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

SECTION 45.

Mr. Noonan (Limerick East)

I move amendment No. 68:

In page 83, before section 45, to insert the following new section:

"45.—(1) Section 18 of the Finance Act, 1978 is hereby amended by—

(a) the insertion in subsection (1) of the following definition after the definition of ‘selling by wholesale':

‘"scheduled transactions" means—

(a) in relation to an agricultural society, transactions falling within any of the classes of transactions set out in Part 1 of the Second Schedule; and

(b) in relation to a fishery society, transactions falling within any of the classes of transactions set out in Part 2 of the Second Schedule;

but excluding sales to the intervention agency and for the purposes of this exclusion, the sale of a commodity by an agricultural society or a fishery society to a person other than the intervention agency shall be deemed to be a sale by the agricultural society or the fishery society, as the case may be, to the intervention agency if that commodity is ultimately sold to the intervention agency;',

(b) the substitution for sub-section (3) of the following sub-section:

‘(3) where, in the case of a trade carried on by a society the transactions in any accounting period of the society throughout which the society was an agricultural society or a fishery society include scheduled transactions, so much of the trading income or the loss (as the case may be) of that period as is attributable to scheduled transactions of the period shall be disregarded for all purposes of the Tax Acts to the extent of 92 per cent of such trading income or loss (as the case may be) in the period to the 31st March, 1993, 84 per cent thereof in the period to 31st March, 1994 and to the extent of 75 per cent of such income or loss arising in the period commencing 1st April, 1994 and ending on 31 March, 2010.',

(c) by the substitution in sub-section (4) (b) for ‘exempted' of ‘scheduled',

(d) by the substitution in subsection (5) (b) for ‘exempted' of ‘scheduled',

(e) by the substitution in subsection (6) for ‘exempted' of ‘scheduled'.

(2) The Finance Act, 1978 is hereby amended by the substitution in the Second Schedule for ‘EXEMPTED TRANSACTIONS IN RELATION TO AGRICULTURAL SOCIETIES AND FISHERY SOCIETIES' of ‘SCHEDULED TRANSACTIONS IN RELATION TO AGRICULTURAL SOCIETIES AND FISHERIES SOCIETIES'.".

This amendment is in effect a new section in substitution for the section the Minister has put in. The Minister announced in the budget that he was going to tax co-operative societies and that the 100 per cent tax exemption which applied to co-operative societies as defined in the 1978 Act would no longer apply. Rather like the debate we just had on section 43, co-operative societies have manufacturing activities which would attract the 10 per cent rate and have other activities which would attract the 40 per cent corporation tax. The Minister has attempted to make all activities, the surpluses rather than the profits because it is surpluses we talk about in relation to co-ops, liable to corporation tax at the relevant rate, manufacturing activities at a maximum of 10 per cent and other activities at a maximum of 40 per cent.

I would argue that the co-operative societies, which are still genuine co-ops are not, of their nature in the business of making profits. They have been an essential part of rural development over the years in farming, in fisheries and in local development. They have been one of the planks on which the development of rural Ireland has been based since the end of the last century. There is no need for me to talk about the development of the co-operatives movement because we are all fairly famliar with it. It built up the economy of rural Ireland, particularly in the processing of milk and the making of butter in the old creameries. In more recent times, when the fairs were taken off the streets, the marts in the towns were organised on a co-op basis.

All along the coast, especially along the west coast, there are fishery co-operatives and they work on the basis of ensuring that those who produce from the sea get a fair return on the sale of that product. Historically, they were exploited, and paid very small rates for their produce. The companies buying from them made profits on the manufacture of goods from that produce.

I know circumstances have changed and, over the last two months, if one opens the financial pages of the newspapers, we see that Kerry Co-op, Golden Vale or Waterford, to name some of the bigger companies, are making very extensive products indeed. I know the time has come for a change and I am not opposing that change. However, I believe there is a better way of doing it. The way the Minister has decided to do it is complex and difficult for the companies.

Most of the activitiy which brings profits in the large co-ops, Kerry or Golden Value, Ballyclough, Waterford, Avonmore and so on, is 10 per cent activity and the Minister brings that in at the 10 per cent rate of corporation tax. I have no problem with that. It is difficult to understand why a publicly quoted company like Kerry plc would not pay or be subject to the same regime of taxation as any public liability company or, indeed, any limited liability company.

There are, however, other activities in the smaller co-ops where 40 per cent rate would apply. Members will be familiar, for example, with the farm relief schemes where, for the first time in generations, there is a scheme in place under which a farmer and his wife can get Sunday afternoon off or can take a week's holiday because there are people who can come in on a commercial basis to milk the cows and make sure that the milk is delivered to the co-op. These kind of service activities would attract the 40 per cent rate of tax and, I think that is going to kill them completely. As regards the fishing co-ops, the catching of fish in the sea landing it on the quayside, putting it in boxes and throwing ice on top, delivering it to the Dublin market, is not a manufacturing activity despite all the Supreme Court cases, and will attract the 40 per cent rate of tax. I think it is questionable whether the fishing co-ops along the west coast are in a position to pay a 40 per cent rate of tax.

