Amendment No. 55 in the name of Deputy Pat Rabbitte is out of order.
If anybody wants to contribute to the section in the general way, we will hear from them.
SECTION 37.
Could we ask the Minister to read his briefing?
Before the Minister speaks, I have to say that yesterday there was very much a finding of feet, as far as the operation of the committee was concerned. There seems to be a gathering consensus that we need to press ahead with a greater sense of urgency. I have no problem with that. It very much depends on the conciseness and brevity of the contributions. I will be depending on co-operation in that regard.
I will do my utmost to comply with that. The section introduces significant restrictions on section 84 lending. In particular it gives effect to the measures which were announced by me on 20 December last. The main change introduced by this section is that, subject to certain exceptions, no new section 84 loans may be given on or after 20 December, 1991. An exception, however, is made in the case of loans included in the IDA list of new manufacturing projects where certain specified conditions are met. The Finance Act, 1991, introduced restrictions on the use of what is known as "high coupon section 84 lending". That is where the borrower and the lender seek to maximise the tax efficiency of section 84 lending by taking loans in currencies which have a very high interest rate. A number of exceptions to the 1991 restrictions were provided for in the Finance Act 1991 including high coupon loans and certain new manufacturing projects. At the end of last year, it became clear that the exceptions which were provided for in the Finance Act of last year were being abused and that many companies had switched their existing high coupon loans to currencies with even higher interest rates. The move to those currencies increased the Exchequer costs to an unacceptably high level. This section gives effect to what I announced on 20 December.
The effect of the new provisions is that a loan taken out prior to 30 January of last year may not be switched to a currency with a higher interest rate than the currency in which it was denominated on 30 January 1991. If a switch had taken place before 20 December 1991 when I made my announcement the loan would have to be switched back to its original currency if it was to continue to be treated as a section 84 loan. Where a loan was taken out after 30 January last year for the purposes of a new manufacturing project which is included on the IDA list provided for in the 1990 and 1991 Finance Acts, the loan will not be treated as a section 84 loan unless the interest rate on the loan does not exceed a rate approved by me in consultation with the Minister for Industry and Commerce, or, if it is lower, the rate which would have applied if the loan had continued to be nominated in a drawn down currency.
What happened at the time was that the highest denomination had been the Greek drachma and they were switching to the Turkish lira, thereby imposing an excessive cost on the Exchequer. Rather than waiting until Budget Day, I moved on 20 December.
I am not opposing the section, but I want a little more information. I take it that the IDA list referred to also applies to SFADCo and Údarás na Gaeltachta. It would in circumstances where either the executive board of the company or the Government had agreed to the package. There would be an actual contractual position. Would that be correct? Would it be extendable in circumstances where negotiations are proceeding?
As I understand it, it is not extendable. If you are not on the list there can be no extension.
What is the basis of the list? Is the list drawn up on the basis of projects of less than £1 million, for example, where the executive board of the IDA have sanctioned it, or more than £1 million where the Government have sanctioned it? Does it extend to situations where there are ongoing and serious negotiations taking place? Are companies going on the list on the word of the IDA?
There is the case where the discussions would have been completed and the executive board would have given approval. I am advised that in some of these cases the take-up might go on for some years. Once discussions are complete and there is an understanding between the executive board and IDA, the take-up of the loan does not have to be on any particular date. It could go on for some years. Once they have agreement on the dates mentioned, they are entitled to a section 84 loan.
Mr. Noonan
Can I take it——
The total limit is of £420 million. That is the total of all the loans.
Can I take it that it is "ring fenced" now, and that no matter what negotiations take place in the future no new companies can come onto this list?
That is correct.
When I was in Industry and Commerce for about 12 months there was a general rule of thumb, in industrial promotion, that, in attracting in a good company about one third was given by way of grant. There were fixed asset grants, topped up by training schemes. Generally speaking, 30 to 35 per cent was given in that way. Another third was on the basis of soft loans, usually of section 84 type. The company put up the remaining third, so two thirds was in grants. It seems to me, on the face of it, that, if one third is taken out there is a serious watering down of the kind of package the IDA could offer to putative investors in this country. I am not asking you to state the Industry and Commerce view or the IDA view, but could you give us your reflections on it and explain how the withdrawal of what seems to be a third of a funding package for future projects will not have an adverse effect on industrial promotion in the country?
