This section reproduces section 375 of the Income Tax Act, 1967, with two changes. Income is substituted for profits or gains in both places. Where the latter expression occurs in section 375 because the word " profits " as defined in section 1 includes capital gains which are not being brought within the Shannon relief. The section is the main provision giving exemption from tax in respect of profits from exempted trading operations.
SECTION 71.
Question proposed: "That section 71 stand part of the Bill."
Why are capital gains not within the Shannon relief?
Because the Capital Gains Tax Act does not provide the relief.
I have no doubt the Minister is aware that the companies who established over the years in Shannon established on the basis that they were free of Irish taxation on anything they made in Shannon. They feel, and I sympathise with their feelings, that they have now been let down and that the guarantee that was given to them on their establishment in Shannon has been broken by the Irish Government and that they have no guarantee now that their situation will not be further whittled away. The fact that the Shannon companies are now subject to capital gains tax, which in the circumstances they regard as a form of corporation or income tax, has created difficulties for the IDA and particularly for SFADCo because the word has got out among potential industrialists at Shannon that the guarantee that was originally given has been broken.
There is a major additional problem now for SFADCo now in trying to attract firms to Shannon and indeed for the IDA generally in trying to attract them to the country. This necessitated assurance by, among others, the Minister for the Gaeltacht at the opening of a factory in Shannon, that the Government did not propose to whittle away the exemptions and guarantees that were given to any greater extent than they did in relation to capital gains and to other analogous taxes in so far as they were relevant. In view of the damage that has been done to industry at Shannon, not the existing industry but to other potential industries which might have started up but have now had second thoughts because of the fact that they cannot rely on a guarantee of tax exemption being honoured in the future, in the light of the damage that has been done to our economy and of the number of industries which are not now here that would otherwise be here, would the Minister reconsider this whole question so that the world at large can see that when an Irish Government give a guarantee of exemption from tax that they will, in fact, honour that guarantee?
We had a full debate on the Capital Gains Tax Bill on this issue. It would not be desirable to duplicate that debate but let us clarify the position briefly. The exemption from tax enjoyed by the operations in Shannon is an exemption from income tax. It was never any more or less. It was never any guarantee of exemption from capital taxes. Capital gains tax would not apply to a company unless it is pulling out. If it realises a capital gain and reinvests the money for gain in a like activity, there is no question of a charge to capital gains tax. In so far as this country is concerned there is nothing at all to be lost by having capital gains chargeable if a company is withdrawing and I refute entirely the suggestion that there has been a fall-off in interest.
(Dublin Central): What Deputy O’Malley has said is perfectly right. These companies came with the impression that any profits accruing, whether it was from the sale of assets or from profits, would be completely free from tax and that they were at liberty to deploy these profits in any part of the world. It was on that undertaking I understand a lot of these companies came to this country and the introduction of capital gains tax certainly was contrary to the spirit of that agreement. Deputy O’Malley is perfectly right.
The Minister states that the exemption was stated to be an exemption from income tax. I have seen the documents used by SFADCo and the IDA for the attraction of foreign firms and the phrase used was " freedom from Irish taxation ". There was no question of it being limited to income tax, or corporation profits tax as it then was.
While operating here?
Yes. The phrase used was "freedom from Irish taxation" and these foreign firms understood that to mean what it does mean, freedom from all taxation. I am aware that they feel aggrieved, and I have had a number of them telling me that they feel aggrieved. I am aware from my own personal knowledge of the additional problems that are created for SFADCo and the IDA and the Minister is simply blandly asserting here that there is no evidence of this fact. If he believes that there is no evidence of this fact, he is the only person in Ireland who believes that there is no evidence that a lot of firms who might have set up here have now declined to do it. It is well known that American firms particularly have been frightened off by the experience of firms who are already established here and who have found that the guarantee that was given to them which they accepted in good faith of freedom from all Irish taxation, which inevitably must include capital taxation, has been broken.
Even at this stage in this Bill the Government would do far more for the promotion of industry and the reduction of the terrible unemployment figures of over 118,000 if they reinstilled confidence in potential and existing industrialists by once again establishing the freedom from taxation that did exist and the promise of which brought many industries into this country that might not have otherwise come.
I believe many Irish businesses would feel aggrieved by the fact that foreign firms could be set up in the Shannon area or, indeed, in any part of Ireland, companies that may come in one year and go out five years later with a huge capital gain and contribute nothing to the society from which they got that gain. I would consider Deputy O'Malley's approach most anti-social.
(Dublin Central): There is a precedent on the holding company here with regard to wealth tax in that Irish companies are subject to wealth tax. How do you reconcile those two differences?
That is a question of domicile.
As long as the company stays operating in Ireland, if gains are made and are ploughed back into Ireland and the benefit is for Ireland, then there would be no charge to tax. Already this year I have issued about 20 certificates for Shannon. One of these covers a firm which employs about 300 people. There is no evidence that there is a fall-off. In fact the contrary is the case. I could not tell you the exact number of certificates I issued last year. I nearly had writer's cramp.
Employment in Shannon Industrial Estate is now at 800 below what it was two years ago.
What did you say there about the situation with regard to capital gains in Shannon?
