Amendment No. 36 in the name of Deputy Rabbitte is out of order.
Amendments Nos. 37 and 38 are related and may be discussed together.
SECTION 22.
Chairman
I move amendment No. 37:
In page 31, subsection (1) (a) (iii), line 29, to delete "(f)" and substitute "(e). —An tAire Airgeadais.
Amendment agreed to.
I move amendment No. 38:
In page 31, subsection (1) (a) (iii), line 30, to delete "(ff) and substitute "(ee)". —An tAire Airgeadais.
Amendment agreed to.
I want to point out, there is a consequential amendment required in relation to No. 38 in that the reference at paragraph (ff) in line 13 on page 35 should be a reference to paragraph (ee).
Is it a drafting amendment?
Yes. It is a drafting amendment.
Amendment agreed to.
I do not think there is any difficulty with the amendment. Will the Minister confirm that it is his intention that 1 January 1993, will be the operative date for the opening of special savings accounts in keeping with this section?
It is 1 January 1993. It is the date of capitalisation.
Is that 1 January 1993?
Hopefully, 1 January 1993, at the latest. It has to be 1 January 1993, but it could be some date in the autumn.
It could be earlier.
What is the Minister's view in relation to the criticisms that have been made by various financial journalists about the extraordinarily favourable attention that has been given to special savings accounts, the distortion this will have on enterprise because one is now being given an opportunity to make a very secure return from investments at whatever the going rate is? If you can get a return of 10 per cent at 10 per cent maximum tax this will protect the deposit base and is designed to do so, at a time of unprecedented high levels of unemployment, it is going to further erode any kind of culture in taking a risk with investment capital if the alternative is to put £50,000 on deposit at 10 per cent and only pay 10 per cent tax. You would want to be presented with an inside track for a winner in Leopardstown, or the first six numbers in the lottery, to come up with better odds. How is the Minister going to review the operation of this?
I have an amendment on this which I think should be moved.
Chairman
There are two amendments. Amendment No. 39 in the name of Deputy Rabbitte is out of order and we have amendment No. 40 in the name of the Minister. We might deal with that before we go on to a general discussion on the section.
I move amendment No. 40:
In page 36, to delete lines 19 to 23 and substitute the following:
"(a) in relation to a company, the person or persons appointed as auditor of the company under section 160 of the Companies Act, 1963, or under the law of the state in which the company is incorporated and which corresponds to that section, and".
Nobody communicated with me; I beg you pardon, they did.
I thought we had accepted the Minister's amendment.
Chairman
We took, by agreement, amendment Nos. 37 and 38 together. Amendment No. 39 in the name of Deputy Rabbitte is out of order. We have amendment No. 40 in the name of the Minister.
Amendment No. 40 is a technical amendment relating to the definition of an appropriate person for the purpose of the new section 37 (b) provided for DIRT free accounts for companies and pension funds which has been inserted into the Act.
Amendment agreed to.
Question proposed: "That section 22, as amended, stand part of the Bill".
On the section, I would like to follow on from the point made by Deputy Quinn. We had a long debate on this on Second Stage. I would have serious worries about the general pitch of this Finance Bill. You can examine all aspects of this issue and make a case for any one aspect of it, but if you look at the overall issue, the general trend and thrust of it seems to be that a whole series of incentives which, when they were put into law, were intended to encourage enterprise, are now being taken out. The advantage for money on deposit is being enshrined in the law in a way which is so attractive that I cannot see why anybody with money would not immediately invest it in these special deposit accounts and leave it there. As I understand it, the new arrangements for DIRT are that companies with special accounts will be zero rated. Is that right or is that confined to pension schemes only?
They would be liable to corporation tax but that would not be taken in advance.
The one that was highlighted most was the special deposit accounts. It seems that a married couple — and I think this is stated in the Bill — can have two accounts. They can have separate or joint accounts. In the case of a family with £100,000 to invest the tax take is 10 per cent DIRT. That is a beneficial type of deposit account to have, but then this is full and final settlement to all tax liability. At the moment the retention on the DIRT is 27 per cent, but there is a liability on taxpayers to return deposit interest as part of their accounts. If they are on a tax rate of 52 per cent — which may have been the case last year — they are liable for the difference. The 10 per cent is a final settlement and there is no liability to make any further return, there is no top-up when you send in your returns.