The balance will still be there. They might not have the advantages of the section 84 soft loans which they had in the past, unless they are on the stated list. You are primarily concerned with future projects.
When we were discussing this back in mid December, the IDA view was that it would not create any disincentive. The position is still a very good one. Over the years the position changed under section 84 loans. It moved to currencies, which had never been envisaged. Nobody ever thought that the Greek drachma and Turkish lira would be used. That was never a proposition agreed by Industry and Commerce. You know that from your own time. The IDA were concerned that section 84 commitments should be honoured in full, and that no contractual or negotiated commitments should be broken. They had no concern about upsetting the balance. Half of the Exchequer cost of the section 84 loans went to the bank. That was a point that was taken up in the Culliton report. Although its report was published after my action of 20 December, Culliton Committee, which had considered the matter prior to that date, recommended that section 84 loans be abolished. I do not want to speculate on the reasons why. I have read some of the Andersen reports and some of the other reports which backed up Culliton. The report was very clear that section 84 loans should be abolished. The ten per cent tax rate is still the key to the future. That has been there for a number of years. The IDA and SFADCo regard that as far more important than any soft loans. That position still holds.
(Limerick East): I accept what the Minister is saying, but there is still one point I want to pursue. I know that half the cost to the Exchequer went to the banks. The banks, in turn, gave low interest loans. Then the Exchequer went after the banks by way of the bank levy. The reason the bank levy was brought in in the first instance was that, under Corporation Tax, the banks were not paying what was considered to be an adequate level of taxation because of all the soft loans. To complete the circle you have to look at what is being done with the bank levy. That is not what I am getting at.
We have seen what has happened with Apple in Cork. The situation is that they are moving PCV board production to Singapore. Two other Apple companies in the United States are also moving to Singapore. They are centralising in Singapore. There are economies of scale, but the big factor is the wage costs. Wage costs in Singapore are about a third of what they are in Ireland. The effect is that if the activity in Cork is replaced it will be by assembly line activity and not be of the "high tech" nature which they have previously. That is not a once off. My understanding is that there are other companies in the country — and it is not for me to announce bad news, but I could name names — which are going to do the same thing. The competition for international, mobile investment is getting more difficult all the time. Our attitude to industrial policy is changing. There seems to be a movement away from aiding fixed asset investment to grant aiding jobs. In parallel with that, we are moving out of the soft loan options. It seems to me that the IDA portfolio for presentation to international investors has been seriously diminished. I would like the Minister to focus on that. Arising from a combination of decisions over three or four years, it seems to me that the IDA can only offer about half of what they were offering previously. That seems to be reflected in the fact that they are not attracting a lot of overseas business into the country at the moment.
Has the Minister a view on making available other sources of easy money or soft loan money to foreign investors, or is the idea to close all doors? How will leasing stand, for example? What will be the approach there? There is no doubt that there is enormous competition for international investment now. On the one hand, we are competing with our EC partners who have bigger home markets. Despite the fact that it is supposed to be illegal, they are still shoving the home market factor when attracting industry, into the UK, for example. They are saying that they will ensure that they will get the contracts for the hospitals. This is also happening in the computer industry. The French and the Germans are doing the same thing. They have the attraction of big home markets. On the other hand we also compete with South East Asia, Singapore, Malaysia, Cambodia, and increasingly with mainland China. All these countries have become competitors for the kind of mobile investment which we got in the Seventies. The Seventies, and sometimes the Eighties, were the periods of greater attaction to our country. At the same time we are diminishing the available package which the IDA can offer. I am not objecting to this. I know there is a lot of leakage and abuse under section 84. What I am trying to focus on is where the Government stand now. What is the nature of the incentive package to attract the American or Japanese multinationals into Ireland? What is the shape of it nowadays?
