Priority Questions
1. Deputy Michael McGrath asked the Minister for Finance if he has considered the feasibility of allowing the proposed water charges tax credit to be deducted at source; the expected cost of administering it if individual taxpayers are required to make a tax return to claim it; the overall impact of water charges and the various reliefs on the public finances in 2015; and if he will make a statement on the matter. [42040/14]
View answerThis question relates to water charges and the tax relief which the Government has promised to provide and for which the Minister provided €40 million in the budget. As part of the package which will be announced, I presume in the next week or two, will the tax relief be provided at source? What is the overall position of Irish Water? Is it on or off balance sheet? It seems very much that next year it will be on balance sheet. Will the Minister clarify these very important issues?
A number of measures were announced on budget day to improve the overall affordability of water charges. The objective of these supports is to assist households which pay their water bills. Following the announcement on budget day, officials from the Department are working closely with their colleagues in other relevant Departments and agencies on the development of the processes that will be employed to deliver the relief. As I stated on budget day and subsequently, we will design the measure as broadly and efficiently as possible to ensure the relief reaches all households which pay their charges. While clearly there are cost implications for the administration of any relief, it is not possible to quantify the cost of administering the relief at this stage.
In the design of the relief we must be cognisant of the impact on Irish Water of EUROSTAT's market corporation test. As the Deputy is aware, the advantage of keeping Irish Water off the Government balance sheet is that the necessary investment in the water infrastructure in the country can be made by the utility without impacting on our deficit or debt targets under the Stability and Growth Pact.
More generally, in terms of the impact of water charges on the public finances, as the revenue from water charges is considered to be outside government, it has no impact on general Government revenue. Savings will accrue to the Exchequer over time as a result of a lower subvention from the Exchequer. As included in the summary of budget measures, the cost of tax relief at 20% on water charges up to a maximum of €500 per annum will be €40 million in 2016.
As Irish Water is considered to be outside government, expenditure by it does not impact on general Government expenditure. If tax relief was provided at source, Irish Water could fail the market corporation test and would, therefore, be classified within general government. Assuming that the operating and capital expenditure plans of Irish Water remained unchanged, the deficit would increase by between €500 million and €600 million, or 0.3 percentage points, in 2015. Separately, with regard to the impact on debt, all borrowings from third parties undertaken by Irish Water would be added to the outstanding stock of sovereign debt.
I thank the Minister for the reply. He stated providing tax relief at source would result in Irish Water failing the market corporation test. That is the issue on which we need clarity. The €533 million to be provided next year from the local government fund will be accounted for in the general Government balance and thus will be on the balance sheet of the State. Is it the Government's intention that Irish Water will be off balance sheet in 2015? To achieve this, what level of revenue does Irish Water need to generate from domestic and non-domestic customers to pass the test?
Providing tax relief at source would have a number of benefits. People would receive the benefit upfront and it would avoid them having to go to the hassle of submitting tax returns. If those who will pay water charges in 2015 must submit a claim the following year, they would not receive the full benefit of the tax relief until the full following year.
The main issue is the market corporation test. Will the Minister explain the Government's position on it? What level of revenue does Irish Water need to raise from domestic and non-domestic customers next year to pass the test and remain off balance sheet?
The Central Statistics Office and EUROSTAT will adjudicate on this issue, but they will not give us an adjudication in advance. As it is not possible to run proposals by them and obtain an adjudication, we are operating without the degree of certainty the Deputy has requested in his question. My advice is a deduction at source would bring about a situation where probably only the net amount would be taken as a contribution. Consequently, while I cannot be absolute about it, there is a risk that Irish Water would fail the market test and everything would be on balance sheet if the deduction were to made at source.
The Government has not ruled out the suggestion Revenue should in some way become involved in the collection of water charges. The Minister has overall responsibility for Revenue and needs to clarify the position on this matter. Because of the way Irish Water has been established as a commercial State company it is not open to the Revenue Commissioners to act as a debt collection agent for a commercial State company. Will the Minister clarify once and for all whether Revenue will in any way be involved in the collection of water charges?
