Special Committee on the Finance Bill, 1992 debate -
Tuesday, 12 May 1992

SECTION 43.

Mr. B. Ahern

I move amendment No. 62.

In page 76, subsection (1) (a), to delete lines 4 to 35 and substitute the following:

"(3) (a) Notwithstanding the provisions of subsection (3) of section 41 of the Finance Act, 1980, in determining the income of a company, referred to in the expression ‘the income from the sale of those goods', for the purposes of subsection (2) of the said section 41, it shall be the sum determined by subsection (3) of the said section 41 for that period reduced by any charges on income paid for the purpose of the sale of goods which are allowed as a deduction against the total profits of the company for that period and paid on or after the 1st day of April, 1992.

(b) Where for any accounting period of a company—

(i) the corporation tax referable to the income of the company from the sale of goods falls to be reduced under section 41 of the Finance Act, 1980, and

(ii) charges on income paid, on or after the 1st day of April, 1992, for the purpose of the sale of goods have been allowed as a deduction against total profits,

then, notwithstanding section 46 of the said Act, the charges on income paid for the purpose of the sale of goods shall be deducted from the amount of the relevant deduction in relation to the period for charges on income in subsection (1) of section 46 of the said Act.'.".

Subsection 1 (a) of section 43 of the Bill provides for a restriction on a set off of charges on income paid in the course of activities qualifying for the 10 per cent scheme of corporation tax. The restriction is set out in a new section, section 10 (a), to be inserted in the Corporation Tax Act of 1976 where a 10 per cent company incurs charges on income such as royalties on a manufacturing process. The new section 10 (a) will restrict the set off of those charges to set off against the income chargeable at 10 per cent included in the company's profits. Essentially the expenses of 10 per cent activities are being ring fenced so that they do not reduce the amount of income or profits of a company which will be charged at a standard corporation tax of 40 per cent. Under the new section 10 (a), part of the company's profits will be treated as reduced by 10 per cent charges on income. The part of profits treated as reduced will be income from 10 per cent activities and to the extent that profits representing income from 10 per cent activities are reduced by charges in income, that income will not be charged to corporation tax. The 10 per cent rate is applied by charging income to corporation tax at 40 per cent and by deducting a relief equal to three quarters of the tax of 40 per cent. However, where income has not been charged at all due to the set off of charges it would be inappropriate to give relief from corporation tax calculated by reference to that income.

Mr. Noonan (Limerick East)

You have an arrangement where you give a relief of 75 per cent and then you take 40 per cent of 25 per cent to give you 10 per cent? Is that the way it works?

Mr. B. Ahern

You calculate the tax at 40 per cent and then you give three quarters relief. I think it is the same figure as the way the Deputy put it.

Mr. Noonan

(Limerick East): So you are getting 40 per cent of 25 per cent which gives you 10 per cent?

Mr. B. Ahern

Yes.

Mr. Quinn

What is the purpose of this?

Mr. B. Ahern

It is to stop the cross between the 10 per cent and the 40 per cent companies.

Mr. Quinn

Just to make a clear division between the 10 per cent category and the 40 per cent?

Mr. B. Ahern

Yes.

Mr. Noonan (Limerick East)

I have a lot of sympathy for the case Deputy Rabbitte made about 10 per cent companies and 40 per cent companies. I would go along with a proposal like they have in the United States that there should be a minimum tax take regardless of what the combined level of relief is. It is difficult to know though where one should pitch that minimum take so that it would be fair and equitable and not injurious to economic activity in the country. I wonder has the Minister got any information on the average actual rates of corporation tax paid? I remember reading an article somewhere some years ago, it may be out of date now, which suggested that in the case of 40 per cent companies in this country their actual rate of taxation, after write offs, was about 14 per cent rather than 40 per cent and the 10 per cent companies usually would pay less than 5 per cent, maybe 3.5 per cent or 4 per cent. Some of them may be up against the 5 per cent, now. It seems that there must be scope for an arrangement whereby we would still fulfil our contractual commitments and the commitments entered into by the Government and the IDA to a 10 per cent regime to the year 2010. I do not think it is possible to pull that one back now, although I do not think it was a very wise extension. Is there scope for saying that 10 per cent companies will still be 10 per cent companies but they will have to pay, regardless of whatever write offs they have, a minimum of 8 per cent? Is there scope for saying on the 40 per cent companies that they will have to pay approximately 25 per cent? Or is there scope for simply abolishing more reliefs and pulling the rates down? Why hold the 40 per cent rate at all if it is averaging out at around 14 per cent? Why not take out a lot of the reliefs and pull that back down to 20 per cent?

Mr. Rabbitte

That has been my argument for a few years.

