Special Committee Corporation Tax Bill, 1975 debate -
Wednesday, 25 Feb 1976

SECTION 101.

Mr. R. Ryan

I move amendment No. 30e:

In pages 96 and 97, to delete subsection (2) and to substitute the following subsection :

" (2) Where the aggregate of—

(a) the accumulated undistributed income of the company at the end of the accounting period, and

(b) any amount which, on or after the 27th day of November, 1975, was transferred to capital reserves or was used to issue shares, stock or securities as paid up otherwise than for new consideration (as defined in Part IX) or was otherwise used so as to reduce the amount referred to in paragraph (a),

is less than the excess referred to in subsection (1) that subsection shall apply as if the amount of that aggregate were substituted for the said excess.".

The subsection limits the amount on which the surcharge may be entered to the amount of accumulated undistributed income of a company at the end of its accounting period. The amendment being made is a drafting one to ensure that provisions (a) and (b) of subsection (1) shall apply to the surchargeable amount set out in subsection (2). There is a consequential amendment to section 162 which we will come to later. For example, a company which has made no distribution could have an excess of undistributable investment income of, say £800 for an accounting period of 12 months but because of previous losses the amount of accumulated undistributed income is £500 only and not £800. In such circumstances, a surcharge would not be entered on the amount of £500 by reason of provision (a) of subsection (1).

Mr. E. Collins

Is any change taking place in this section?

Mr. R. Ryan

It operates in ease of the taxpayer.

Mr. Lalor

I want to protest. I presume you know our chief spokesman on finance, Deputy Colley, is in hospital. Deputy de Valera, who is on this Committee, is ill. Deputy Haughey is the Chairman of a Committee of the House which is now sitting. I want to say that the co-operation of my party in the forming of further Special Committees will not be forthcoming if you continue in this manner. I am sitting in now for Deputy Crowley.

Chairman

The times were arranged last week after the discussion.

Mr. Lalor

Is it agreed that you should have two meetings of Special Committees going on concurrently when we have Members sitting on both?

Chairman

All I know is that the matter was discussed here as to what times we would sit this week. It was agreed that we would sit at these times. I am responsible for this Committee only.

Mr. Lalor

I do not think Deputy Haughey was here at last week's meeting when the time was fixed.

Chairman

Others were here. There were people coming and going.

Mr. Lalor

Fair enough. What is the duration of this meeting?

Chairman

We adjourn at 6.30 p.m.

Mr. E. Collins

I am sorry to hear that Deputy Lalor's co-operation will not be forthcoming on the creation of future Special Committees. This was a good development in parliamentary procedure. A mechanism of alternates was established to allow for attendance at other Committee meetings or other Dáil business. That is also an innovation which I would welcome. I do not think anyone is trying to be smart, if I may use that phrase, in having this Committee meeting today. I fully appreciate the significance of the EEC Secondary Legislation Committee sitting. If we are to modernise the procedures of the House we will have to be flexible.

Mr. Lalor

I am all for flexibility. My protests, apparently, were inflexible.

Chairman

There has to be some co-ordinating person to deal with this. This has happened in many other committees too. We have had clashes of times.

Mr. E. Collins

I appreciate Deputy Lalor's position but I feel that his comments are a bit harsh in this respect.

Mr. Lalor

I have not sat on the Committee before and I am unaware of the arrangements. I saw on the Order Paper today that this Committee was to sit this morning at such and such a time. It did not say anything about sitting this afternoon.