As the Deputy is aware, the entire issue of Irish Water and the policy underpinning it is being revisited by the Government and there will be an announcement next week or in the next couple of weeks by the Minister for the Environment, Community and Local Government. The re-examination is taking place with three principles in mind: to provide certainty about the bills people will face for water supply; the affordability issue - the Government is examining the situation to ensure whatever charge is applied will be affordable by the generality of households; and, for the reasons outlined by the Deputy, the fact that we would like to keep it off balance sheet because there would be an easier funding arrangement. As the money dedicated to Irish Water will be spent, it is not a question of extra money being spent. It is not even a question of having extra taxes to raise it; rather, it is how to account for the investment in Irish water. The potential effects of being on balance sheet are that the deficit would go up and the debt would increase. These are the considerations and we are proceeding on that basis.
We are over time.
On Revenue, obviously, all options are being examined. As the Deputy stated, Revenue has never acted to collect outstanding debts. It is responsible for raising revenue.
2. Deputy Pearse Doherty asked the Minister for Finance his plans to help first-time buyers access the housing market through a mortgage guarantee scheme or other measures; and his views on the Central Bank of Ireland's proposals to introduce a 20% deposit and a 3.5 times loan-to-income limit on mortgages. [42002/14]
View answerIt is telling that the Minister has refused to rule out a role for Revenue in collecting water charges. My question is on the Finance Bill and mortgages.
While the Bill contains a measure dealing with the DIRT applied to those saving to buy premises, one of the Government's major commitments was the mortgage guarantee scheme. On 27 May, the Minister stated: "I will do an economic analysis on the subject matter of the question, and if I think it can improve supply, I will take action in the Finance Bill; if I think it will not, I will not." The Central Bank issued guidelines on 20% deposits and so on, but what is the Government's policy on a mortgage guarantee? It is important that we know now so that we can feed into the Central Bank's consultation process with accurate information.
As the Deputy is aware, the Central Bank of Ireland has published a consultation paper regarding macro-prudential measures for residential mortgage lending. The measures as set out in the consultation document would place restrictions on the loan-to-value and loan-to-income ratios that banks can apply when lending for house purchases. They would apply to all lending in Ireland by regulated firms. The Central Bank has indicated that the primary objective of these measures is to increase the resilience of the banking and household sectors to the property market and to try to reduce the risk of bank credit and house price spirals developing in the future.
The specific measures proposed for principal dwelling houses are to restrict new lending to a limit of 80% of the value of the property and a maximum of three and a half times gross income. The Central Bank has also stated that banks will be able to lend, in some instances, above these thresholds. However, any lending in excess of the loan-to-value ratio must be limited to no more than 15% of the value of new loans issued and, in respect of exceeding the loan-to-income ratio, to no more than 20% of the value of new loans. Other exemptions will also be available in certain circumstances.
I recognise the Central Bank's prudential responsibility and its role in proposing measures to strengthen the financial system. As these particular measures are new proposals in an Irish context, I welcome the fact that the bank is engaging in a public consultation process on them. While there will no doubt be discussion about the precise calibration and thresholds adopted at a particular point in time, macro-prudential rules in the mortgage credit area would nevertheless send a further signal that Ireland has learned from the financial crisis and is putting the architecture in place to prevent a repeat of the crisis. While it is important that credit be available to meet necessary economic and social objectives, it will also be important to ensure that future credit extension is provided on a more sustainable basis.
The Deputy also referred to a mortgage guarantee scheme. My Department is committed under the Construction 2020 strategy to examining the concept of a mortgage insurance scheme and how it might benefit new housing completions in the market. The objective of any such scheme would be to help ensure adequate availability of mortgage finance on affordable terms for new completions, particularly for first-time buyers, as the economy recovers. Of particular interest would be the means by which such schemes could support greater levels of investment in new housing, with the associated benefits for the construction sector and, ultimately, the consumer.
