Léim ar aghaidh chuig an bpríomhábhar
Gnáthamharc

Committee on Budgetary Oversight díospóireacht -
Tuesday, 20 Sep 2016

Revenue Raising Proposals: Minister for Finance and Revenue Commissioners

I welcome the Minister for Finance, Deputy Michael Noonan, and his officials from the Department of Finance. From the Revenue Commissioners, I welcome Mr. Gerry Howard, Mr. Gerard Moran, Mr. Brian Boyle and the officials who are accompanying them. They are here to assist the committee in its consideration of budget 2017 and, in particular, to address revenue raising proposals.

Before we begin, I remind members and delegates to turn off their mobile phones as the interference caused by them affects sound quality and the transmission of proceedings. I draw attention to the fact the witnesses are protected by absolute privilege in respect of their evidence to the committee. If, however, they are directed to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him or her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person either inside or outside the Houses or an official either by name or in such a way as to make him or her identifiable.

I ask the Minister for Finance to make his opening statement.

I wish to thank the committee for the invitation to appear here today to discuss revenue raising proposals. Both the Minister, Deputy Donohoe, who the committee is seeing tomorrow, and I are looking forward to a fruitful and positive collaboration with the committee in the weeks and years ahead. Innovations such as this will increase our collective understanding of the economic and fiscal challenges facing the country. The budget will be announced on Tuesday, 11 October.

Since the publication of the summer economic statement in June, the national economic dialogue has taken place. This provided a cross-section of stakeholders an opportunity to have an open and inclusive exchange on the competing economic perspectives in advance of budget 2017. Subsequently, in a new departure and in line with commitments made to the select committee on arrangements for budget scrutiny, the Department of Public Expenditure and Reform published its mid-year expenditure report and my Department circulated the tax strategy group papers and the income tax reform plan to the Oireachtas earlier this year. With the publication of the tax strategy group papers and the income tax reform plan, I fulfilled two commitments in the new programme for Government to help make the annual budgetary process more transparent and to provide Oireachtas Members with the ability to make proposals, which, in part, is why we are here today.

The tax strategy group papers run to 250 pages and set out existing measures across all tax heads, and contain issues for discussion as well as costed options for tax changes. I believe the formulation of expenditure and taxation policy options will benefit from the discussion of both sets of documents and from the enhanced scrutiny and dialogue this committee can provide. The income tax reform plan, which runs to 50 pages, sets out a menu of different options for reducing the universal social charge over the coming years. The plan details the existing income tax and USC systems and presents three possible options to continue the phasing out of the USC. While there are many potential options, the committee will also be aware that, due to the limited Exchequer space available, it would not be possible to phase out the USC entirely over the next three years. Both documents were circulated over the summer and are available on the Department of Finance website.

It is also my intention that, in line with the Oireachtas budget reform report, I intend to publish the Finance Bill as soon as possible after budget day and not later than two weeks after the budget. Indeed, in line with the Oireachtas budget scrutiny report and in order to allow more time, the Finance Bill will be shorter than in previous years and will focus on key items of budgetary importance.

The economy continues to perform strongly, as evidenced by developments in the labour market. Employment in the second quarter of 2016 has increased by 56,200 year-on-year, while unemployment has fallen from a peak of over 15% to 8.3% in August. Domestic demand is also growing strongly, with private consumption up 3.5% in the first half of the year. However, the international outlook illustrates the need for caution. The recent UK vote to leave the European Union has only added to those concerns. My Department is currently preparing a full macroeconomic projection, in advance of the budget, which will take account of this and other international developments.

Turning to the fiscal position, the attainment of an underling deficit of 1% in 2015, which facilitated Ireland’s successful exit from the excessive deficit procedure, attested to the return of the public finances to sustainability. We can ensure this position is maintained into the medium term by the achievement of the medium-term budgetary objective of a structural deficit of 0.5% of GDP. Based on current assumptions, this should be accomplished by 2018. Once this goal is achieved, it will provide us with more flexibility to increase expenditure on priorities over the medium term.

Looking at the Exchequer position, this provides a real-time indicator of how the public finances are performing.

After the first eight months of the year, tax revenues are now €449 million, or 1.6%, above target. This equates to an annual increase of 6.2%, or €1.7 billion, when compared to the same period in 2015. While this represents a reasonably solid performance, I emphasise that we are not complacent about any challenge or risk which could emerge. We are committed to complying with the fiscal rules which are designed to ensure increases in public expenditure are sustainably financed through the decoupling of increases in expenditure from cyclical or windfall revenues. We are not going to repeat the mistakes of the past because we know the price.