Mr. R. Ryan

I know Deputy Lalor is at a disadvantage because he has not heard the reasons why there is a time restraint on this Bill. It has been accepted by his colleagues that it is necessary to pass this Bill into law. That means getting it through both Houses and having it signed by the President before the commencement of the next tax year, which is 6th April. There was agreement last week in the light of that, to have a full session today. It was felt that it would be helpful to get one run at it so that we would not forget what we had learned about earlier sections as we go along. This is a difficult Bill. After the recent vote the Committee reassembled and there was a quorum for more than ten minutes before the Chairman proceeded. We are most anxious to facilitate the Opposition in every way possible. We are sorry that any of Deputy Lalor's colleagues should be ill. We will facilitate them in every way we can. There are four other Members of the Opposition we know are not ill. I am sure they have other obligations around the House. We really cannot fulfil our duty to the nation unless we proceed with this Bill with all possible speed. We will not be thanked by people who will be affected by this Bill unless we get it through. There has been considerable clamour to get it through and the only reason why it is not advanced now is its immense complexity.

Mr. Lalor

I accept that. We insisted that the Minister for Finance should be present. You must appreciate, on the other hand, that we may have difficulties on Report Stage if Deputy Haughey has to go through a lot of it that he has not had the opportunity of going through on Committee Stage.

Chairman

To help you on that, it has been agreed here that sections can be recommitted on Report Stage. We cannot recommit sections here in this Committee until the whole Bill has been dealt with. We can do it at the end of the Committee Stage of this Committee. We can recommit it for consideration here, or we can do it in the House at Report Stage. The Minister has agreed to that in reference to section 43. We are trying to meet all the difficulties that have arisen since this Committee started.

Mr. Lalor

I am sitting in. I know very little about the Bill and I will be asking a lot of questions. I just want to inform the Chairman and the Minister that we will move from one section to another only when I understand what the section is about, and I am very dense.

Chairman

We are dealing with amendment 30e at the moment which is the deletion of subsection (2) and the substitution of another subsection.

Mr. Lalor

Is that the amendment to section 101?

Chairman

Yes.

Mr. Lalor

I am at a disadvantage. I take it that the Minister has explained the purpose of the amendment.

Mr. R. Ryan

I have. The amendment will give an easement to the taxpayer who, as a consequence of adopting the amendment, will not have to pay as much tax.

Mr. Lalor

I recall going into the House in relation to one of the Bills some time ago and asking if something in the particular Bill—I think it was the Wealth Tax Bill—was a proposal in easement of the taxpayer. I remember the Minister smiling and asking me was I serious in suggesting it would ease the burden on the taxpayer in any shape or form. Now he tells me the purpose of this subsection is to ease the burden on the taxpayer.

Mr. R. Ryan

That is right.

Chairman

Any point arising on the amendment?

Mr. Lalor

This would involve the deletion of subsection (2).

Chairman

Yes.

Mr. Lalor

We are talking about the deletion of subsection (2) and its replacement by this amendment. We are taking out altogether " the amount on which a surcharge may be made under this section for an accounting period should not exceed the aggregate of." Is it not just a rephrasing of the subsection?

Mr. R. Ryan

It is a drafting one to show that provisions (a) and (b) of subsection (1) shall apply to the surchargeable amount set out in sub-section (2).

Mr. Lalor

The Minister said originally that it is to ease the burden on the taxpayer. In what way does this amendment propose to do this?

Mr. R. Ryan

Under subsection (3), if the amount there is £500 or less it will not be involved in the surcharge.

Mr. Lalor

The Minister said in relation to subsection (3)——

Mr. R. Ryan

I should have said subsection (2). The limits in subsection (2), (a) and (b).

Mr. Lalor

We are talking about the existing subsection.

Mr. R. Ryan

I am saying the effect of the amendment is that if the figures in subsection (2), (a) and (b) are £500 or less they will not be involved in the surcharge. I quoted an example before Deputy Lalor arrived saying that if a company made no distribution, and had a distributable investment income of say £800 for an accounting period of 12 months but because of previous losses the amount of accumulated undistributed income is £500 only, in such circumstances a surcharge would not be entered on the amount of £500 by reason of the provision (a) of subsection (1).

Chairman

Has the Deputy got the sheet of worked examples?