To further assist the evaluation and consideration of such a measure, I recently wrote to the Chairman of the Oireachtas Joint Committee on Finance, Public Expenditure and Reform, Deputy Twomey, with a request that the committee consider the matter of mortgage insurance in an Irish context and, drawing on the experiences of other countries, prepare a report on the issue. It is considered that the committee would be a most qualified and appropriate forum to conduct such an examination.
Additionally, the Deputy will be aware that budget 2015 contains a number of measures to support a well-functioning housing market. In order to support first-time buyers in saving towards a deposit for their first homes, DIRT will be refunded in respect of savings up to a maximum of 20% of the purchase price. This measure will run until the end of 2017.
I welcome that the Minister has asked the finance committee to produce a report. As a member of that committee, I am sure it will do that work as diligently and as speedily as possible. However, we need to get to the core of the Government's position at this moment. The finance committee's reports on mortgage arrears have not been implemented. The key issue is that the Central Bank has voiced its opinion on 80% loan-to-value mortgages and asked for submissions. It is important that we know the Government's thinking on a mortgage guarantee scheme. For example, would a scheme only guarantee loans within the 80% limit or would it extend to 90%? How would defaulters be pursued? Would the Government, which would have taken on some of the risk, pursue them? What fees would be applied?
Crucially, in terms of the consultation process, we need to know the Government's position. Given the Minister's statement of 27 May, has an economic analysis been conducted by his Department? Is there any intention to introduce a mortgage guarantee measure in the Finance Bill or is it being left to the finance committee to produce a report that the Minister will consider?
There has been a great deal of concern about the lack of supply of houses, particularly in the Dublin area, in recent months. The situation has changed dramatically since many of the Deputies rightly advised me of ghost estates all over the country and an oversupply of unoccupied houses. The pendulum has swung rapidly and now there is a distinct lack of supply in the Dublin area. The Government's Construction 2020 policy raised the issue of the guarantee that is the subject matter of the Deputy's question. I committed to reviewing it and we are processing that, but events have been overtaken somewhat by the initiative of the Central Bank, acting independently, in making proposals of a prudential nature confining mortgages to 80% with some exceptions. However, we must remember that the bank is engaged in a consultative process and has not yet established its policy. Like other participants, the Department of Finance will make a submission to the Central Bank setting out our position.
In principle, the guarantee is a good idea. The best operating guarantee that I have encountered - there may be others - is the one in Canada. In simple terms, its prudential rules apply to mortgages of up to 80%, but one needs to be insured if one borrows beyond that level, with the insurance provided by the private sector. One must insure back to the first Canadian dollar - in our case, the first euro - rather than just the excess piece. I would like the all-party advice of the finance committee, because party politics should not be involved. It is a question of getting it right and ensuring that we assist purchasers, particularly first-time buyers and young couples who want to buy homes.
I ask Deputies to keep an eye on the clock, please.
I will. I appreciate the Minister's clarity, but can I take it that, regarding the Central Bank's consultation process on 80% loan-to-value mortgages, we should not assume it will be okay because the Government will introduce a 10% guarantee scheme to raise the ratio to 90%, as suggested in some media? We need clarity. Should we focus on the 80% ratio or will the Government come in through the back or side door to increase the ratio via a guarantee scheme? From the Minister's answer, it is clear that the latter is not the stated intention. He is saying that we should take the Central Bank's proposal at face value and decide whether 80% is an appropriate figure, because no other attempt to increase the ratio will be made by the Government. It has been suggested that the Government might do otherwise.
I would like to clarify my thinking. I have stated a number of times that I do not want our economic model to revert to a boom-and-bust one. Unlimited lending of excessive mortgages is part of the fuel that fires a boom-and-bust model. Obviously, I am in favour of initiatives that obviate that danger. I have certain views about the Central Bank's guidelines, but I will make a submission through the Department of Finance to the Central Bank, which is independent, as part of the consultation process.
In principle, I am in favour of a guarantee scheme, but it would not be a reaction to the Central Bank's guidelines. Rather, it would be separate. Had there been a guarantee scheme in recent years, people would not be in mortgage difficulty now. If they were unable to pay excessive mortgages, there would have been an insurance scheme to pick up the deficit for them. However, this should not be a State system. The private sector is active enough to provide a scheme.