The argument has been made that this is so attractive that people will not invest their money, but put it on deposit. The family with £100,000 — and I am sure there are a number — will put it on deposit. I understand the banks are talking already about deposits of that level being given 10 per cent without a reduction. In other words, they incorporate the tax and give them a net 10 per cent. This seems to be what is happening.
People will argue, of course, that the banks have to do something with their money anyway and that bank money will filter back into enterprise, investment and so on, but I doubt it. The record of the banks in terms of venture capital is not good; they run a mile from anyone looking for venture capital.
Unless you are in New Hampshire.
The banks will give loans for asset-based investment. They are great at giving loans for office blocks, housing or anything that is backed by bricks and mortar — in such cases they queue up to give loans. As Deputy Quinn stated, a great deal of money has gone out of the country to subsidiary banks in North America.
It is a fallacy to suggest that money on deposit in the banks will create jobs, industrial investment and more business in Ireland because much of it does not. It goes into asset-based investment. I am concerned about the imbalance in the savings market in the country.
I understand what the Minister is trying to do. After 1 January 1993 money can be put on deposit anywhere in Europe and, obviously, at a take of 27 per cent, money will tend to move where the rate is lowest. The Minister is trying to preserve the base of savings on deposit here. The 10 per cent provision is attractive enough to ensure a distortion in the savings market and that money will go to the special accounts but it is not attractive enough to repatriate "hot" money. There is a danger of falling between two stools. There is a great deal of money in deposit accounts overseas, but it is probably beyond the range of this provision for individuals or companies with £50,000 to invest. Married couples, by and large, tend not to have amounts of money like this, therefore, the doubling up will not be important.
If the Minister's intention is to lower the rate and widen the base so that money is returned and put into deposit accounts, here, this provision is not attractive enough. There are more attractive things to be done with it overseas and the ceiling is probably too low. On the other hand, it will distort the savings market at home and any hope of money going into venture capital is gone; the return is substantial. I presume the Minister expects an inflation rate of between 3 and 4 per cent this year. Hopefully, unless Germany goes totally off the rails, inflation rates will be less than 4 per cent throughout the decade. That is the expectation and policy is geared towards keeping it below 4 per cent anyway. The real return will be approximately 6 per cent on money on deposit. Where else in the economy is there a guaranteed return of 6 per cent per annum at a time when there are almost 300,000 people unemployed?
One can defend or attack any section of the Bill, but the overall pattern is to move away from risk-taking, enterprises and the promotion of business towards sedentary activities, and putting money on deposit is one of them. I would like to hear the Minister's views on those matters.
I disagree with Deputy Noonan that the overall thrust of the Bill is anti-enterprise or anti-business. Some of the measures addressed by the Minister ought to have been addressed in a number of previous Finance Bills. Those Bills did nothing for enterprise; they acted as shelters to hide profits and money without making proper returns to the Exchequer. However, I agree with him on one point and I believe the Minister has got the balance wrong here. Deputy Noonan did not refer to the imbalance this will cause between the banks and building societies and the insurance sector. This is bound to cause a shift. I do not see why any sane person would now put money on deposit through the normal brokerage system with any of the major insurance companies when they can avail of this facility.
Deputy Mitchell referred to the report published by the office of the Comptroller and Auditor General on the efficacy of the BES scheme. That report contains a graph which shows in a very illuminating fashion that until such time as those geniuses — many of them poached from the Department of Finance — worked out ways of making the investment virtually risk free and asset-backed, the scheme attracted virtually no money. The amount of money attracted by the BES in its early years was negligible, when there was genuine risk, but when a system was worked out whereby it was virtually risk averse——
The rules were changed in 1987.
That is correct. This is a good example of the philosophical point being made here as to why anybody would invest money in enterprise if they are assured of a net return of the order of 6 per cent as envisaged here. Having regard, in particular, to Irish culture, precedent and experience, I do not see any reason for such a shift. The philosophical point is the main point; instead of encouraging investment in enterprise, etc. and taking a risk, this will ensure that the opposite will happen.
It does not show much confidence in the free flow of capital. I appreciate, as Deputy Noonan has said, why it is done but we believe that the flow will be such that it will affect our interest rates, and so on, if we are obliged to make this kind of move. It is not, as the Minister reminded me on Second Stage, designed to take back the millions that are salted away in tax havens; it is for a different type of saver. The Minister should have taken a risk, at least initially, to see how it would work and what impact the total removal of exchange controls would have in the early days and weeks.