There are also difficulties for the co-ops where for example, at certain times of the year, one dairy co-op has a surplus of milk and a neighbouring co-op has a shortage and the co-op with a surplus sells to the one in deficit. That would not be regarded as a 10 per cent activity because there is no manufacturing involved and that transaction will attract a rate of 40 per cent.

The Minister brought in a section different to what he suggested in the budget in an attempt to save that activity, but I do not think he has it right. I believe there is still a problem. Quite frequently the sale is not from co-op to co-op but is a sale from the milk producing part of the co-op into a manufacturing unit of another co-op which may not be organised as a co-op within the meaning of the Act, so consequently it will attract the 40 per cent rate of tax.

I am suggesting to the Minister — this is not down for debating purposes, because I firmly believe it is a better approach — that he look at the amendment again. The present position is that there is a 100 per cent exemption for the activities of co-ops. A co-operative society and their activities have already been defined within the principal Act, so we do not have to go into this business of redefinition of activities or try to extend the scope of what is a 10 per cent company or anything like that.

The only exclusion on the co-ops is selling into intervention. That is not regarded as an exempt activity, as I understand it. That is fair enough, I agree with that completely and would ask for no change on that. I am saying to the Minister that the approach he should take is to pull back progressively the 100 per cent exemption, on a phased basis, to 75 per cent and he will achieve a 10 per cent tax rate on all co-op activity and acquire the yield he is looking for.

The way the amendment is drafted at the moment ensures a 100 per cent exemption from taxation on the surpluses of co-ops. I am saying that progressively over three years bring it back down to 75 per cent, so that 75 per cent will be exempt but 25 per cent will be taxable at 40 per cent at the standard rate of corporation tax and 40 per cent of 25 per cent is 10 per cent. You will then get a flat rate of 10 per cent right across the board and we will get over the problems Deputy Rabbitte was talking about — that those to whom a 10 per cent applies will get away with it. I am saying that it should be phased in. My amendment suggests that, with a three year phasing-in period, the exemption in this tax year would be 92 per cent, it would be 84 per cent in the second year and in the third year you would arrive at the desired point.

Even if the Minister found difficulty with the phasing, I believe the principle is still very sound and a better approach. In any event, I do not think we are going to get very much from the co-ops on those activities which are not manufacturing, the ones to which the 40 per cent applies. If we do it the Minister's way, they will go to their professional advisers and they will start restructuring; we will get this outbreak of restructuring all over the country. A lot of what the Minister should be getting in yield will be going into the business firms and he will not get as much.

From what I am hearing I believe the Minister's estimated yield is grossly underestimated. He estimates a yield of £1.5 million in the first year and between £6 million and £7 million in a full year. Those figures are a lot lower than the real figures. On last year's profits two of the main Munster co-ops would give the Minister his £6 million to £7 million. I am saying to the Minister that he has scope.

If the concession I am talking about is made, the Minister will achieve his yield and a lot more. The yield put in by Finance and Revenue was very prudent and very cautious and I know why. When people are being brought into the tax net for the first time, there is only an estimate of what the tax yield will be because it is not known what they are at. You can take it that they themselves admit that the yield will be higher than the Minister estimates. This amendment is meant to save the yield and make it easier to administer.

Mr. Finucane

I fully support my colleague's amendment. The umbrella body, ICOT, have met the Minister and put forward their views in relation to what the Minister has proposed and the impact it would have on the co-operatives. I am aware that at that meeting the Minister stated that he was not going to concede anything in relation to co-operative taxation and that he was under strong pressure from the unions to do this and that he had, indeed, been "lambasted" for making concessions in the Bill, to use the Minister's word.

I wonder what the unions are saying in relation to the co-operative taxation. It has to be recognised that up to 16,000 members of trade unions are employed in co-operatives. A lot of those companies are located in parts of the country to which it would be extremely difficult to attract enterprise. Those people are trade union members and they are concerned about co-operative taxation and the impact it may have on them for the future.

Deputy Noonan ranged widely over aspects of co-operatives and the impact the tax would have on them. He, quite rightly, stated that the yield estimated by the Minister caused surprise within the co-operatives because one yield would be far higher than the estimate. In relation to co-operative taxation, I sometimes think we are overreacting to a saga of events that took place before Christmas.

I am referring to various scandals, etc. In targeting the co-operative's overall yield I wonder if the Minister is aware that the net profit of the 35 livestock marts around the country in 1990 was £1.2 million.

Of the 35, seven were losing money and the net profit on sales in those marts was 0.27 per cent.

If you take the marts as a barometer and say that their business is expanding, the figures do not support that. In 1988, the turnover of those 35 marts was £810 million but in 1991 it was £610 million, a reduction of 25 per cent. In relation to sales in marts — and one targets calf sales as a barometer of what is happening in the agricultural industry — since 1984 there has been a reduction of 130,000 calves. Therefore, in relation to co-ops, and I am specifically referring to the marts, they are already pressurised in relation to their activities. A 40 per cent tax would be punitive. Deputy Noonan's amendment was specifically addressed to that special area. In relation to the 35 livestock marts, we are talking about the members, not about company directors. We are talking about former members who will probably get a dividend of £20 a year, if they are lucky. Targeting all of that particular segment is an unwise decision. It will have repercussions within those marts.