Models operating elsewhere suggest that between 0.6% and 1% would be added to the interest rate to give a guarantee for large mortgages. That might be a prudent control. One would get a higher mortgage but one would pay for it through an insurance scheme. Then one would have all the benefits of the security that affords. I would genuinely like to hear the views of the Deputies opposite at a meeting of the finance committee to determine whether we can arrive at the best position. Then we will go ahead and do it.
3. Deputy Richard Boyd Barrett asked the Minister for Finance his plans to make changes to the budget 2015 proposals, particularly in view of the considerable public outrage concerning the cumulative impact of direct and indirect taxes on low- and middle-income families imposed over recent years; and if he will make a statement on the matter. [42042/14]
View answerThe weekend's protests were not the result of communication problems; they were really an elemental outburst of rage, not only against water charges but also against six years of unfairness, stealth taxes and cuts. Much of the anger is centred on the cumulative impact not only of direct taxation but also of indirect taxation and charges. If the Government is listening to what the people expressed on the streets at the weekend, as it says it is, will it do something about the cumulative impact of all the measures that drove so many people onto the streets?
I thank the Deputy for his question. The period from 2008 to the present saw one of the largest and longest periods of fiscal adjustment in the history of the State. The budget deficit in 2011, when the Government came to power, was unacceptably large and unsustainable, at an underlying level of 8.6% of GDP. In budget 2015, I set a deficit target for 2015 of 2.7% of GDP. Reflecting this progress in reducing the deficit, our debt burden is now firmly on a downward trajectory, with forecasts indicating that it will fall below 100% of GDP after 2017. Reflecting these improvements, our credit rating has seen repeated upward revisions by ratings agencies.
A consolidation of such scale necessarily resulted in a drop in living standards for all citizens of this country. Despite the enormous challenge of such an adjustment, the Government has ensured that the richest in society bore their fair share of the burden and that the poor and most vulnerable were protected as far as was possible.
The latest research from the ESRI on the distributional impacts of budgets for the period 2009 to 2015 shows that the top quintile bore the largest burden of income tax and welfare changes over the period, with income losses of approximately 13% to 14%. The impacts on those in lower quintiles were all in the region of 10%. This reflects the Government's firm commitment to make sure those who could afford to pay the most did so.
Analysis published in the budget book shows gains to all household types from budget 2015. For example, a single earner on an annual income of €25,000 will gain €174 per annum; a married one-earner couple on €35,000 will gain €174; and a married one-earner couple with two children on €55,000 will gain €626 per year. These gains reflect the Government's commitment to helping those on lower and middle incomes.
Analysis of the taxation measures in the budget based on the ESRI SWITCH tax-benefit model indicates that all household deciles will gain from the income tax measures in budget 2015. Some of these gains arise from the increase in the exemption threshold for the universal social charge, USC, which had the effect of removing lower-income people from liability for the charge. This is the second time the Government has done this. This means that all individuals with income below €12,012 will be entirely exempt from the USC. The Government also reduced the lower USC rates and increased the thresholds, delivering further benefits to those on lower incomes and ensuring fairness. At the same time, the benefits for any individual from the income tax package were capped by introducing a new higher rate of USC for high-income individuals, thus maintaining the progressivity of the system and ensuring that those on high incomes did not benefit over and above what is fair.
Additional information not given on the floor of the House
These changes occur against the backdrop of Ireland's having one of the most progressive income tax systems in the OECD.
Cognisant of the effect of indirect taxes on living standards, especially for those on lower incomes, this budget contained limited changes to indirect taxes. The increase in excise on cigarettes is motivated by the negative health outcomes of smoking, and the main increase in indirect tax revenue resulted from a technical change whereby VAT is charged for cross-Border EU telecommunications, broadcasting and electronically supplied services.