Notwithstanding the fact that GDP now flatters the position to some extent, our debt-to-GDP ratio has come down strongly since the peak in 2012 and 2013. However, as the committee has discussed with the various bodies which have appeared before it, our debt levels remain high. We are committed to continuing to reduce this debt burden even further as part of our budgetary strategy.

As set out in the summer economic statement, the fiscal space available for budget 2017 will be of the order of €1 billion. I note that both the Irish Fiscal Advisory Council and the ESRI, representatives of which have appeared before the committee, have indicated that this is appropriate. The fiscal space will be allocated between expenditure and revenue on a two-to-one basis. This split between expenditure and revenue recognises the need to boost the supply of critical infrastructure following the reduction in capital investment after the economic and financial crisis. On the revenue side, reform of the income tax system will incentivise and reward work. Investing in infrastructure and addressing expenditure priorities while encouraging labour market participation and reforming the income tax system will serve to facilitate continued economic growth.

Looking to the future, there is some concern about global economic prospects. The Government is very cognisant of the risks facing us. It is, therefore, essential that we plan for the future in a prudent fashion. It is for these reasons that a contingency reserve or rainy day fund will be established to which, from 2019, when we expect to run a balanced budget, €1 billion will be remitted each year to provide a counter-cyclical buffer or fund to deal with any unforeseen circumstance that may arise.

I thank the committee.

I call on Mr. Howard to make the opening statement on behalf of the Revenue Commissioners.

Mr. Gerry Howard

I thank the committee for giving us the opportunity to attend the meeting. We look forward to assisting the committee in its work. It might assist its deliberations if I outline at the outset the role of the Office of the Revenue Commissioners as it relates to the process of preparing the budget and the Finance Bill.

In addition to our role in the administration of the tax code, Revenue provides support for the Minister for Finance and his Department in the development and analysis of proposals for inclusion in the budget and the Finance Bill. Its role in supporting this process is informed by our experience of the administration of taxation. This experience enables us to advise on the practicality of proposed measures, including avoidance and evasion risks and how they might be mitigated and administration and compliance costs for Revenue and taxpayers. This approach applies equally whether proposed changes are in the nature of revenue raising measures or tax reliefs.

Within Revenue, there are a number of central divisions tasked with supporting the legislative process. I am responsible for business taxes, while my colleagues, Mr. Gerard Moran and Mr. Brian Boyle, are responsible for indirect taxes and personal taxes, respectively. Each of these divisions works closely with the tax policy division of the Department of Finance throughout the year. From time to time, Revenue also brings specific proposals to the Department where we see a need for legislative change to improve the workings of the tax code.

In terms of preparation for the budget and the Finance Bill, we assist our colleagues in the Department by providing estimates of the likely cost or revenue raising potential of specific proposals.

We also assist in the preparation of papers for the tax strategy group in relation to its deliberations, draft provisions of the Finance Bill with the support of colleagues in the Office of the Parliamentary Counsel and provide technical support to the Minister during the passage of the Finance Bill through the Houses of the Oireachtas. In summary, Revenue's role in the budget and Finance Bill process is one of practical and technical support in respect of the policy responsibilities of the Minister and his Department. In that role, we are happy to assist the committee in any way we can.

The first questioner is Deputy Stephen Donnelly.

I thank the Minister and everyone who has attended. I will focus on the use by vulture funds of section 110 companies and the Minister's proposed amendment. My calculations suggest that if we shut this down and stop the vulture funds avoiding capital gains and very significant profits on interest payments, we could double the fiscal space for next year. There could be €10 billion to €20 billion available in future lost taxes. Just for next year, we could bring the fiscal space from the current agreed assumption of €1 billion to €2 billion and possibly higher. The Minister has drafted an amendment to the Finance Act, which is very welcome, and has stated that he is very open to feedback from the Oireachtas on it. He is probably aware that the day after the amendment was put forward, the big accountancy firms were sending bulletins to their clients stating that they feel they can comfortably get around most, if not all, of it. As such, I wanted to get the Minister's thoughts on his openness to closing it down.

I do not have the resources of the Revenue Commissioners and the Department of Finance to draft amendments. Obviously, they must be highly technical to avoid the lawyers and accountants getting around them straight away. There are three ways that the accountancy firms have raised themselves to indicate how these companies are going to continue to pay virtually no tax. One is that the proposed amendment allows the assets to be marked to current market value, which obviously would erase any taxes on capital gains from the purchase to today. As we all know, there have been significant increases in asset values since then. The second is to continue the use of these loan notes. While they have to be at arm's length, if one can get a big four accountancy firm to state that a 20% interest rate is reasonable given the risk, one can still do that. The third is that it only applies to property.