In relation to pollution control, vis-�-visthe recent Environmental Protection Agency Bill, they may not have the necessary finance to make the necessary investment. We also recognise that those specific marts play a wide role in the area of disease eradication. I targetted this specific area in order to highlight the injustice of what the Minister is trying to do.

Mr. Roche

I am concerned at this particular section and the impact it will have, not on the big manufacturing co-operatives and the PLCs, who will look after themselves, but on small co-operatives and on the peripheral activities of the co-ops. I would have to say I am very impressed by the line of argument put forward by the ICOS in that the co-ops, particularly the small co-ops who provide services to members, are fundamentally different to the PLCs. they are not the same as those at manufacturing end of things and, as such, they are worthy of consideration in some special way.

For example, the farm relief services in County Wicklow would be adversely affected by these particular changes. Profitability has been very low over the last couple of years. For example, in 1990 the profit turnover ratio was only four per cent. It declined further in 1991. Therefore if we introduce this type of measure it would have the undesirable effect of putting a service, which the State regards as a very beneficial and positive, into doubt.

Deputy Finucane mentioned the livestock marts. We have mainly private livestock marts in County Wicklow but in the South Leinster area there are a significant number of small livestock marts in areas where private sector marts will not operate and they are highly marginal. Those who are lossmakers would hardly be affected by this because they would not be in a tax paying situation. The ones who are really marginal provide competition, and flexibility, and are available to farmers who cannot take their stock to the private sector marts. I think it would be a regressive step if a taxation measure introduced to provide a certain neatness in the overall system had an impact on those.

Another area was not mentioned here nor by the ICOS but it has been mentioned to me by a number of people from the farming sector and by representatives from some of the co-ops. It may be that this is a signal that some co-op managements, particularly the larger ones, are already using the changes proposed here to get rid of services which they do not want to continue operating. I am referring to the co-op shops. They provide a very extensive range of goods and services to their clientele. At least one of the large co-ops, relatively easily recognised as Waterford Co-op, has three shops. In the area I am most concerned about, they are marginal in their activities and management are saying that if this particular tax change goes through the shops will close down. It is obviously a fairly marginal activity.

I can see the need to equalise the tax regime between one shop and another shop if they are operating in direct competition with each other. However, if this particular change goes through it may result in services, particularly small co-op services, being put in danger. Services which are provided against the advice of the managers, particularly where the co-ops have become very large manufacturing PLC type operations, may be squeezed further. I would ask the Minister to consider between now and the Report Stage some means of alleviating the impact that this would have, particularly as I believe the yield from the changes could be achieved otherwise than is proposed.

Mr. Hogan

The Minister in the course of his budget statement said he was very conscious of making sure we sustain our employment levels and, indeed, in his budget he created opportunities for employment. This very tax is going to do the exact opposite. It will put a great strain on many of the co-operative organisations throughout the country and we should remember that the concept of a co-op is not confined to agricultural activities. There are many other co-operatives, for example, in laundry facilities in a community, particularly in deprived areas. The concept of a co-op has been used in urban and rural areas to ensure that there is co-ordination, proper administration and a proper structure for many services.

We are not just talking here about a purely rural matter. It is a concept that has been a long time with us and has worked well in a non-profitmaking way to ensure that we have proper structures for many of the services that are essential in any community.

In my opinion the number of anti-employment in this budget is mind boggling despite what the Minister stated in his budget speech. I do not think the Minister has any idea of how rural communities are ticking over, if he is going to proceed with this sort of tax. Indeed, the Chairman will be well aware of the many improvements that have taken place under your direction over the last number of years in the horticultural business througout the country. The co-op structure has been largely responsible for co-ordinating the marketing and employment opportunities and the distribution facilities in these important areas of horticultural activity.

May I give an example of how this tax will effect my own constituency in Carlow-Kilkenny, the core area of Avonmore Foods Plc, a co-op that has brought about the amalgamation and rationalisation of a very dispersed agricultural industry in recent years. The company employs 3,000 people in the south-east and the Midlands right up to the Chairman's own area in County Louth. That co-operative is said to have made substantial profits in recent years. Because it is now partially owned by institutional investors, it is required to make certain profits to satisfy the shareholders, the stock market and the investment opportunities that have been given to the co-operative movement by much needed capital injections. £1.5 million will be paid by Avonmore Foods in a full year under this provision. I do not know from where the Minister pulled the figure of £6 million. The figure will be substantially higher if he utilises the full potential of that tax provision. In fact, it even copperfastens——

Mr. B. Ahern

I hope it helps me to deal with all the other things I have to pay for.

Mr. Martin

A few new schools.

Mr. Noonan (Limerick East)

You will do well on company cars too.

Mr. Hogan

Deputy Martin will be well aware that we have a Minister of State at the Department of Education in my constituency, Deputy Aylward who is well able to look after the building of schools. Certainly any money that is available will not be going to Cork, it will be coming to Kilkenny.

Chairman

Do not introduce extraneous matters.

(Interruptions.)

Mr. Hogan

I am being provoked by Deputy Martin. I could make several suggestions to the Minister about the additional revenue he will raise in the co-op tax, and how and where it should be spent but that is not the subject of the debate today. I am trying to impress upon the Minister that he will create havoc in rural communities if he seeks to implement his taxation regime. If Avonmore pays £1.5 million in a full year that money will not be avilable for re-investment. A number of current co-operative activities are subject to 40 per cent tax already, for example, the hardware sector which is becoming more important for some of the ancillary industries of co-operatives in rural areas.