Mr. B. Ahern

The average rate of corporation tax is 24 per cent of commercial profits. There is no figure for the 10 per cent regime. There has to be a balance. The difficulty — and Deputy Noonan has answered the question himself — is that if you were to have a minimum rate of tax that would probably take away all the incentive for companies to expand and to try to develop new products or whatever. You know from speaking to any group of accountants that the first thing they look at in the Finance Bill is where they next try to reduce tax. The whole effort is to find ways of achieving a lower rate for the client. Others do it on the basis of expansion, taking on new lines and expanding and that is a good thing. How do you find when it is a negative and when it is a positive? The present system needs tightening up. We have reliefs that are used purely to save taxable income and do nothing to expand a company or give employment. That happened with the BES schemes. Some of them were very good but so many of them were of no value at all as far as employment was concerned.

The reason for minimum tax in the US is that there is a big difference there between tax profits and accountancy profits. That is not the case either here or in the UK.

Mr. Rabbitte

Is it not true that there is a European Committee, the Ruling Committee, that has recently reported on this very point of the harmonisation of the accounting base and the tax base to try to bring them into line? There must be something of a problem in Europe with this phenomenon or this committee would not have reported.

Mr. B. Ahern

That committee did not suggest minimum taxes. The Deputy is correct, the Ruling Committee are looking at ways of how you may, in the future, have harmonisation of company taxes. In that area they will eventually have to look at reliefs. They did not come down on any single recommendation.

Mr. G. Mitchell

It would not be possible to bring accountancy profits and tax profits into line.

Mr. Quinn

Surely there is a certain inconsistency in the philosophical approach of the Department or maybe the Progressive Democrats have not focused in on corporation tax with the same degree of intensity as they have on personal tax? If the Department's and the Government's hands-off approach, as I perceive it to be, is, on the one hand, to simply guarantee revenue and, on the other, to eliminate distortions and consequently loopholes in the tax regime, surely it would be simpler to go for a minimalist minimum tax without the incentives, thereby allowing companies to retain as much profit as they possibly can to do with it as they wish. That now seems to be the new God of economics, that the market in its wisdom will decide everything and that if you allow a company to retain as much profit as possible and have a degree of certainty, from the revenue point of view, so that, if profits are being made, you know that you are going to get a guaranteed 25 per cent or 26 per cent. It would be much simpler to administer and you would then end up with the economic Gods of the corporate sector deciding in their wisdom — since we are now bereft of any apparently — as to where to put their money and you would get economic growth. Has that been considered or are we just running round closing loopholes all the time? It is back to the same question that we had before, because the technicalities of taxation are matters which are frankly beyond the scope of a select committee of this House in the time constraints that we have. What we have to do is try to elucidate what is the policy behind it and allow professional revenue commissioners and taxation specialists, both in the private sector and in the Government's own public service, to implement that policy. Is there a policy here? If we want to get a bigger slice of corporation tax — and we have been arguing for so many years now — has the Department ever looked at the question of a minimum tax on the 10 per cent and 40 per cent regimes. If the shelters are eliminated to the point of virtual disappearance and then allow normal economic factors are allowed to prevail rather than having grant attitudes or grant incentives as the driving point.

Mr. B. Ahern

The Deputy asked a number of questions. Because there is a rise in the take from corporation tax a minimum tax would yield little. The Deputy is suggesting that we should tell the 40 per cent and 10 per cent companies in advance the tax they have to pay and then they could re-invest whatever profits they have left over. Deputy Quinn would be the first to point out what might happen in this country if that was the case.

The whole question of repatriation of profits from many of our multinationals has been a burning issue for a long time. We would allow them make more profits in whatever niche of the multinational industry they are in and they would then transfer those profits straight out of the country. I fear that would happen in many cases. The policy of the Department always has been to maintain contact with industry at all levels. There is no other Government Department, with the exception of Industry and Commerce or the IDA, who meet business people so much. They are clearly listening to their views. The loopholes are being closed as part of broadening the tax base because many of them make no sense.

Mr. Rabbitte

It is not true to say — if I understood the Minister correctly — that, if you were to go for an alternative minimum tax system, the Exchequer take would be less. The purpose of my amendment was to frame this alternative minimum tax. It does not mean that anybody is perfectly free to go ahead and apply the tax regime as it is. An alternative minimum tax system would be available whereby a company that does return profits in accordance with conventional accounting methods would be liable to not less than 20 per cent effective tax rate or, in the case of the 10 per cent manufacturing industry regime, 50 per cent of that, which is 10 per cent. It could not be less than the 10 per cent, rather than the 8 per cent that Deputy Noonan referred to. I do not see how giving yourself that minimum rate could possibly diminish the income to the Exchequer.

I am fascinated by the basis on which some amendments are ruled out of order. Deputy Noonan has been giving me the benefit of his advice here. It is extraordinary that we are expected to come into this committee and say: "I would like to see tax reliefs for the PAYE sector there" and then, when you set out to show where you are going to get the money to pay for those reliefs, you cannot advance the case because it is a potential charge on some well heeled corporate owner.

Mr. B. Ahern

May I point out to Deputy Rabbitte that what he is saying could have the effect of stifling a good company from expanding because it would see it as negative taxation, regardless of how they might expand or what new products they might go into. I can think of a number of companies which genuinely try to put their profits into expansion. Maybe there are not enough of them.