I give the example of Cerberus, having gone through the 2014 accounts. While a great deal of attention has been paid to the €190 million difference of opinion between NAMA and the Comptroller and Auditor General, conservative calculations suggest that over the next ten years Cerberus will walk away on Project Eagle with approximately £2 billion in gains. Because it is using section 110, it will pay essentially no tax on that. The Irish people have already covered over €3 billion in the fall in value of the assets which NAMA bought and sold. Is the Minister open to a conversation? Does he agree with Cerberus that, as the amendment is currently structured, it already has approximately €1 billion in capital gains? That is broadly accepted. It would wipe out any taxation on that €1 billion in capital gains. Going on its 2014 accounts and marking them for ten years, it looks like there will be an additional £900 million in gains on the interest payments. If Cerberus can convince an accounting firm to structure an arm's length loan and say that 18% is a reasonable yield, that will erase all taxable profits. As the amendment currently stands, Cerberus would walk out of this country having made approximately £2 billion, or €2.8 billion, in gains while paying virtually no tax.

Cerberus would have paid virtually no tax. Is the Minister open to shutting that option down? Does he believe Cerberus should pay capital gains tax, corporation tax and dividend withholding tax? I will finish with my next comment. It is worth-----

The Deputy has been given more latitude than anybody else.

I appreciate that. If we shut down this option we could double the fiscal space next year. It is a very material issue. I thank the Chairman.

Section 110 was originally designed to give a very strong incentive to the financial services industry at its initial stage in Dublin. The initiative has worked. Now it has been applied, where it was not intended to be applied, to property funds. After consultation with Revenue it was decided to close what was regarded as a loophole or an unintended application of the section.

In closing it the advice was that it could not be closed retrospectively but, by putting forward a fairly detailed amendment, that it could be closed from the date of the publication of that amendment, so we are working forward. How one would measure future revenue flows is difficult to say because, obviously, if one closes a method of applying a particular tax section people will change their behaviour. In any calculation of possible yields one must allow for a change in behaviour. The change in behaviour may be such that it will not be used any more if the amendment is successful.

To get back to the key point, as well as publishing with the intent of signalling to the industry that the section could no longer be used in the way it was used to reduce tax on property portfolios, it is also intended as a consultation document. Therefore, we welcome the comments of the accountancy and tax firms and what they are saying, and we welcome comments by members as well.

I am also aware that there is another set of issues that arise from the funds industry. Work has to be done there as well and further amendments have to be crafted that would be appropriate. The policy intention is that we would be able to maintain it as originally intended for the financial services industry. If there is any abuse there we would certainly tidy it up and focus it more but we would rule it out completely for property. I am open to advice. The Deputy has put a lot of time into this matter and he has contributed very significantly to the public debate on the matter. I appreciate when he said that he did not have the technical expertise. If he gives the prose version of what he thinks should be done to us then I will get my officials to consult with Revenue and talk to the Deputy to see, in the space that is left, whether his version can be designed in a way that is more effective.

I thank the Minister.

That is the thinking at the minute.

On the figures supplied by the Deputy, I do not have a figure for possible tax loss or what impact it would have on fiscal space. It is too late in the cycle now to do anything to increase the fiscal space in this budget but, obviously, it has implications for the future. Maybe Revenue can give an idea of what it thinks the tax loss might be or might have been, or would be, if we did not close the loophole.

Does Mr. Howard wish to comment?

Mr. Gerry Howard

I simply would not feel that we are, at this point in time, in a position to put any particular figure on it. We started working on this matter in November 2015 and identified an issue. We traditionally reserve the right to tax profits and gains from Irish property. We were just concerned that the section 110 vehicle was being used to get around that measure so we started looking at it as an issue. It would be too early, at this stage, to say what the implications, in terms of yield, are likely to be. We have done some initial reviews of the matter but there is insufficient information at this point in time to say what the likely impact of it is.

There will be deductions, as the Deputy has quite rightfully said, in terms of interest. Traditionally, interest has been allowed as a deduction as all expenses are in the calculation of profits.

It is a matter of fact as to how the provisions work out. Certainly, there are legitimate expenses being put through these vehicles that should, with the legislation as it is, continue to be allowable. Until that matter is finalised it would be very difficult to put any figure on what the likely tax scale is.