Livestock marts have been mentioned by Deputy Roche. Many of them are making no trading profit at all at the moment. Deputy Hilliard will be well aware of that. I agree that they will not be taxed under this regime but an investment of £8 million is being proposed next week by the Department of Agriculture and Food for the improvement of livestock facilities. While the Minister for Finance is making sure that 40 per cent of any profit made out of that improvement will be sent off to the Revenue. That is not proper planning. The Department of Agriculture, through FEOGA, is seeking to improve the facilities while the Minister for Finance is proposing to take away 40 per cent of the profits from doing that. Those figures were not built into the development programmes now being proposed. With the reform of the Common Agricultural Policy and the affects of the downturn in agricultural trade generally throughout the country, there will be less activity and more rationalisation throughout rural Ireland in the future.

What will be the effect on the input of co-operatives in the important LEADER programme announced by Commissioner MacSharry and supposed by him to be the saviour of rural Ireland in providing alternative farm enterprises or alternative employment enterprises in rural communities. Co-operatives have been given a lead role by the Commissioner in the disbursement of moneys and in seeing that these projects are up and running as soon as possible. These projects will now be subject to 40 per cent taxation. Is that not true? Wha effect will that have on the actual viability of alternative enterprises in rural communities?

I would appeal to the Minister to think again about this area of co-operative taxation and to accept the very measured amendment put forward by Deputy Noonan which would produce a tax yield from the co-operative structure without damaging the structure itself.

Mr. Martin

Perhaps due to my na�vety or the fact that I am a relative newcomer to this type of debate on the Finance Bill I am somewhat incredulous——

Mr. Noonan (Limerick East)

City man.

Mr. Martin

I have a certain degree of agricultural experience also, Deputy, and a fairly lucrative one at that. Coming from a PAYE background I am astounded at the tone, tenor and content of this debate. I am absolutely amazed to see that some of the major co-operatives have 100 per cent exemptions.

Deputy Noonan actually endorsed the Minister's measure when he said that from two co-operatives alone in Munster he will reach his target of £6 million. I would hope that the Minister could double or even treble that. We are having disputes about reducing personal taxation. Individuals in the workplace are paying 27 per cent tax at the moment, some are paying up to 48 per cent tax——

Mr. Quinn

Plus PRSI.

Mr. Martin

Plus PRSI, and we are having this argument about multi-million pound businesses. We need some degree of perspective.

Mr. Quinn

When they are losing money it is the rural heart of Ireland. that is an important phrase.

Mr. Martin

I will leave emotion out of the debate. It is quite clear that, historically, the original philosophy behind the co-operative movement has evolved. It is a completely different phenomenon today from what it was 100 years ago. We must pay tribute to the growth of co-operatives. I am not anti co-operative. There have been outstanding developments in modern Ireland in terms of the dairy industry, etc., and co-operatives have made tremendous progress. Having said that, they could make greater progress, particularly in the application of research and development. They could do much more. Co-operatives are still far too conservative in the application of research to product development, etc., We could have far more jobs in the added value area if we had more innovation there.

I have very little sympathy for some of the arguments made. It will not tear rural Ireland apart or create the grave difficulties outlined by a number of Deputies. In certain co-operatives, including the smaller co-operatives which are not making profits, the losses made in previous years can be set against any tax liability in future years. If they are not making money they will not be paying tax. I cannot see the problem there.

I commend the Minister on this. I am genuinely flabbergasted that, over the last ten years, we had these exemptions for what is a major business with tremendous revenue and profits. The Exchequer is entitled to a slice of that profit. The same Deputies will argue trenchantly in the Dáil about the reduction in health expenditure, the reduction in the education estimate and the demands we will have in both of those sectors over the next ten to 15 years. How will we pay for all of these services in health and education? Most of us in this Chamber agree to the need for a consensus society with a degree of public expenditure in areas like health and education. That is my position in the taxation debate. My overall reservations about tax reductions, etc., is that we are reducing the amount of money available for the vital services in health, education and across the board. If this measure, which can generate extra revenue for the Exchequer, can help to balance the books and help the overall position then I would enthusiastically support it.

Mr. Quinn

Could I ask a question in relation to the policy towards co-operatives and the method of taxation? Deputy Noonan has offered an alternative road to the same destination. I am not in a position to evaluate the merits or demerits of it but clearly if one refers back to the Culliton report or other industrial policy documents which have appeared over the last ten years, there is a need for the State to act as a marriage broker for the co-operatives in general. We have seen the failure of negotiations in relation to Waterford and Avonmore and the general chaos that reigned in the large co-operatives, leaving aside the small local ones. This would focus mainly on the big co-operatives.

In relation to this taxation measure, did the Department or the Minister for Finance have a policy agenda also? Is there any possibility of incentives being brought into the taxation provisions for co-operatives to force them to come together given that the present negotiations between co-operatives have collapsed? From the point of view of developing a coherent, soundly based, agri-business, the division within the co-operative movement is still too destructive. Could an incentive to bring co-operatives together by mergers be included that would give us the scale of operation that R & D, etc., would require if they are to survive after 1992?