The tax measures outlined are designed not only to extend the recovery across the economy but also to strengthen the recovery for the future. These reductions in tax have the effect of increasing the reward from employment. They lower the cost of employing people, which will help create jobs. Indications from the ESRI HERMES macroeconomic model show that up to 15,000 jobs could be created from the reductions in labour taxation when the full effect of the tax reforms that will be introduced over the next three years is evident.
As a result of the decisions made by the Government and the emphasis we have placed on minimising the negative effects on economic growth from fiscal consolidation, our country is now in recovery. My Department is forecasting growth of 4.7% of GDP in 2014 and 3.9% in 2015. On a no-policy-change basis, my Department would have forecast GDP growth in 2015 of 3.6%, but as a result of the measures outlined in the budget this has been increased to 3.9%. It is clear from the analysis demonstrating the positive distributional and growth impacts of budget 2015 that it does not need the changes the Deputy suggests.
That response really demonstrates how the Minister just does not get it. He does not understand why people went out on the streets at the weekend. I will just throw his own figures back at him. Somebody earning €17,000, as mentioned by the Minister, got €173 back in the budget. Somebody earning €120,000 got €687 back, according to the budget document. The latter got almost five times more than people on the lowest incomes.
Even if water charges are pitched at the figure mentioned yesterday by the Minister for Social Protection, Deputy Burton - namely, €200, which figure I doubt and which already seems to be causing great controversy in the Government - it would more than wipe out what the Government is giving back to the individual on €17,000. The person on €120,000, however, will be more than able to manage. Therefore, how can the Minister seriously say to me and, more important, the people of this country that this is fair and progressive? When the Minister adds to it the impact of rising bus fares and electricity prices, property tax, public service charges and all the other taxes and charges that disproportionately hit the less well off, can he not understand that there is nothing progressive about the way in which he is managing taxes and that tax justice is the issue at stake? He is not dealing with it in a fair way.
In reply to the Deputy, I would like to make three points. As stated, we have had the greatest fiscal adjustment in the history of the State. When we went into government at the start of 2011, the deficit was over €22 billion. At the end of next year it will be less than €5 billion if our budget comes in on target. This shows the extent of the adjustment.
Second, while one can have many anecdotes in these debates, one's argument must be evidence-based to establish the true position. The strongest piece of evidence is the ESRI's research. The ESRI states that those in the highest income quintile were subject to the biggest adjustments, in the order of 13% to 14%. Other quintiles were subject to an adjustment, or a loss of income, of approximately 10%. Therefore, the evidence contradicts what the Deputy is saying.
There is another very fundamental fact about giving relief by reducing taxes and the USC. Those who pay most obviously have greater scope for benefiting if tax rates come down, and those who pay very little tax do not have the same potential to benefit. For example, somebody on €17,000 pays less than €600 per year in tax and USC, while somebody on €70,000, where I capped it, pays just short of €25,000. Obviously, if the pool is €25,000 as against €600, the potential when one adjusts for higher gains obviously goes with the higher income.
This is the problem with statistics. The Minister knows what they say about statistics. It just does not reflect the human reality that people are facing. That is what was expressed at the weekend.
The OECD found last week that Ireland, out of 41 countries in the OECD, was 37th, or near the bottom of the league table, in terms of child poverty. Since 2008, child poverty has increased far more here than in almost every other country in Europe bar Latvia, Greece and Iceland. Other countries, even in the teeth of recession and adjustment, have improved with regard to child poverty. Here we have gone from 18% child poverty to 28.6%. Is that not the clearest evidence that, despite all the statistics the Minister throws around, the adverse measures he has been introducing in recent years disproportionately affect those on the lowest incomes? That is why people are on the streets expressing their rage. The Minister has to listen.
If we are to develop policy according to an evidence base, then all evidence is relevant, and what the Deputy cites needs to be taken into account by people forming policies. However, the point I am making is that the worst-off people did not bear the sole burden. Everybody suffered because the level of adjustment necessary was enormous. It was unprecedented historically.