This is bound to encourage a great deal of money into a purely sedentary situation, as Deputies Noonan and Quinn adverted to. If you talk to any small business person, as I have had occasion to do on a daily basis before being elected to this House, they will tell you that unless you can sign over your house, car or whatever, it is difficult to get money out of the banks. Therefore, there is no reason to believe that this provision will increase the availability of venture capital for Irish business. If the Minister is not seeking some way of causing serious "hot" money to return to the State, then the levels at which these provisions are pitched are entirely to high. Apart from all the inequities that they create within the system — I refer to the one between the banking system and the insurance sector and between accounts where other savers are liable to the full range of DIRT at 27 per cent. I do not understand why that difference should be there. As I asked on Second Stage, is this money trapped? If I show up all of a sudden with £100,000 on 1 January 1993, will that money be trapped? Once I pay my 10 per cent is that it or are there questions asked about where I got the £100,000? I do not want to make too many topical references to £100,000. I would like to be reassured that no questions are asked once you pay your 10 per cent.
In so far as these changes bring us into line with procedures in other European countries, they are welcome. The general procedure for other European countries is to pay interest in full to residents and to deduct some small withholding tax from non-residents. Until now our system was the reverse. Therefore, in so far as our system will be comparable to the main European stream, is welcome, but I still want to raise a question with the Minister. What objectives has he set for these dramatic detailed changes? What is he seeking to do? What is his objective in bringing in this detailed legislation, is it to bring back "hot" money from abroad? Is his objective to fill the banks' coffers so that in turn they may use that money for investment purposes? Has he considered, for example, what it will do to the insurance industry now that you cannot deduct premia against tax? Will people say that they can get 10 per cent on a joint account or on two separate accounts, that they can have up to £100,000 on depost and their full tax liability wil be 10 per cent? What will that do for the insurance industry? Has the Minister weighed this up and what specifically is he trying to achieve by this detailed provision?
In order to qualify for the reduced rate of DIRT will there be a stipulation that withdrawals must be subject to the 30 days notice? Will the Minister explain the necessity for that provision now?
Does this apply right across the board? Does it apply to banks, building societies and investment companies? Will the Minister outline exactly what he has in mind? What financial businesses or institutions will be affected by it? To pursue in a little more detail what Deputy Mitchell said, is it planned to try to attract back monies from outside Ireland? Does the Minister envisage an amnesty of some sort for the return of monies from outside Ireland?
Deputy Rabbitte spoke about money that has not been included in tax returns. At the moment money held abroad, on which there might be a tax liability, is outside the scope of the Revenue Commissioners. The amount of money in that category in Ireland at present is very limited, but there is a considerable amount outside Ireland. If the Minister could get this money back into the country it would benefit everybody. We should try to strike a balance to attract money from outside Ireland and if we can achieve that it will be worthwhile. The Minister should be straight with us and let us know if he is trying to bring back this money. If somebody puts £100,000 on deposit and pays 10 per cent DIRT, will the Revenue Commissioners want to know where the £100,000 came from? I would like a specific answer to that question.
Will there be disclosure on the special accounts?
Deputy Enright asked about the type of institutions that will be involved. The institutions that pay DIRT at present will be covered by this provision. In regard to Deputy Noonan's question on disclosure, the regulations that apply at present will continue. At present DIRT is not disclosed by the banks to Revenue; but if Revenue, for whatever reason, make inquiries, there is no follow up on the interest but that is no protection in regard to the £50,000. They can come back at any stage in relation to the asset, but we all know that it is often difficult to do that. According to a Sunday newspaper I will now know everything about people, even what they are having for their breakfast. If it is a saving built up over a period and there is nothing peculiar in it, it is unlikely that someone will be followed. But with the normal checks and balances which exist at present it is likely that questions will be asked. In the detailed self-assessment which will grow in the years ahead perhaps more questions will be asked.
Deputy Enright asked me to give a definite answer, which is that there will not be disclosure. I propose to introduce a technical amendment to section 22 on Report Stage regarding the fixed interest rate condition of the special saving accounts which will be designed to ensure that they are confined to savings products of two years' duration.
Deputy Mitchell asked about the Government's commitment to closer economic and monetary union. The Government are committed to abolishing all remaining exchange controls before the end of the year. It is a question of liberalisation, it could be 1 January next but, perhaps, it will be earlier. I examined the implications of that liberalisation for DIRT and taxation generally and the only significant restriction in the movement to capital is the prohibition on individuals having current or deposit accounts abroad and that restriction must be removed. It may not be necessary to explain to the committee, but at present, one can link into accounts in the North through Pass machines, therefore there is no control and something had to be done urgently.
