T. J. Fitzpatrick (Dublin Central)

But at the end of, say, a ten year period, a company decide that they will distribute the entire profits that were made over the past ten years, would shareholders be entitled to a tax rebate? In the intervening years they had ploughed back their profits, but now they are taking the decision to take them out together: " We are striking a dividend now to cover the whole period of profits ", and they distribute them.

Mr. M. E. Dockrell

The money lying there for ten years will be that much bigger.

Mr. T. J. Fitzpatrick (Dublin Central)

It is not lying there. It is in plant and machinery.

Mr. M. E. Dockrell

It has gone into the business. The machinery is that much more valuable after so long.

Mr. T. J. Fitzpatrick (Dublin Central)

Will they be allowed to have tax relief?

Ruairí Brugha

They have got it.

Mr. T. J. Fitzpatrick (Dublin Central)

I am talking about any company who decide that they will not distribute any profits at all for the first eight or nine years because it is desirable that they should try to put it back into plant and machinery. After ten years they go right through their accounts and see that they have made £50,000 or £60,000. They decide they are going to distribute that money because they are in a position to do so. I want to know if the shareholders can claim the tax rebate for the full amount?

Mr. R. Ryan

Yes.

Mr. T. J. Fitzpatrick (Dublin Central)

But it will not show up in that year's accounts?

Mr. R. Ryan

No, that is why we have made the provision enabling a person to go back to see what the profits were for as long as it is necessary to cover the distribution.

Question put and agreed to.