Mr. Lalor

I am not too sure. Is the Minister quoting from one of those examples? He mentioned the figure of £900. The Minister is saying that if the company show a profit of £900 and if there has been a loss of £400 the previous year that that means that there is only a cumulative profit of £500 and, therefore, in that particular context under the amendment he is proposing there would not be any surcharge.

Mr. R. Ryan

No, I mentioned £800 and £500. There will be no surcharge if the accounts of the company show that the accumulated undistributed income is £500 or less.

Mr. Lalor

Is the Minister talking about a surcharge of undistributed income? If a company is making a profit of £500 what sort of tax is on such a company?

Mr. R. Ryan

We dealt in section 100 with what is meant by income, trading income, the estate income, et cetera of a company and it is not the trading income that will carry the surcharge but income from other sources which, if not distributed will carry the surcharge.

Mr. Lalor

That is dealt with in section 100.

Chairman

Has the Minister received any representations on this?

Mr. R. Ryan

No.

Mr. Lalor

The Minister said he has not received representations. Does the amendment proposed here make it easier to do the sum? The Minister does not normally introduce an amendment unless it was found that the section was not as copper fastened as he would like it to be or unless he wants to give this relaxation to the taxpayer.

Mr. R. Ryan

There are many provisions in this Bill which are operated to relieve the taxpayer and many amendments introduced to operate in easement of the taxpayers because it is in accordance with the Government's White Paper which was published in 1974.

Mr. Lalor

How is that done?

Mr. R. Ryan

The White Paper on Corporation Tax 1974 and another one in 1972. All we are doing is implementing the proposals which have been debated for a long time.

Mr. Lalor

I still find it difficult to appreciate in what way the amendment to subsection (2) makes the operation of section 101 easier. Quite frankly I cannot see the improvement in the amendment of subsection (2) compared to what was there originally.

Mr. R. Ryan

The position is, as I have already explained, if we did not make the amendment even if the accumulated undistributed income was less than £500 we would have to surcharge it. The consequence of making the amendment is that it will not be surcharged if it is £500 or less.

Mr. Lalor

Where is that? We have in the original Bill subsection (2) which says :

The amount on which a surcharge may be made under this section for an accounting period shall not exceed the aggregate of—

(a) the accumulated undistributed income of the company at the end of the accounting period, and

(b) any amount which, on or after the 27th day of November, 1975, was transferred to capital reserves or was used to issue shares, stock or securities as paid up otherwise. . . .

The Minister said that the amendment ensures that an income of £500, as provided for in the section, will not be taxed under this amendment whereas as subsection (2) stood it would have been taxed. I think I am justified in asking where the wording in the amended subsection (2) brings about this change.

Mr. R. Ryan

When subsection (2) is read together with the amended subsection (2) it produces that result. The effect is clear when you do that.

Amendment agreed to.

Question proposed: "That section 101, as amended, stand part of the Bill."

Mr. R. Ryan

This section provides for a surcharge on close companies at a rate of 20 per cent of the excess of the aggregate of the distributable investment income and the distributable estate income over the distributions made for an accounting period. I want to emphasise that we are dealing here with the distributable investment income and the distributable estate income and not the trading income. There will not be a surcharge when the excess is £500 or less and marginal relief is provided where the excess is slightly more.

Mr. P. Belton

There is no surcharge on trading income?

Mr. R. Ryan

No.

Mr. P. Belton

What happens to a holding company where the sole income is income from the trading company? It might have a rent from it or something like that.

Mr. R. Ryan

If the trading company retains the profit there will be no surcharge, but if the trading company were to pass money to the holding company and the holding company did not distribute, the holding company would be surcharged in its distributable income.

Mr. P. Belton

All of it?

Mr. R. Ryan

Yes.

Chairman

On the definition of what is a holding company under those circumstances suppose it was a trading company that happened to be a holding company and if this income is part of income, suppose the articles and memorandum shows they are operating as a holding company of the parent company, what is the position there?