I have said previously that the people who suffered the most were those who had lost their jobs. Regardless of whether their previous incomes were high or low, those who were out of work were most hit by the recession and most at risk of moving into poverty. The second group that suffered comprised those who were forced to emigrate. I do not refer to people who had jobs here who emigrated voluntarily but to individuals who, owing to economic circumstances, decided they had no choice other than to seek employment elsewhere. That is what we are trying to repair. The repair job is going very well, thank God. We have the highest growth rates in Europe. We also have the highest level of job creation in Europe and are eliminating our deficit. We will have a balanced budget in a year or two. Things are going well, but the repair job will continue. I am not claiming we have the finished article; rather, I am saying we are well on the way to recovery. We have to start looking again at societal issues, rather than just at the economy. We need to ask ourselves questions about the kind of country in which we want to live, the values the country should have and the manner in which we should look after the vulnerable. All of these are valid policy issues as the economy grows.
4. Deputy Michael McGrath asked the Minister for Finance if his Department will be making a submission to the Central Bank of Ireland on mortgage lending rules; his views that a State-backed insurance scheme for first-time buyers would conflict with the proposed Central Bank of Ireland rules; and if he will make a statement on the matter. [42041/14]
View answerThis question is quite similar to Question No. 2 in the name of Deputy Pearse Doherty which related to the proposed Central Bank rules on minimum mortgage deposits and the Minister's views on a mortgage insurance scheme. It seems that the thrust of the Minister's comments in response to that question was that the two issues needed to be viewed separately. He suggested the proposed Central Bank rules needed to be examined on their own merits. He also said that if a mortgage insurance scheme was introduced, it would not be designed to circumvent Central Bank rules. Will he clarify his thinking on the issue? I will elaborate on my own views.
As I have indicated, the Central Bank recently published a consultation paper on macro-prudential measures for residential mortgage lending. The bank is required to consult the Minister for Finance on proposed measures in this area. It may also consult others, as it considers appropriate. Given the wide public interest in this matter, I welcome the commencement by the Central Bank of a public consultation process on its macro-prudential proposals. I normally take the opportunity to reply to such Central Bank consultation processes. As the Deputy will be aware, the deadline for providing comments for the Central Bank is 8 December next. My Department is committed, under the Construction 2020 strategy, to examining the concept of a mortgage insurance scheme and how it might benefit new housing completions in the Irish market. The objective of any such scheme would be to help to ensure the adequate availability of mortgage finance on affordable terms for new completions.
To further assist the evaluation and consideration of such a measure, I recently wrote to the Chairman of the Joint Committee on Finance, Public Expenditure and Reform. I asked the committee to consider the matter of mortgage insurance in an Irish context and, drawing on the experiences of other countries, prepare a report on the issue. It is considered that the committee is the most qualified and appropriate forum to conduct such an examination. In other countries mortgage insurance schemes can operate with macro-prudential frameworks. This is recognised in the Central Bank consultation paper which asks whether some adequately insured mortgages with higher loan-to-value ratios should be exempt from the proposed measures. Obviously, this is a matter that will require discussion and consideration as part of the Central Bank's consultation process. To answer the Deputy's question precisely, they are two separate issues, but they are obviously connected. They will be connected as people debate the issue.
While it would be good to require some level of minimum deposit, a 20% deposit requirement would be excessive in the majority of cases. I would have thought a deposit of between 10% and 12% would be more realistic and achievable for people seeking to buy a home for the first time. It seems from a reply to a parliamentary question that I received last night that these rules will not apply to institutional investors. It seems that private equity funds buying portfolios of residential properties will not come under the requirements of the new Central Bank rules. That is an issue. As a member of the Joint Committee on Finance, Public Expenditure and Reform, I will play my part in examining the mortgage insurance scheme. I welcome the Minister's statement that he is in favour of private sector involvement. My own view is that, to be frank, the State has enough contingent liabilities. I would be reluctant, therefore, to allow the State to sign up to further liabilities. This proposal needs to be examined on its own merits. Will the Minister be making a submission on behalf of the Government in the coming weeks?