I thank Mr. Howard and the Minister. I am sorry to hear Revenue's position. At this point Revenue should be able to give some sort of a scale. A very small number of companies are involved in this matter. About ten companies have bought practically all of the NAMA assets, these vulture funds and most of them have now released their accounts. As an example, Cerberus took in interest payments for 2014 - and we have their accounts - in the sum of €112 million. It paid interest amounting to about €27 million to Nomura. That means Cerberus gained €85 million in interest alone in 2014. As things stand, it pays zero tax on that sum because it has an arm's length loan to itself that violates the principles that the Minister, quite rightly, put out after the tax ruling, that economic activity should be taxed here.

Nomura has had a conservative £1 billion increase in its asset base. The amendment, as it stands, will allow Nomura to mark its asset base to the September value thus wiping out £1 billion in capital gains. Corporates pay capital gains tax of around 25% when one balances everything out. The amendment will allow Cerberus to wipe out £250 million in capital gains tax that was due to the State. The amendment will allow the wipe out of tens of millions of pounds a year in corporation tax and dividend withholding tax. If one rolls that up for ten years the sum will amount to close to £2 billion of gains. The amendment, as it stands, means Cerberus will walk out of this country having paid no tax on such gains. I am just referring to Project Eagle. When one scales it up one starts to get into the tune of between €10 billion and €20 billion.

I am cognisant that the Minister has repeated again today that he is open to my suggestion. I have to emphasise that the accounting firms, that have an input in the drafting of this amendment were, within 12 hours, sending circulars to their clients saying something like: "There is nothing to worry about, we will set up arm's length mezzanine financing, we will come in and we will mark to market all of your capitals, and don't worry about all of the capital gains for the past six or seven years as we have already taken care of them for you." As things stand these funds are going to walk out of this country, having made many billions in profits off the backs of people trying to pay their mortgages and businesses trying to pay down their loans, without paying taxes.

I agree with the principle outlined by the Minister that the economic activity must be taxed in this country.

Deputy, a question please.

Yes. How can we ensure that the Oireachtas does not vote through an amendment to the Finance Act that allows these companies to mark their assets to current market value? It is something that is not afforded to any other individual or company in this country. I refer to years of capital gains being ignored. How can we make sure that the Finance Act does not just apply to property? If it does, then every non-property business in the country can suddenly give itself a loan from the Cayman Islands and avoid paying corporation tax. How can we make sure that the amendment, as passed, does not lock in the massive tax avoidance that has happened to date? How can we make sure it does not do what the big four accountancy firms are saying which is "there is nothing to see here, we are going to continue avoiding taxes for years to come, you guys can exit the country and you will be gone before anybody realises what has really happened"? How can we, in the very short space of time between now and the Finance Act, close the loopholes the big four accountancy firms are saying are in what I believe is a well intentioned amendment?

Yes, I really have made the points already. I do not have anything to add to what I have said already. I reiterate my offer of taking the Deputy's views into account and examining them seriously, and ensuring he has an input into helping us to close any loopholes that may exist.

I thank the Minister.

I welcome the Minister and the witnesses. The committee has met thus far with a large number of witnesses from various organisations. I would like the Minister to take us through this year's budget and, in particular, an issue raised by him in his opening remarks, namely, the universal social charge. First, I would like to give him a flavour of what some of the organisations we met had to say in regard to the phasing out or abolition of the universal social charge. Professor Alan Barrett of the Economic and Social Research Institute, ESRI, said that the USC has many desirable features as a source of revenue, such as progressivity, transparency and stability. Dr. Tom McDonnell of the Nevin Institute said that the USC has a simple and highly progressive structure and the dismantling or phasing out of it would be regressive and extremely costly. The European Commission has criticised the move to abolish the USC. The IMF has called the proposal regressive. The Irish Fiscal Advisory Council called it an unrealistic proposal. In a rare example of agreement, the Irish Congress of Trade Unions and IBEC are opposed to the abolition of the USC. Are all of those experts wrong? We also learned from a briefing document published via a freedom of information request that officials in the Department of Finance believe abolition of the universal social charge or a phasing out of it to be base eroding, regressive and of little value to many people. Are the officials in the Minister's Department who wrote that briefing document also wrong?