If the company makes a profit that includes a capital gain and if that capital gain is ploughed back into its activity there is no charge to capital gains tax. If, on the other hand, the company realises its assets there and transfers the property elsewhere then that would give rise to a liability to capital gains tax. That is appropriate when one considers the cost to the Irish tax-payer. It is only reasonable there should be some return to the country by way of capital gains tax.
I do not see why that is in these sections.
It does not arise on these sections as such. If the debate is opened up on the application of capital gains tax, such as debating the general principles of capital gains tax, I am saying there is no liability if the gain made by the business is ploughed back into the business.
If the company is neither anti-social or naturally rapacious and comes to Shannon and there enjoys tax relief, which is an ordinary device we use to attract industry here, it is no good talking about being anti-social at this stage. We have been through all that and we agreed terms because of our special need for industries. We finally agreed that these companies should enjoy tax relief. Now, if after five, six or seven years this company is no longer to continue operating or, for some reason or other, has to cease operating and then proceeds to liquidate and pay out its funds and you impose capital gains on that distribution are you not, in effect, going in the back door and taxing those profits which you agreed would be free? In other words, is that not a back door method of getting tax on profits which ought to be free from tax?
But it is profits of the trading operations which are exempt from tax. If the accumulation of those trading operations——
That is the only exemption that was ever granted. If the accumulation of profits from those trading operations are subsequently distributed under liquidation of the company do you look on them as capital gains?
Capital gains tax would apply to the actual—to gain made on the liquidation.
The Minister is quite right. There is no question of taxing profits.
That is not what I am talking about. I am talking about a capital distribution.
But a capital gain merely refers to the capital gain on the selling of an asset.
An investigation of the accumulation of profits which would be realised would take some time to get at.
If a company ceases trading, for perfectly legitimate commercial reasons, all I want to be assured of is that capital gains are not used now as a device for getting back tax on those profits.
You are getting into a great deal of detail now on the Capital Gains Act which I would like to have before me before I proceed to answer many of these questions. All this particular section is doing is applying the existing law. We are not making any change now.
But these sections are re-enacting the Shannon Airport law and surely we are entitled to ask some questions on that.
I am not suggesting for a moment that the Deputy is not entitled to ask questions. I am just saying that I would like to get an opportunity of looking at the actual Acts rather than speaking off the cuff on matters of great technical difficulty.
Great technical complexity.
Yes, complexity definitely.
The Minister pointed out that there is a substantial difference between section 71 and the corresponding section in the 1967 Act because it refers to income rather than profits and gains. The difference is, as the Minister stated, in order to catch these parties for capital gains tax when they were previously free of all tax and told on their entry to Shannon that they would be free of all tax.
From their trading operations.
They were told they were free of all tax and that was it. If they make a capital gain it can only arise out of their trading operations because they have not any other operations. Deputy Collins and Deputy Belton made the case that not to charge them capital gains tax on their capital gain would be anti-social——
I said no such thing.
——would be unfair, vis-�-vis, their Irish companies. Precisely the same argument applies to income taxation or corporation taxation. They are free of VAT. Irish companies are not in similar circumstances.
The point I made was that if a foreign concern came in here and five years later withdrew with substantial capital gains which were not taxed that would be anti-social—that is speculation—and I wondered if it should be encouraged.
No more anti-social than we have all agreed to as an industrial development device. We have agreed that these companies should be free of tax. The Irish companies are paying tax.
I would absolutely agree that it should be free of tax on genuine trading.
That is what we are getting at. We are concerned lest those taxes on genuine trade should accumulate. Those companies who legitimately have to cease trading will be caught by capital gains when it comes to realisation and distribution right along the line.
I do not think it would.
How can you talk about reinvestment profits for a company which is going out of business—a company ceasing to trade, realising its assets and those assets have, over the years, been ploughed into an accumulation of profits which now show, presumably, a capital gain as a result of all the profits accumulating over a period.
One would assume that the Minister's thresholds will increase in line with genuine inflation.
Genuine inflation!
What is " ungenuine " inflation?
Speculation.
I sympathise with Deputy Collins's predicament on having to sit on this Committee.
The Committee has already passed the section of the Bill which charges capital gains to corporation tax. That is section 13. All that section 71 is doing is providing for the disregarding of income or losses in the case of exempted trading operations. Now it is only for the purpose of adopting the correct language for corporation tax purposes that this alteration has been made in section 375 of the Income Tax Act, 1967. We really have already resolved the question of charging to corporation tax capital gains under existing capital gains tax law.
That is an interesting statement but I do not think it is what we are talking about. The Minister is making a change in the provisions. He is using a different word now. Deputy O'Malley and I are concerned that this change in the manner in which these provisions are being re-enacted would endanger this principle which we thought was firmly and safely established for Shannon. If the Minister can say to us that in no circumstances will the profits which have accumulated by virtue of the special Shannon provisions be indirectly caught and taxed through capital gains machinery, if he gives us that simple assurance, then we would be happy.
Less unhappy.