Mr. Quinn

My point is that if you can apply that logic to companies to provide them with incentives, how can you justify the removal of precisely the same concept of incentives for individuals?

Mr. B. Ahern

They are there for companies as well. A large number of incentives which have been abused are being closed off. Base broadening is narrowing the difference between accounting profits and tax profits. What we sought to do is to eliminate abuse. In other cases, like the wear and tear allowances, we brought in a better system. From an accountancy point of view, it is a straightline system and is far more beneficial.

Mr. G. Mitchell

I presume that the observations made by the Consultative Committee on Accountancy Bodies have been circulated in relation to section 43 and have been or will be taken into account by the Minister. They say subsections (2) and (3) of section 10 (a) are inconsistent in relation to the treatment of trade charges while section 16 (a) (2) needs to be amended if relief is to be available for 10 per cent losses forward. I presume the Minister has taken that into account in his technical amendment or will do so on Report Stage.

Following on the point I made on various different sections of the Bill yesterday on the question of objectives, do we actually set objectives for tax concessions which we give? Has the Minister considered whether the 10 per cent rate should be abolished entirely? An argument is advanced that foreign companies investing here will not bring research and development into the country because they can write it off at higher tax rates outside the country. Would it not be better to have higher tax rates for those companies and have inducements in other ways so that they would locate their research and development here? I do not know if that has been addressed already. There is an argument which says that because of the 10 per cent rate, companies only put manufacturing process into this country and do not move in research and development. They keep it somewhere else and write it off at 50 per cent or whatever the tax rate happens to be. There might be a greater attraction for them if they could write that off at a higher tax rate in this country and have grants or some other inducements to assist them. Has the Minister given that consideration in relation to the 10 per cent tax rate?

Mr. B. Ahern

You could argue all day and night about other ways of doing it but the IDA believes that it is imperative to have the 10 per cent rate in the long term for their industrial policy in view of the ferocious competion for foreign investment. That is the reason it was brought in.

I want to make one other point in relation to the ruling committee. The main focus of the committee, at European level, is the removal of competition between member states and their philosophical arguments do not relate to minimim tax or anything else. The issue is the distortion of competition within the Community brought about by the tax systems. The reason I raise this is that the 10 per cent may be an issue in the future, although it is some way down the line. In view of the recommendations and the deliberations of the committee that issue may be a major one in the future but, hopefully, not in the foreseeable future.

Mr. Rabbitte

I think we should move on but I do not want to leave one point on the record. The Minister said earlier that the application of an alternative minimum tax would stifle good companies. If we were suggesting — and certainly in my amendment I was not suggesting this — that the rate should be 40 per cent or whatever, I can see that point. In a situation, however, where we recommend that there should be no change in the manufacturing tax regime of 10 per cent and that the minimum tax should be of the order of 20 per cent, I do not believe that any good company operating within this jurisdiction would regard that as stifling.

Amendment agreed to.

Mr. B. Ahern

I move amendment No. 63:

In page 77, subsection (1) (c), to delete lines 7 to 37, and substitute the following:

"(2) Notwithstanding subsection (2) of section 16, for the purposes of that subsection the amount of a loss in a trade incurred by a company in an accounting period ending on or after the 1st day of April, 1992, shall be deemed to be reduced by the amount of a loss from the sale of goods, if any, incurred in the trade by the company in the accounting period.

(3) Where in an accounting period ending on or after the 1st day of April, 1992, a company carrying on a trade incurs a loss from the sale of goods, the company may make a claim requiring that the loss be set off for the purposes of corporation tax against its income from the sale of goods—

(a) of that accounting period, and

(b) if it was then carrying on the first-mentioned trade and if the claim so requires, of preceding accounting periods ending within the time specified in subsection (4),

and, subject to any relief for an earlier loss, to the extent that the trading income of any of those accounting periods consists of, or includes, income from the sale of goods, that trading income shall then be reduced by so much of the loss as cannot be relieved against trading income of a later accounting period.".

Section 43 (1) (c) of the Bill provides for a restriction on a set-off of trading losses arising in the course of activities qualifying for the 10 per cent scheme of corporation tax. The restriction is set out in a new section 16 (a). Sub-section 16 (a) (3) provides for the relief of losses in a 10 per cent trade against 10 per cent income accruing to the company in the period of a preceding accounting period.

In this way, losses from 10 per cent activities are prevented from reducing profits chargeable at the standard corporation tax of 40 per cent but will be allowed against income from 10 per cent activities. Subsection (2) and (3) of the new section have been revised so as to eliminate certain drafting ambiguities and provide, more clearly, that these measures ring-fence the 10 per cent trading losses.

Mr. Rabbitte

Are we talking here about a group of companies situation, that the main core business of the company would be manufacturing but that they had a number of other interests that are subject to the 40 per cent charge and that in future the 10 per cent can no longer be set-off against the 40 per cent? Are we talking about a group of companies?

Mr. B. Ahern

No, the group position was removed in 1988. This is in the case of a single company.

Amendment agreed to.

Amendments Nos. 64 and 65 agreed to.

Section 43, as amended, agreed.