There is £13 billion in DIRT liable accounts in the financial system; £5 billion in the associated banks and £8 billion in other institutions. In addition, the institutions have some £4 billion in non-resident accounts which are not liable to DIRT and a proportion of those funds are believed to be beneficially owned by residents, but I will not speculate on the amount involved. I would ask Deputies to take this into account in considering this matter because back in the late nights of January and February when we were drafting the Bill in the Department this is what swayed me.
Interest earned by residents on deposits in financial institutions is liable to income tax at the taxpayer's marginal rate. Tax at the standard income tax rate is deducted at source under the DIRT and this raised £260 million net in 1991. Any further tax due is intended to be collected by Revenue on foot of the declarations by taxpayers of interest received. In fact, only £11 million is raised in this way. This reflects the combination of non-declaration of interest by many recipients and the attractions of more tax effective savings in the higher rate. On £13 billion in DIRT accounts we raised £260 million and the rest should be declared in the normal way under laws passed here, and only £11 million is collected.
Largely non-declaration?
Yes. What do you do? If you follow the system and wait to see what happens the money will vanish. This is the hard reality. I do not want to follow the German Minister who tried that, he is no longer Minister. The information I got was that if I did not take action the banks had their literature ready to attract people to move their money out of the country. I am delighted to see they are now changing their literature to attract money into the country and keep it there. That is what I intend to do.
We would give you every encouragement.
That is accepted but what about the consequences on enterprise and employment?
We accept the objective, but what are the criteria?
Deputies Noonan and Quinn mentioned that when considering the impact of the new 10 per cent DIRT rate it should be borne in mind that the comparison is not between a DIRT rate of 27 per cent or a top rate of 48 per cent and the income tax or capital gains liabilities which would be encountered if the same funds were invested in equities. The comparison is between no effective taxation on income from foreign deposit accounts and the return from equities. Whatever the effect of the changes in the Bill on the equity market, the effect of not offering a special savings account would be much worse. As far as the equity market is concerned, the majority of shares traded on the Stock Exchange are bought and sold by financial institutions. This is illustrated by the fact that the average size of an equity transaction was £20,150 last year. In fact, pension funds in life assurance companies dominate the market and pension funds will benefit from the changes in DIRT. Life assurance companies are concerned about the likely affects of the changes on their operations. A number of arguments have been put forward on this, but there is no need to go into them. They have to make some move. They are not opposing the Bill, but they are in consultation with officials to see what they can do to bring them back into parity. Their argument is about competition with the building societies.
How could unit-linked investment possibly compare with this?
The difficulty in Deputy Noonan's point is that if people can sit at home, invest their £100,000 and gain 10 per cent, what is the point of taking the risk, of getting involved in the equity market? That is the concern Deputy Noonan raised.
To put it another way, is there not an incentive for people to cash in their investments and put the money on deposit?
I do not think there is. You are talking about £50,000 and that is big money for anyone who has not got it, but——
It is big money in Connecticut.
Is this the type of scheme the person with real big money will get involved in? I do not think it is.
There will be many publicans and small farmers who are struggling to survive selling out.
On money coming back in, there is a great deal of money outside the State and we may attract some of the small people to bring their money back here, but the huge sums of money that went out in years past will not come back because of the 10 per cent provision. It is evident from the people I have spoken to in the past six months that we can forget about bringing back the person with £100,000. Perhaps some small investors who might have difficulty with their health or wills would feel more secure if their money was safely back here.
Deputy Quinn asked for my comments on those people who are hyping it up left, right and centre. Most of it is exaggerated. Deputy Noonan made the point that we will have to check this as we go along, that is correct. In the United Kingdom, they brought in a system and changed it some years later and in France they have changed the system two or three times. I spoke to the French Minister over the weekend and he told me they are still looking for ways around this problem and that they have lost a considerable amount of money. The money from Germany flowed into Switzerland and Austria. Therefore, we must do something to make it attractive to invest here. There may be difficulties in regard to some equities, but that is something on which we will have to keep a check. I cannot say that every area is covered.
On a point of order, will the Minister indicate whether he will be accepting any of the amendments between this section and section 36? There are a couple of amendments down to section 24.
In relation to cottages?
Section 22, as amended, agreed.