When the Central Bank invites consultations, the Department of Finance usually makes a submission. We are preparing one and it will not be a Government submission, rather it will be a submission by the Department of Finance in response to the Governor of the Central Bank's invitation to make a submission. It does not have to be an institutional submission. Any Deputy who has well formed views can make a submission before 8 December. Obviously, that will have influence also. The Central Bank is aware that Deputies have very close contact with their constituents. The views of Deputies are valuable when the Central Bank is considering its policy on issues such as prudential rules for mortgages. I agree that there should be rules. We can debate whether a requirement to have 20% of the mortgage would be too high. In the consultation paper there is an exception whereby a bank can lend up to 15% of its loan book in mortgages in excess of 80% of value. If there was a guarantee, it would provide for extra flexibility. While the two issues are separate and should be considered separately, there is a connection between them.
It strikes me that a 20% minimum deposit requirement would be too onerous for many. A couple buying a house in Dublin for €300,000 would be required to have €60,000 put aside, which would be really tough. It would be unachievable by many who are renting at a time when rents are increasing quickly and simply do not have the capacity to save such an amount of money. This has societal implications also. Persons from wealthy families that have access to resources and savings will be able to get around these rules. The Central Bank needs to take account of these points when it is finalising the formal proposal. Some level of deposit is good and should lead to more responsible lending, but we do not want to over-react to what has happened. A 20% minimum deposit requirement would be an over-reaction and have unintended consequences which would not necessarily be good for society.
I am looking forward to the committee's consultation and its report on these matters. I do not think it is necessary for a mortgage insurance scheme to apply to the full life of a 25 year mortgage. It seems that if there was insurance for the first five years, things would be well settled thereafter. If someone has paid fully for five years, the likelihood of default thereafter will decrease in normal circumstances as their career moves on, they receive extra income and their family settles. It might not be necessary to have a 25 year insurance guarantee. I would like the committee to consider whether a starter guarantee would be appropriate.
5. Deputy Richard Boyd Barrett asked the Minister for Finance if he will provide details of the proposed knowledge box tax scheme being worked on by his Department; and if he will confirm reports that the Government is consulting leading multinationals based here on the design of the proposed new scheme and the way he plans to ensure the knowledge box does not become another mechanism for tax avoidance by major corporations; and if he will make a statement on the matter. [42043/14]
View answerLast week, while low and middle income families were preparing to get out on the streets to protest against the unjust water charges, it was reported that the Department of Finance was working with multinational companies to discuss the patent box proposal. Is it true that it was clearly indicated that the Department was reassuring multinational companies that no further tax burden would be imposed on them as a result of the changes to the double Irish scheme and the new patent box proposal? Is it fair that such companies are being reassured that they will have to pay no more tax, while ordinary people are being crushed?
In last month's budget I announced several changes to Ireland's corporation tax regime as part of an overall strategy to play fair and win. This included a change that will bring Ireland's company residence rules into line with those in the rest of the OECD and end the so-called double Irish scheme. This was balanced by a number of competitive enhancements contained in the roadmap for Ireland's tax competitiveness.
This strategy was underpinned by extensive research undertaken and commissioned by my Department in 2014, which has now been published. One of the key findings of the research is that the FDI sector is very important for economic growth and employment in Ireland and that Ireland needs a competitive corporate tax offering to attract foreign direct investment. In particular, we need to ensure a competitive offering for knowledge-based investment which is related to research and development and intellectual property.
In recognition of the fact that investment and growth in OECD economies is increasingly driven by investment in intangible assets, putting in place an attractive intellectual property offering is key for Ireland's success in attracting foreign direct investment. That is why I made a clear statement on my intention to introduce a competitive income-based regime for intangible assets in Ireland which will be called a knowledge development box, KDB. I view this as a positive measure for Ireland and my intention is that the Irish KDB will be among the best in class on offer internationally. In order to gather views from as broad a spectrum as possible on what this may entail, I will launch a public consultation process before the end of the year on how the Irish KDB should operate.