The Minister said that it is not possible now, given the limited fiscal space, to phase out the USC over three years. The Fine Gael manifesto committed to this being done over five years. From the Minister's perspective, what is the current position on the phasing out of the USC and the timeframe in this regard? I referred earlier to the view of all the experts on this issue. It is a rare example of agreement from so many different diverse organisations. They are all of the view that it is not wise or prudent to be phasing out this tax at this time. Given the pressures on public services, does the Minister accept now is the time to re-evaluate the phasing out or abolition of the USC?

My next question, which relates to corporation tax receipts, is directed to the Revenue witnesses. In 2014 and 2015, we experienced a massive increase in corporation tax receipts. During its appearance before the committee, the Irish Fiscal Advisory Council expressed caution in respect of future budgets, in particular any proposed phasing out of taxes, spending and so on based on potentially unrealistic or unsound corporation tax receipts. That is the opinion of the fiscal council, not mine. I am seeking the Minister's view as to the sustainability of these corporation tax receipts. Given we have had serious corporate restructuring that has on the one hand resulted in the boosting of corporation tax receipts and on the other hand a distorting effect on GDP, as happened in 2014 and 2015, are we likely to see more of this in the coming years and is that likely to have a further impact on our GDP figures and also on corporation tax receipts?

On the USC and the views expressed by the many distinguished witnesses who have appeared before the committee, their opinions should be valued, as I am sure they are. There are other opinions as well. The opinions of the political parties during the election were to the effect that the USC needed to be reduced, that it was an emergency tax introduced at a particular time and that now that the emergency was over, work should continue to phase it out. Whatever we do in this regard in the upcoming budget is not a first step because reductions in the USC were provided for in the previous two budgets. Deputy Cullinane will recall that during the election time his party was the only party that was committed to maintaining the USC. The Fine Gael, Fianna Fáil and Labour Party proposals, which were varied but bore a lot of similarities as well, were around the phasing out of the USC. These were reflected in the programme for Government such that I am not constructing a budget a couple of weeks from a standing start. The budget will be based on the programme for Government, which sets down the intent of those who adhere to it in respect of USC.

On the phasing out of the USC, we are in the third year of reducing it. We have committed to anything we do being directed towards reducing the impact on low and middle income earners and continuing that process in subsequent budgets if the Government is still in office. The reason I reference a period of three years is the commitment given by Fianna Fáil to support the Government over three budgets and then review the position. I am saying it will not be possible to phase out the USC completely in a three-budget cycle, but it should be possible to phase it out in a five-budget cycle, understanding that after the fifth budget, because of the way in which the tax years are structured, there would still be a tail heading into 2021 which would be eliminated in the course of that year.

On corporation tax receipts, the question on which was addressed specifically to the Revenue officials, there was a spike and at the time nobody could explain why it had occurred. There are now better explanations, one of which is the corporate sector is more profitable. As long as it sustains profitability, there will be a strong flow. The fear expressed last year, that one should not rely too much on them because it might be a one-year spike, has ameliorated somewhat. It now looks as if corporation tax receipts - there was a 40% jump in the yield - will flow in at a much higher rate than heretofore for a variety of reasons, one being the profitability of companies. That is not to suggest the yield will not rise and fall with the business cycle and the profitability of companies. It should be remembered that corporation tax receipts account for about 15% of total revenue, which is very significant. We are not, by and large, funding through corporation tax receipts. There is a serious flow of funds, but they are nothing like income tax or VAT receipts. What I am saying is people should not be fascinated by corporation tax receipts.

Would Mr. Howard like to comment?

Mr. Gerry Howard

I would like to make a few general comments on the matter, following which I will try to address the specific questions raised.

The performance of corporation tax receipts was stronger than expected in 2015, with total receipts of €6.9 billion in comparison with a figure of €4.6 billion in 2014, which represents an increase of 49%. Receipts were about 50% ahead of the forecast. Up to end August 2016, they were once again ahead of the forecast, running at about €3.5 billion, or approximately €500 million or 17.1% higher than the forecast. Approximately €300 million, however, may have to be refunded later. This year, excluding the potential for refunds, we anticipate that receipts will be approximately €200 million, or 7%, ahead of the forecast.

As members will probably be aware, corporation tax receipts are highly concentrated, with a high proportion coming from the foreign direct investment multinational sector. In 2015 approximately half of the increased corporation tax receipts came from a small number of companies. This was attributable to various issues, including - I must be mindful of the need for confidentiality for individual taxpayers - the profitability of some businesses, improved trading conditions and, in some instances, currency fluctuations. Although corporation tax receipts are concentrated in the multinational sector, it is fair to say the base for the additional corporation tax receipts is relatively broad, with improved receipts from Irish businesses also.