That phrase " indirectly " is a very broad phrase, as Deputy Haughey knows. If profits had been made and not distributed and are reinvested somebody could make a capital gain on the investment. That would be an indirect tax on profits generated out of trading operations. Profits on trading operations as such will not be taxed. The only issue which arises is whether capital gains tax will be charged to a company which makes a capital gain on capital assets which it is selling and does not reinvest the proceeds of in the same business. Such a company will pay capital gains tax but, if there is then distribution to a non-resident holder of shares of the company, such non-resident will not pay capital gains tax. The company itself will pay it.
He might well be caught for capital gains under his own domestic tax law.
Yes.
To that extent you are not following through the same régime as applies to income tax. Where the operating profits are free of income tax here, all your efforts are to make sure that the person in receipt of the benefits, in whatever country he is, is also receiving them free in his home country. In this case, on a distribution of a Shannon company the foreign resident could apparently know the cost of the capital gains in his own domestic situation.
The major effect of what the Minister is proposing or, indeed, has put into effect already, is to encourage Shannon firms and similar type firms to take out their profits every year because, if they take out their profits direct in cash as they are made, they are not liable to corporation tax or income tax. There is no possibility of a capital gain on the cash being taken straight out of the country but if they re-invest, which is what we should be encouraging, in more modern equipment or extending their premises, they immediately incur at least a potential liability to capital gains tax. That and the present and future situation would be affected. I have in mind also the position of a company that established in Shannon, say, 15 years ago, which did make profit which was free of tax, which was free during the whole of that 15 years to repatriate their profit but they generously, from our point of view, decided not to repatriate their profit but re-invested in their factory in Shannon, extended or re-equipped their factory out of profits, that company, not having repatriated its annual profit now stand in effect liable to be taxed on the invested proceeds of that accumulated profit over the past ten or 15 years.
I do not see how that could be.
Because they could make a capital gain on the new assets.
The obvious flaw in the Deputy's arguments is that the assets would have been de-valued as at the commencement of the Capital Gains Tax Act and so the accumulated profits for the past 15 years could not possibly be subject to the capital gains he is talking about.
If it is capital it cannot be subject to capital gains. If it is reinvested it is deemed to be capitally invested.
Yes.
Therefore it cannot be subject to capital gains.
If and when the capital gain is realised. It will not be taxed unless and until the gain is made.
What Deputy O'Malley and Deputy Haughey are talking about is the possibility of money which has accumulated out of trading over a period of years and become part of the company, then if that company goes into liquidation that additional money could be subject to capital gains. Is that right? I would suggest to the Minister that he can give that undertaking because that money which has been put back in is in fact capital.
But if it is realised it is potentially liable to capital gains tax.
Whatever is used to purchase, develop or create is disposed of, is realised, and a profit is made on it, then that is subject to capital gain.
Only on the profit.
Suppose a factory came to Shannon and its profits are tax free. It keeps its profits and those profits are still tax free. Now in most cases when they come in first they move in machinery. They buy new machinery to expand the business. That machinery depreciates and will eventually be worth less than when it was bought. The losses on that will go against the capital gains that were made on the actual sale itself. I think that is reasonable. I see nothing whatsoever wrong with it. Otherwise they are going to get away with bloody murder. I cannot see how the hell there is going to be a capital acquisition because, if you are making that kind of money, you are not going to get out anyway. I cannot see the point of this argument at all. The machinery is not going to appreciate in value. It is going to depreciate in value.
That statement does not hold water because machines do appreciate in value.
There are two companies in Shannon holding large stocks of diamonds.
It is trading stock and trading stock probably far exceeds the value of the capital invested.
Say South Africa goes the way it is forecast it will go, the capital gains on existing stocks of diamonds in Shannon will be enormous.
It is a trading profit.
If the diamonds are untreated?
It is comparable to butter or oatmeal on the grocer's shelf.
Even disposed of on a liquidation?
It is trading stock.
Does the Minister agree with me that, as a result of provisions made now for capital gains taxation on Shannon, a prudent foreign industrialist in Shannon would seek annually to repatriate the profit as it accrues rather than reinvest?
If he sees the prospect of a better rate of profit by further investment here he will do that.
He knows he can be subject to no taxation if he repatriates his profit annually.
If there is such a danger for foreign companies there is nothing stopping them from leasing their equipment.
Is it the position that if a company trading at Shannon made, say, £100,000 and put that into land or building, and if that company has to liquidate, the £100,000 would not be subject to capital gains but any profit made on it would be subject?
Yes.
It is an effective method.
It is all very reasonable. They want more.
If the Minister will not give me any assurance I am going to oppose the section.
The consequence of opposing the section will be, in fact, that you will stop me giving an advantage to the taxpayer.
I want to make it clear that I am opposing the section on the basis that the Minister cannot give me the clear-cut assurance I am seeking. I am only opposing the section because of lack of clarity.
Question put.
The Committee divided : Tá, 5; Níl, 3.
Question declared carried.
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Tá |
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Belton, Paddy. |
Esmonde, John G. |
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Collins, Edward. |
Ryan, Richie. |
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Dockrell, Maurice. |
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Níl |
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Fitzpatrick, Tom (Dublin Central). |
O'Malley, Desmond. |
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Haughey, Charles. |