As is the case with all public consultations undertaken by my Department on corporation tax, input has been welcomed from all sections of society. A number of parties came forward to give their views on the public consultation on the OECD base erosion and profit shifting process - the so-called BEPS project - from earlier this year, including groups which represented multinationals based in Ireland, political parties, non-governmental organisations and individual citizens. I expect the consultation on the KDB to be no different and encourage all interested parties to have an input into this process.
It is the intention that the design of the KDB in Ireland will be along the lines of what are commonly known as patent boxes which have been in place for many years in countries which compete with us for foreign direct investment. The measures in place in our competitor jurisdictions are the subject of ongoing discussions at the OECD and EU levels as regards their compatibility with the international rules around fair tax competition. As I said in my budget announcement, it will be necessary to ensure the Irish KDB meets the standards that remain to be agreed to by both the OECD and the European Union.
The double Irish was a massive tax avoidance scheme by the multinationals which centred, to a large extent, on the way in which they could charge for the intellectual property rights of subsidiary companies which were tax resident nowhere and, consequently, avoid paying billions of euro in tax. Is the patent box not exactly the same because it centres on intellectual property? It is about offering further tax reductions to corporations here which pay some of the lowest levels of tax anywhere in the world. Yet again, they will be able to avoid corporation tax through this mechanism. Is this not replacing one tax avoidance scheme with another? It was reported last week that the Minister's Department was working with multinational companies and that, when in the United States, the Minister for Jobs, Enterprise and Innovation, Deputy Richard Bruton, had met 17 leading multinationals to reassure them that the patent box scheme would not in any way penalise them in terms of having to pay a little more in tax. Is that true? Is this fair when ordinary people are being absolutely hammered?
There are 200,000 or more ordinary people, as the Deputy described them, working in foreign direct investment companies in Ireland and we want to ensure that not only are these jobs preserved but that they grow in number and prosper. We abolished the double Irish, which was never an invention of the Irish tax authorities. The tax avoidance arose in matching gaps in different nationalities' taxes and an advantage was gained, but it was never marketed by IDA Ireland or any other Government authority as an inducement to come to Ireland. It is being removed in the Finance Bill 2014 and we will have a chance to discuss the details in the next couple of weeks as we go through the Bill. The intention behind the knowledge box is to ensure we remain competitive. The United Kingdom, Holland, France and Spain have patent boxes and it is the intention of many other European countries to have them. Modern industry is driven largely by intellectual property. If a country is not at the races, it is not going to be seen as a location for modern industry. The intention is that an advantage will be given to companies which establish real research and development activities in the country. It is not a system to avoid tax.
The workers who work in these companies pay tax in the region of 30% to 35%, but, according to the US Bureau of Labor Statistics, the people who own these companies pay tax at 2% on their enormous profits. Even according to Revenue's figures, they pay an effective rate of approximately 6%. How is it fair that these multinationals pay tax at 2% or 6% when the people who clean the floors in their buildings pay tax at 20% or 30%? Why is it that the Minister is consulting these multinationals and assuring them that they will not have to pay anything more when even a small extra tax contribution from them would do away with the need to introduce water charges and to have many of the crushing austerity taxes and charges he is imposing on ordinary workers? Why is it that he will not even have a serious debate on the fairness of this and look at the effective corporation tax rate and increase it for the companies in question?
As I said, I have announced that there will be a consultative process which will commence before Christmas. It is not aimed particularly at the multinationals; therefore, I invite a submission from the Deputy along the lines of what he has spoken about, if he feels like doing so. We have consultative processes for new initiatives in the Department of Finance. That is the democratic way in which we operate. I assume IBEC, IDA Ireland and the American Chamber of Commerce Ireland will make submissions. All of these organisations are very familiar with the requirements of multinational companies. However, we live in a global world and the main actors in terms of globalisation are multinational companies. The amount of revenue generated in Ireland by any of the big multinationals is quite small. The Deputy quoted American statistics, but I would not like it if the impression was given that they were based on profits generated in Ireland. They are based on profits generated worldwide. It is in the hands of the American authorities to amend their tax laws to take a greater proportion of revenue from American multinationals.