I am not objecting to the drift of what the Minister is doing. The questions raised by Deputy Noonan are fundamental ones and need to be addressed by the Minister. This raises the whole question of our industrial policy, which is not specifically the task of this committee or of this Minister. It seems to me that it is very relevant. What we have been doing in rethinking our entire industrial strategy over recent years has been done on an ad hoc basis. The Minister’s predecessor made a number of decisions, apparently, off the top of his head or at the behest of the IDA, for example, extending the special 10 per cent manufacturing tax regime to the year 2010. He also abolished Fóir Teoranta and rationalised other agencies. Not many of these actions seem to have any interaction with industrial policy, the Department of Industry and Commerce, or the Minister for that Department. For example, let me take up the point Deputy Noonan made about completing the circle in relation to changes proposed in the banking sector. As I understand it, what the Minister is proposing in the Bill is that the bank levy can now be offset against their corporation tax liability. That was not the situation up to now. As I understand it, the view in the banks and industry, is that the changes will make tax based lending less attractive and the banks would be less inclined to make section 84 loans available because of the specific changes. I have never been able to figure out whether Deputy Noonan is right when he says that approximately half goes back to the banks under section 84. I don’t know how much of that is of direct benefit to the banks and how much is passed on as cheap loans to industry. I do not know whether that has ever been quantified, or whether it is capable of being quantified, but I suspect that the banks got their share of the action.
It was taken back through the levy.
That is right. When one comes to deal with corporation tax, I find it very hard to deal with it in isolation. It may well be that the Minister and his advisers have an overall plan and an overall strategy. Notwithstanding the Chairman's exhortation to us to move on quickly, I would like to hear the Minister say something about his overall strategy. Quite clearly, section 84 loans were a major incentive to industry. Whether, the Culliton thinking, which challenges the entire basis of that kind of soft loan — that kind of effective hidden subsidy from the taxpayer — changes the entire picture is a new question. I will mention in passing that section 84 has been available not just to companies in the foreign sector. In the case of the indigenous sector — the Goodman Group of Companies — section 84 loans were a very important part of the package put to that company. I am not commenting on any other events. What I am saying is that here was an indigenous company that was a major player in that particular market. I certainly thought it was a good idea at the time that such an indigenous industry should be built up here. A package of £70 million in section 84 loans was part of the incentive for that group of companies to engage in the development that was envisaged in the plan. The fact that a lot of it was drawn down for purposes other than intended is something that is being looked at elsewhere, but it was a major part of the package. What we are talking about here ultimately is industry and jobs. It is important that we would spend a little time on the overall thinking of the changing, evolving strategy.
I will go over a number of points. First, the Culliton one. What Culliton recommended was that section 84 loans which exploit an unintended tax loophole to provide interest rate subsidies to firms at significant cost to the Exchequer should be ended. He felt that the subsidies provided are not well focused on priority industrial projects and that many of the subsidies leaked outside the industrial sector entirely. He also said that they have tended to favour large multinationals rather than indigenous projects and they are not included in the costs directly attributed to the activites of the development agencies which promote them, and so distort the proper evaluation of the performance of these agencies. To the extent that interest subsidies are needed as part of the incentive package for industrial promotion, provision should be made up front and should be fully costed in project and programme evaluations. That would be the considered view.
On the question of the bank levy, section 42 deals with the set-off of the levy which gives credit to a bank thereby reducing its use of tax shelters. That facility is still there. The other matter I will mention is that US dollar loans that are non-section 84 loans now have a very low interest rate. US companies here can borrow very cheaply. To the best of my knowledge, they can borrow at 5 per cent or 6 per cent, which is extremely attractive. I know that in a number of applications at present before the Government, involve borrowing at an extremely low rate.