Mr. Hilliard

I worked in the livestock mart business for 25 years before I came into the unfortunate profession of politics. I also live in the parish where the founder of the co-operative movement came from, Dunsany, Kilmessan. That man was Sir Horace Plunkett.

There are different types of business in our country and over the past 30, 40 or 50 years business trends have changed drastically. If we continue basing our tax system on outdated logic this State will not have much income in future years to provide the services people need and demand. We have many types of co-operative business. We have huge co-ops and small co-ops trading in different products. Many of our huge co-ops have moved into a classification similar to that of big private business. We must accept that fact. I do not think the measure the Minister is suggesting will hinder the small ones. Having worked with them for so long in co-operative marts and private marts, I could look at it in a different way. It could have a different meaning to some co-ops, especially the small co-ops. Any co-op not making profit is not liable to pay this tax. We want to be clear about this. It is a tax on profits when all bills and expenses are paid out of income. Many of the smaller co-ops which would be on the borderline as regards this tax, if they have good financial advice, which most of them have, might be encouraged to re-invest or decide on a development plan to keep their profits out of the area where they would be taxed. The bigger co-ops could not do that because of their massive profits. They might be able to re-invest part of them and save some of the 40 per cent tax. The smaller co-ops can be encouraged to think of ways and means of developing their business, creating more employment. I would look at it from that point of view. I do not think the Minister is trying to hinder any co-operative society which is involved in a small trade. I understood that the reason for bringing in this tax is basically to tax trade which, in the past was dealt with in a different manner. The livestock mart business is not in competition with anybody else. They are trading in one product. I know of co-op marts in this country which inserted provisions in their constitutions limiting their business to one specific line, before they ever went out to collect share capital from the local farmers, co-op marts which specifically stated to the farmers that they would trade with livestock and livestock only. Such co-ops should not be subject to this new tax because they are not interfering with any existing trade.

The sale of livestock on the streets of the town is long gone. This was a whole new business. They have not received any grants from the State. They built up the marts from their own resources. They constitute one of the best information systems for the farming community regarding the prices of livestock from one week to the other. In the past farmers had to depend on a few buyers who had the secret knowledge of the value of livestock in the UK. I make a case that the co-operative livestock marts should be treated with more favour.

Mr. Rabbitte

Listening to this debate is an interesting experience because it highlights the number of exemptions, shelters and allowances that exist. Is it any wonder the PAYE sector has been shouldering 90 per cent of the tax burden? I have listened with some interest to some of the most eloquent speeches that have been made during the course of the debate. The Deputies who spoke are representing their constituencies and constituents. A struggle for supremacy in The Wicklow People is going on now that Deputy Roche has repositioned himself more strategically for the remainder of the debate. That is perfectly understandable. What I have to do is to look at it from the point of view of my constituency and constituents. The most significant economic activity taking place in rural Ireland is that of the major co-ops. Should we resist the application of taxable status to such economic activity? I think the answer is no. I do not think we can. I heard Deputy Noonan comment on the origins of the co-op system, I know a little about it. I have great sympathy with the early conditions which gave birth to the co-op movement and I support its continuation. As Deputy Hilliard said, however, in the case of the major co-ops, the situation has changed and changed utterly. The circumstances Deputy Noonan described in the early years of the foundation of the State are totally changed. One should not lose sight of one’s own constituency. Some of my constituents are trying to prevent their homes from being repossessed because they cannot repay mortgages and are simultaneously liable to income tax. How can one defend a situation in which these large scale enterprises — and I hope they get larger — are entirely exempt? That is not permissible. There may be an argument as between the treatment of the major co-ops and of the smaller players. I thank Deputy Finucane for mentioning the co-op laundry in the impoverished parts of the city. I can assure him that he need have no concern about their tax liability.

Finally, it reminds me of one statistic that has always remained in my mind. There was considerable impatience yesterday when we were dealing with the area of income tax and so on and great pressure to move on. Deputies were weary listening to me and sometimes I get weary listening to myself, but it is interesting that there is such a lobby on an issue like this. In the early eighties just after the period of the PAYE uprising I remember the then president of the ICMSA making the point that in that particular year his members paid £32 million in income tax but they paid £40 million to accountants to teach them how to minimise it. I do not think we should forget that statistic. There is an instinct suggesting that somehow, social responsibility is not shared equally by all members of society. To go back to Deputy Martin's point, in certain areas of society, it is believed that if you can minimise your contribution to the Revenue, fair play to you. The removal of this exemption is overdue.

Mr. Dennehy

As my colleague pointed out, we have a 34 per cent rural constituency.

I found it interesting comparing this discussion with this morning's where we debated at length the position of companies who are registered to pay 40 per cent but who manage to pay only 24 per cent. We were very worried about that. Now we are discussing companies which pay nothing on the exempt activities, in other words, on the vast majority of their activities. There are two different aspects to this. In fairness to Deputy Noonan, he tried to bring forward alternatives and amendments which would mean that people would pay in time, but Deputy Hogan wanted them to pay nothing at all.

Mr. Hogan

I did not.