Mr. R. Ryan

Trading income and trading company are defined in sub-section (4) of section 100. A company could not be a trading company and a holding company at the same time. Dividends and rents in the hands of a holding company would not be trading income and so they would fall to be dealt with as investment income and estate income.

Mr. P. Belton

It would be a bit stupid to have a non-trading company now when the tax bills come through.

Mr. Lalor

The Minister is talking about trading companies and holding companies. There was a type of non-company co-operative society which was non-taxable up to now. Following the proposed amendment would they be regarded as a trading company?

Mr. R. Ryan

They are not close companies and are not affected by this.

Mr. Lalor

Yes, we are dealing with close companies. I have not got the definition of close company.

Chairman

A close company is defined at the beginning of this document.

Mr. Haughey

I have a note—and I put it before the Special Committee for what it is worth—which says there is not adequate provision for losses forward where estate income and investment income of trading companies is concerned.

Mr. R. Ryan

There is no adequate provision to bring forward losses?

Mr. Haughey

The question of losses in previous years is completely ignored.

Mr. R. Ryan

Deputy Haughey is right. We are providing that you only look at the situation in the accounting period itself so far as investment or estate income is concerned. Losses incurred in that period can be set off.

Mr. Haughey

Nothing forward.

Mr. R. Ryan

Nothing forward.

Mr. Haughey

How does the Minister justify that?

Mr. R. Ryan

Perhaps the Revenue Commissioner could speak?

Chairman

A query has been raised in open Committee and I should like it to be answered for the purposes of the record.

Mr. R. Ryan

Yes. There would be the ordinary provisions for carrying forward losses on trading but not for carrying them forward against investment and estate income in computing that income liable to surcharge. We have to put a limit on that.

Mr. Haughey

It seems unreasonable to bring in these surcharge provisions.

Mr. R. Ryan

A trading company has certain advantages because it is a trading company. If it changes its character or tends to change its character by reason of substantial investment and estate income, it is inappropriate that it should have the benefit in computing surchargeable income of trading losses carried forward when trading income is not liable to surcharge.

Mr. Haughey

These provisions apply to all. It is not a question of a company changing. It is still a genuine trading company but it has these estate and investment incomes. It would also have losses forward.

Mr. R. Ryan

Would the Deputy accept that if trading losses were to be carried forward accumulated profits would have to be carried forward too? We could hardly carry forward losses and not apply the same rule across the board.

Mr. Haughey

What the Minister is doing here is compelling a company to distribute. Is not that right? He will surcharge them if they do not. If a company has losses forward why should it be forced to distribute? It might need the cash for trading purposes. It might want to retain the investment and estate income in its own hands.

The position, therefore, is that in so far as subsection (2) (a) is included in the section, it means that, in effect, losses forward on trading accounts would have to be given full effect to before any surcharge could come into operation in any particular accounting year.

Mr. Lalor

I would like to ask what exactly does subsection (3) mean. It refers to section 28 (4) and (5).

Mr. R. Ryan

Section 28 is the one which deals with the reduction of corporation tax liabilities to small companies. This applies the provisions of section 28 (4) and (5), which deal with the method of counting associated companies.

Mr. Lalor

Is the purpose of that to cover the first £500 in the same way?

Mr. R. Ryan

Subsection (4) of section 28 applies the provisions of subsection (3) which explains that where a company has one or more associated companies in an accounting period the lower and the upper relevant maximums are divided by one plus the number of associated companies. We are ensuring by this subsection (3), that those provisions preventing fragmentation will be applicable for the purpose of subsection (1) of section 101.

Chairman

Yes, giving the small companies the benefit of this, and allowing for the small company situation. Is that the position?

Mr. Lalor

This section is dealing with the close companies irrespective of size. Where you have a small company where the profits are between £5,000 and £10,000, the situation is that in that context the first £500——

Chairman

This has to be read in the context and allowing for that.

Mr. Lalor

This does not mean that the first £500 is non-taxable?

Chairman

If it works out on the calculation.

Question put and agreed to.