The other point about section 84 — and Deputy Noonan has acknowledged this — is that it is a badly targeted incentive. I am not disagreeing with what Deputy Rabbitte is saying. What happens now? What are the criteria of Government? Applications go through the rigours of the IDA board and are brought forward to Government. The IDA take into account the cost per job; the value of each job; whether it is lowly paid or professional or technical. It takes into account the location and the opposition. In all cases the IDA do their utmost — and Deputy Noonan will be familiar with this from his period as Minister — to see what the opposition is and what is happening elsewhere. Like the business generally, people can get a lot of that information. The Government's view on such applications is probably more flexible now than it used to be. The value and the cost per job is not based on any rule but on what type of industry it is and whether there is value added. Location and staffing requirements are also taken into account. When in the Department of Labour, I had the pleasure of meeting the industrialists in Japan, Germany and in other countries and I know it is not just about the grant package. Industrialists will tell you that they want to be part of the market and be close to the market. It is an advantage being in the Community, but we are not altogether in the right location for many industries. An example is that we have not done well on the huge Japanese investment in the motor business in the last five to ten years. This country was not considered to be the best location. Many of the car firms opted for the UK. The IDA have tried to pull in the manufacture of accessories for that industry, a campaign that is still on going. The way the IDA structure the grants is relatively good. They always say that the 10 per cent is the main factor. When account is taken of capital and other costs we all know it is not 10 per cent we are talking about. The skilled labour force — local graduates and technical staff — is also a factor. Mention will always be made of stability of Government. By this I mean the democratic system of Government — democracy. These are the criteria and are the same in every country. Finally, during my period of office any applications that come before the Department of Finance — and there are not as many as we would like — are followed up. They are examined carefully to see whether it is right to accept them, rather than ask about the criteria which we used in the past.
Arising from the Minister's reply, and I wanted to wait until he had responded to the general policy question from Deputies Noonan and Rabbitte, do I take it that, with the effective closing down of section 84 type facilities, other than the 10 per cent tax regime for manufacturing industry, the Department of Finance does not see any direct handson industrial role for itself in relation to industrial policy?
This was the major industrial instrument of taxation policy, in addition to 10 per cent. We are all agreed that section 84 shelters were abused — as indeed any shelter becomes abused; that is in the nature of the business — but with its closing down now, and it has to be seen against the background of the closing down of shelters on the personal side also, is this a retreat, a formal philosophical retreat, by the Department of Finance from the market place in terms of intervention? Is it that the only kind of regime is the taxation regime of 10 per cent? This goes back to the further question asked by Deputy Noonan whether there is a policy behind this or is it just a scramble to cut off loopholes and to limit the haemorrhage of tax revenue from a purely revenue point of view?
There are two points which I would like to make. Firstly, I was looking at Deputy Rabbitte's amendment 55 which is an insertion in advance of section 37. One of the criticisms I think we have in this House is that pubic servants, public bureaucrats, mandarins — whatever appellation we give to them — are inclined to draft law in impenetrable language. Clearly whoever drafted this on behalf of Deputy Rabbitte — I make this particular point as an ex-mandarin and on behalf of current mandarins — had an excellent grasp of the language of obscurity. For example, we read at the bottom of the first paragraph, and I quote:
shall not be less than an amount equal to the alternative minimum tax amount as computed in accordance with subsection 1 (A) (A) below.
There must have been a simpler way of expressing it. The general point I am making is that I think Deputy Quinn was quite incorrect. There is a very severe limitation on section 84 loans which we all accept was fairly widely abused and, as Deputy Rabbitte said, the banks, among others, grabbed very considerable concessions from the use of the section. What is actually happening here is not so much a philosophical retreat but the awakening of a sense of equity throughout the tax system. The logic in this situation is that you have to limit all of these tax havens and this particular section was focused on very specifically in the Culliton report as something that was not having the desired effect. I think it is wrong to characterise what is happening here in the Finance Bill as a total closure. It is being very severely limited to two lists of specifically approved loans under section 84. There is a very severe limitation and I think that what we are trying to do, on all sides of the House, is clear the tax system, in so far as we possibly can, of loopholes which achieve an inequituous situation where cute and clever people can abuse the system and achieve different treatment from the State than ordinary mortals who pay tax. It is a diminution of what was originally intended to be an inducement to create jobs and an inducement in the industrial programme. At the same time, it is one that has a very clear focus and is very clearly in line with the Culliton report. Therefore I think the characterisation of it is possibly wrong.