Mr. Dennehy

It is important to point out what the present position is. In the past we protected co-operatives. It was a good policy to do so until they came to the point where they were capable of carrying the load themselves and moving on. They are now at that point. It was stated that two companies in Munster, alone, could pay the £6 million we are looking for. If that is correct, then we should go for them all and perhaps get a yield of £20 million or £30 million from the large companies. I would ask the Minister to consider allowing the formula proposed in Deputy Noonan's amendment to apply to the smaller ones. Obviously a difficulty could arise if one of these companies was trading against a company operating under the new regime as proposed by the Minister.

In a unique exemption, these companies, which have not paid anything until now, are to be allowed roll up their losses, if they have losses, as though they were paying under section 16 of the 1976 Act, dealing with corporation tax. They will be allowed roll up all their previous losses and offset them against any profits. That is a great gesture, allowing the tax to be phased in. It will give smaller companies and people who have losses a chance to stay on their feet. The ones we are after are huge publicly quoted companies. We cannot allow the present position to continue in fairness to other taxpayers. When people use the argument about employees and say how many thousand employees are involved, we have to bear in mind that these employees are paying 48 per cent income tax in many cases, as well as PRSI, etc., while the beneficiaries of the company are paying nothing. We cannot tolerate that, but at the same time we must protect the smaller companies. I am sure that can be done. I would like to hear the Minister reply on that. It is time for a change.

The Minister is proposing to phase this in on a two third/one third basis. Even for the larger companies it will be phased in over two to three years while the small company will have the protection of rolling up previous losses. It is imperative that we make this change. I commend the Minister for tackling the issue. It has been one of the sacred cows, no pun intended. One did not touch the areas of rural development and co-operatives. Kerry Co-Op and others are massive companies and they are in competition with people who are paying tax under the present regime. We must support the Minister. In relation to the smaller companies, if there is room for manoeuvre under Deputy Noonan's amendment, it should be considered.

Mr. Power

This debate has been very interesting. Deputy Noonan gave a good outline of the co-operatives and the way they have grown. We can all appreciate the importance of co-operatives and the role they have played in economic activity, particularly in rural Ireland. As Deputy Rabbitte pointed out, that situation has changed dramatically over the last few years. It is vital that we tap that source of wealth and get our fair share from it. The Minister, in this year's budget and over the next couple of years, will be looking for alternative sources of revenue. This was an obvious one. I compliment the Minister on his actions. In relation to the smaller co-operatives, I would like to ask the Minister if he is happy that his proposals will not put some of these co-operatives out of business. They are very vital and give employment in areas where it would be very difficult to get any other industry to set up. That is the only worry I would have about the proposals.

Mr. Noonan (Limerick East)

I am not proposing that the co-operatives should be exempt from tax. I appreciate what everyone is saying about the large publicly quoted PLCs. Their business is like any other business. Most of it is involved in what is defined as 10 per cent activity. I am proposing a tax rate of 10 per cent. I am also proposing a flat rate tax of 10 per cent so that they will not have write-offs in relation to that part of their activity. To narrow the debate down, there would be a bigger take under my proposals from their manufacturing activity than there would be from the Minister's proposals. I want to get at the other activities, which are not 10 per cent activities. This is a better way of doing it. I do not think there will be any loss in yield to the Minister in what I am suggesting.

We all remember the outcry when UMP closed down and what it was like in the west of Ireland. That was a privately owned company. For my urban colleagues, it makes the point that there are large stretches of Ireland where the only viable industry is the food industry. If Kerry Co-Op were to pull out of Listowel, the town would close down as there would be no jobs. There is one very simple rule about PAYE. The prerequisite to pay PAYE is that you must have a job. Many of the jobs in rural Ireland are in the food industry. If you wipe out the jobs, PAYE will no longer be an issue. When UMP closed the morale of a town collapsed. We all saw the television interviews with people from the west and their anxiety. The same would apply to Listowel, Charleville, Mallow, Mitchelstown if the co-operative, and the food processing industry, were taken out. The Minister should be very careful not to do any damage to the food industry. I am very critical of the way that industry has developed in this country. The beef industry is in a frightful mess. I am glad that the dairy co-operatives — who have some level of efficiency — are moving in and taking over some of the beef plants. However, the dairy co-operatives and the whole-milk based food industry are lagging behind our European partners, the Danes, the Dutch and the French. Given the changes proposed at Maastricht and the developments which will take place in this decade, they are not in great shape now to face the kind of competition that will arise. Their units are too small. Their research and development is not sufficient. They have not branched out into the whole range of products which will be necessary to keep the businesses viable and to get on to the shelves of the European supermarkets, selling to the housewife rather than into intervention. That is a major problem.

We are now just at the point where there is a possibility of a food industry being redeveloped. I would ask the Minister to look at what I am suggesting. The flat rate tax approach will give him the kind of yield he is looking for but will apply to those who can best afford to pay it. It will protect the position of some of the small companies and especially the ones that have very low profits.

The other point about these publicly quoted companies, the full processing companies which were originally co-operative, is that they are not yet distributing dividends to any degree. Therefore, it is not a question of the PAYE man being ripped off while a group of wealthy capitalists are making extravagant tax free profits. They are not. Traditionally the co-operatives paid nothing to their shareholders. Every farmhouse in the country had share coupons up on the dresser that were worth nothing, there was never a penny paid out on them. Farmers invested their money simply to have some kind of processing place for their milk. However, they have become valuable in recent times because they were bought back when the companies went public. There are still no dividends being paid, that I am aware of, by the major quoted co-operatives, even though the profits are quite good. All the money is re-invested. I say to the Minister that I put this suggestion forward as a better way. I agree with other speakers who say the time has come for large businesses to contribute to the Exchequer. I suggest that there is a better way of making these contributions and I would be interested to know from the Minister whether the yield from what I suggest will be any less than the yield he referred to.