Chairman (Mr. Kirk)
Could I bring to the attention of the Committee that we are still on section 37 and we have spent more than half an hour on it? We have to push on.
To answer Deputy Quinn's question; there is still £420 million on the approved lists. I suppose it is a safe bet to say that it will not all be called because some of these projects will not surface. But while they cannot get low loans, there are still the industrial grants, which a lot of people query. There are the training grants which——
I know there are other measures, but my question related to the Department of Finance?
In direct grants? But there are others, things like the wear and tear allowances, permissible instead of the old depreciation method. That again is a cost that has been very much structured to suit business needs. If you take the position of a person coming in there is a 10 per cent rate, capital write offs, a very simple system now of the wear and tear allowances and a regime that certainly is not hostile in any way. The IDA try to package to the maximum extent possible on the percentage coupon rate. There used to be an old rule of thumb, now breached many times on the value of the job — a technical job, a normal operative job and a graduate job. These are all considerable incentives. Our graduates are second to none. I do not want to get into an industrial policy discussion but it is location and labour costs that are hampering our ability to attract jobs. That is what is being looked at in the Apple and in so many other cases.
Is section 37 agreed?
A quick point on Corporation Tax, if I may, since we are talking about raising tax. If one proposes radical changes, as I have done in the area of personal tax, then it is fair to say where it should come from and I continue to argue that there is too little coming from the corporate sector. I know the Roman numerals may well have upset Deputy Roche but the effective point I was making is that there ought to be an alternative minimum rate of tax, as, for example, is operated by the federal system in the United States. I am talking about an effective tax rate; notwithstanding write offs and so on that one can shelter behind, that one pays not less than 20 per cent. The reason for the complicated verbiage referred to by Deputy Roche is that in the case of the 10 per cent manufacturing regime you have to provide for that: 50 per cent of 20 per cent is 10 per cent. I think it is something the Minister ought to have a look at because everybody on this Committee knows that the 40 per cent tax rate, for example, is largely a figment of our imagination. There is no company with advisers worth their salt paying the full belt and the Minister himself made the point that we know the 10 per cent is something else with the write-offs that are permissable.
I would like to put on the record that the grant expenditure for last year, was £135.6 million. While not disagreeing the point that Deputy Rabbitte makes, the Corporation Tax yield has been rising for a number of years. It went up a number of years by 4 per cent and then 5 per cent and the last two years it has gone up by over 7 per cent each year.
With respect, I think those statistics are being misinterpreted. The Finance Services Centre in Dublin produces one per cent stamp duty on transactions and then there is the 10 per cent of the take. That is flowing in to the Corporation tax figures and I think that explains the increase. Because the take from corporation tax has gone up over the last couple of years, the case has been presented constantly that the normal run of manufacturing industry and businesses are paying more.
That is the CII line.
That is the line. I do not believe that. I believe the extra yield is coming from the financial services industry for reasons that the Minister knows well and I am not going to hold up the Committee in arguing that case.
That is not the only one. We do not have the national income figures yet. They lag a couple of years behind but if you look at the latest national income figures, we have, there has been an inordinate increase in profits.
That point should be recorded as well. Some of it may be illusory because it suits multinational companies engaged in transfer price fixing and so on but nonetheless there has been an enormous increase. In addition, there has been some tightening up of the write offs that were available and that is reflected in the figures, such as the virtual abolition of the export sales relief. That was a big one. So some of the restrictions brought in are beginning to be reflected. The Con Power and CII line about the huge increase needs to be looked at a little more carefully.
The financial services would not be that big a proportion but it is a factor.
Forty-three million! £44 million!
It was £50 million last year. The 1989 yield was £303 million and the 1991 figure was just short of the £595 million. It is a substantial increase.
Our point is that there is substantial room left.
I will not argue against the principle that the shelters continue to reduce the tax take whether the rate is 10 per cent or 40 per cent. I am arguing the same thing on the income side. It is far more important to have a fair system and an upfront system. The idea of burying everything in shelters is wrong.
Question put and agreed to.
Section 38 agreed to.