Mr. B. Ahern

This was one of those issues in the budget that attracted much comment and correspondence. I want to say at the outset particularly to ICOS with whom I have met many times both formally and informally over the last number of months, that they put forward their case in a fair way. I have no argument with them as a group representing their industry and making their case. There are a number of other groups within the co-operative movement who are slightly more argumentative and their arguments tend to change as time goes on. Past Governments have looked at this issue, implemented some aspects of it, dropped it, reconsidered it and dropped it again.

During the short Christmas break, while reading through the correspondence, I saw where companies, who were effectively plc's had huge turnovers. I made that point to many of them and to the accountancy bodies. Many of these companies, whenever they came to meet me, were accompanied by tax consultants and accountants of the highest level. Some of the smaller companies also had the best advice available. It certainly generated interesting discussion. No other group had the same level of expertise available to them as the co-operative groups.

Initially, these groups tried to convince me to drop the idea totally. They put forward all the arguments as to why. Somewhere along the road it became clear to them that I was not going to do that. The argument was then put forward that I should look at the cases of co-operatives trading with each other. I considered this. They were referring primarily to small co-operatives. I am far more knowlegable on them now than I was six months ago. I am not sure if I understand exactly what a small co-operative is because the large plc's started as large co-operatives. I think I understand what small co-operatives are now, even though Deputy Roche mentioned one today that I had not heard of before, namely the shop operatives.

Mr. Rabbitte

There is one in Cork Street.

Mr. B. Ahern

We call them enterprise co-operatives in the city areas. They agreed they had to pay tax, and that was acceptable to them. ICOS certainly accepted that as well as some of the individual co-operatives. They outlined to me where items had been exempted from the 10 per cent manufacturing rate since 1976 and that was changed in 1978. Individuals co-operatives approached me, as did Deputies from all sides of the house, and explained to me that some co-operatives are only collectors of milk from individual farmers, and that they pass on the liquid milk to larger co-operatives for actual processing. This was a huge problem which I said I would deal with. I have learned that you deal with matters on Committee Stage, and not earlier. I said we would deal with that and it was no longer a problem. Then it came to light that there were co-operatives which did not sell milk to other co-operatives but who sold it to plc's. All the co-operatives were selling direct to plc's, and not to each other. I undertook to look at that problem.

Then the problem was with "40 per cent co-operatives", who were dealing with non-manufacturing products. I said I would look at that also. Initially they were all dealing in milk and manufactuing products. Subsequently, the "40 per cent" element in our discussions. I have to say, in fairness to ICOS, they maintained a sense of balance throughout so that I at least understood what I had to deal with. These are the co-operatives that the Chairman and other members, would be familiar with namely those involved in roof repairs, fencing, laundry as well as many other services.

Mr. Rabbitte

Artificial insemination.

Mr. B. Ahern

The idea that Deputy Noonan mentioned is a good one under which people would stand in for others wishing to take off to Croke Park or Lansdowne or wherever. I know from previous experience that people find it difficult to do. Three-quarters of my relatives are in the farming community and I have to believe them when they tell me these problems.

Mr. Rabbitte

Maintain a healthy scepticism, Minister.

Mr. B. Ahern

I said I would look at those and I suggested two changes. I made provision in the Bill that that cumulative net losses since the co-operatives were set up could be offset against their profits. This meant that all those co-operatives that had been developing over the decades could use their losses against their profits. I also moved to phase in the 40 per cent provision.

Deputy Finucane mentioned the trade union reaction. I made a comment in a speech that I was going to look at this section, and the Congress of Trade Unions criticised me because of the direct competition aspect. My colleague, Deputy Roche, said that where you have shops or farmers who are trading in businesses who are paying the 40 per cent rate, they are in direct competition with co-operatives which are exempt from this tax. That is unfair competition.

I have had many contacts with people who are involved in these businesses. Some people tried to tell me that they did not exist, that they were all in the black economy. However, I have a letter from the General Secretary of the Congress of Trade Unions that categorically and emphatically makes it clear that that is not the case. A member of a co-operative recently told me that it was a figment of my imagination that these kind of companies existed in rural Ireland. Admittedly, I am not in rural Ireland as often as other Members in this House, but I raised this with a number of my colleagues and Deputies in Opposition and I asked them if there were such companies in these businesses around the country. Some of them were kind enough to investigate this and they discovered that these companies did exist. In accordance with the commitment in the Programme for Economic and Social Progress to increase the corporation tax yield through the widening of the tax base, the Congress of Trade Unions requested that the proposal contained in the budget be implemented, that profits from non-manufacturing activities of co-operatives should be subject to the standard 40 per cent corporation profits tax, because of competition. I am phasing in the 40 per cent over three tax years. I want to give a categorical assurance to Deputy Noonan that my reason for doing that was because of the points he made earlier.

I have gone through the UMP saga from the finance perspective and co-operatives play a special and very particular role in rural Ireland. I have met people who voluntarily serve on committees to help make the co-operative system work and assist their neighbours. I commend that voluntary work. It is as admirable as collecting for a charitable organisation. They are not making money. Any profits are reinvested into the co-operative. All the changes that I recommend are to help those kind of co-operatives.

Let us look at the worst scenario. Take, for example, a co-operative in the non-manufacturing areas I have mentioned, farm machinery, fencing, clearing felled trees and drains or other services. They pay 40 per cent tax on the third year of operation. With the capital allowances available for the machinery they need, for their tools, and the use of their net losses from the past, it is unlikely that small co-operatives will pay much tax. The £6 million yield mentioned is an estimate. I did not set out to get £6 million. I did not set out in the Social Welfare Vote to pay considerably more than I am paying. These are estimates.

Mr. Rabbitte

Just the figure that is needed to make a start on the Tallaght Hospital.

Mr. B. Ahern

I hope, from all I have heard, that I will get even more.

Deputy Quinn asked a question on amalgamation. There is no barrier to amalgamations in the tax system. There are a number of provisions in the tax Acts.

Mr. Quinn

Sticks or incentives.

Mr. B. Ahern

That is something that will be looked at and perhaps that is something they would want. It is the commercial realities that they follow.

Mr. Quinn

Or individual personality stubborness.

Mr. B. Ahern

There are moves underway, but to start offering incentives to amalgamate would not be appropriate. We have had this argument so many times; if profits are small the tax payable will be small. Co-operatives may be in competition with other co-operatives. Fishery co-operatives pay 10 per cent on processing fish.

Mr. Noonan (Limerick East)

Not for boxing and icing.

Mr. B. Ahern

That is correct.

Mr. Noonan (Limerick East)

Is that within the ripening bananas definition?

Mr. Quinn

If you did not put in the icing, it certainly would be.

Mr. B. Ahern

There is a phase-in of the change under section 45 and there is an EC implication in giving a general 10 per cent rate to non-manufacturing activities. There is a special incentive for expenditure by farmers on pollution control, which Deputy Hogan mentioned. They have accelerated capital allowances of 50 per cent which is extremely attractive.

I dealt with the question of competition, and that is a real difficulty. The expansion of co-operative activities will involve capital expenditure on plant which will qualify for capital allowances set off against net profit. This would reduce their contribution well below the 40 per cent level. In some of the arguments put forward, people suggested that is not the case.

As regards fairness, the 10 per cent rate applies to co-operatives' competitors in the food processing industry. The 40 per cent rate applies to competitors in other sectors such as sales of farm machinery, building materials or animal medicines. It is not possible to justify the co-operatives tax advantage over small rival companies. Abolition of the exemption will simply introduce a level playing field. I do not accept the arguments on that.

Deputy Noonan's proposal, as I understand it, is that one would get to a position which would ultimately lead to a maximum effective tax rate of 10 per cent for all of their activities, excluding the flat rate. That still does not deal with the competition element. It would deal with the other elements. It suggests that only 25 per cent of the profits would be taxed and, if taxable at 40 per cent, this would result in an effective rate of 10 per cent. The purpose of the budget proposal was to bring co-operatives into line with other businesses, from a tax point of view, on a phased basis because I accept the argument on phasing. It was a base broadening measure, as were many of the other measures. Under the budgetary proposal, co-operatives which are manufacturing goods are entitled to that 10 per cent rate. That is a favourable rate. Where the co-operative is not engaged in the manufacturing of goods, it could be taxable ultimately at the 40 per cent rate but not until the 1994-95 tax year, remembering that their various net losses in previous years since their foundation can be used. Therefore, if the arguments are correct that they had these major net losses, this measure will help.

On section 44, I want to indicate that I am considering that section also. This is where co-operatives are selling to non-co-operative markets. There is an argument in what Deputy Noonan raised earlier and I understand the point that the Deputy is making and I will address that issue.

With regard to leaving legitimate 40 per cent companies, other than giving them a three year phase-in, this would create major difficulties for other companies who employ people and who are trying to trade. I will discuss with my officials the various points and arguments that arose today. It has been a good debate and we will ensure that we have covered everything.

To summarise, I am prepared to look at co-operatives in the liquid milk business who are not processing themselves but who are passing milk on to other co-operatives. We will try to deal with that. Co-operatives who are not selling to other co-operatives but who are selling direct to plc's — which is Deputy Noonan's point — the 40 per cent companies, will be phased in over three years, and where they have net losses from previous years, they will be allowed to carry them forward. That goes a substantial way towards implementing what I said on Budget Day.

I have already endured considerable criticism from the trade union movement on this aspect and to go any further would be bordering on losing credibility.

Mr. Noonan (Limerick East)

I want to thank the Minister and to indicate that at Report Stage I may be moving amendments to line 43 on page 80, after line 2 on page 81, and after the last line on page 82. I am not pressing the amendment at this stage.

Amendment, by leave, withdrawn.

Mr. B. Ahern

I move amendment No. 69:

In page 84, subsection (2), line 27, to delete "section 39" and substitute "section 41".

Amendment agreed to.

Section 45, as amended, agreed to.

Sections 46 to 51, inclusive, agreed to.