It is not just foreign direct investment companies that have aided matters. Our indigenous industry has also increased. A large number of companies have returned to profitability so that is the part of the increase. Proportionately, it is a smaller part of the yield but I suggest that it is still significant in the long term.

Corporation tax for 2016 was forecast to grow to about 9.7% from 8%. It was not linked to the potential growth in the economy. I suggest that corporation tax for this year is likely to be in the region of €6.5 billion, which is about 14% of the total tax take for this year. That is what we estimate will happen this year.

The Deputy asked about the future sustainability of the corporation tax yield. Predicting the future is difficult and someone would be very difficult if he or she thought he or she knew what the future held. There is no particular issue that suggests that it will drop but we do not know. It depends on future profitability. A small number of companies pay a disproportionately large amount of tax as part of corporation tax so how these companies perform in the future will impact on the future yield and its sustainability. Another factor is indigenous industry as it returns to profitability. The long-term effect of that is also very difficult to predict. I would be cautious. We have €6.5 billion but I would not like to predict what it will be in the future. It is there at the moment and we have no reason to think it will change in respect of particular issues.

Could Deputy Cullinane be brief?

It is not about being mesmerised or fascinated by corporation tax receipts. It is about trying to get behind the figures to discover why there was a spike in 2014 and 2015 and how sustainable those figures are. Mr. Howard referred to a very small number of companies that contribute the vast majority of corporation tax receipts. Notwithstanding the fact that corporation tax is 14% of the overall tax take, which is still very significant, the Irish Fiscal Advisory Council made the point that we are all basing assumptions, spending proposals and revenue-cutting or revenue-raising proposals on those figures. The council expressed caution about that and the fact that we are now very dependent on a small number of multinational companies for the bulk of corporation tax. Does Mr. Howard agree with the caution expressed by the council?

My second point concerns USC. The Minister has said that his preference is to phase it out over five years. What would be the total cost of phasing it out by 2021 or 2022?

Mr. Gerry Howard

Ten companies produce quite a large amount of that corporation tax yield, and that is why we need to be cautious. I would not predict anything about how those ten companies might behave in the future, but there are other factors concerning domestic businesses, so there are many issues that play into the future yield. If we lose some, we may gain others, so it would be very hard to put a figure on any of these things. I would certainly advise caution but it is not Revenue's specific role to advise on what those issues might be.

We not have yet received the returns for 2015 so it will be next year before we have those returns and have had a chance to study them. That is probably where we can feed into the debate more precisely. When we see what has given rise to these additional profits, it may be of value to people.

What would the USC yield in 2021 be if it was then phased out?

Mr. Brian Boyle

It would depend on the model used to phase it out but the total yield from USC on an annual basis is in the region of €4 billion. A complete removal would, in today's terms, mean a total cost of €4 billion.

Is it likely to increase by 2021?

Mr. Brian Boyle

Yes, it will increase. On a no policy change basis, the return from USC will continue to increase based on growth in the economy. I do not have figures for that today but I can come back to the Deputy with more projected detail. Obviously, it will rise in line with general income tax. I think it has risen from €3.8 billion up through €4.1 billion so it is on an incline.

We have previously been advised that on a no change basis, it would be €5.4 billion by 2021. Is that a ballpark figure?

Mr. Brian Boyle

I am not in a position to confirm that today.

Could anyone confirm it?

In respect of corporation tax and the Irish Fiscal Advisory Council's advice that the yield in 2015 might not be sustainable, when we were formulating the budget for this year, we took that into account. The outturn for 2015 from corporation tax was €6.9 billion but we put €6.6 billion into the budget for 2016 so we were allowing for the fact that there might be some fall off. In the summer economic statement, we increased that projected figure to €7.1 billion because an extra €500 million had come in. This is allowing for the repayments Revenue has adverted to now. We did not ignore the advice of the Irish Fiscal Advisory Council but took it into account when we formulated last year's budget. Events have overtaken it again and it looks as if, by year end, more will be collected in corporation tax than was collected last year and significantly more than was estimated in the budget.

The tax strategy group documents have been very useful in respect of a variety of different issues and have helped our deliberations, as have the presentations from the Irish Fiscal Advisory Council, the ESRI and others. Our party would agree with the Irish Fiscal Advisory Council, the ESRI and others in terms of concern about a narrowing of the tax base and would retain the USC. Will the Minister consider or look at the indexation of tax bands, rates and credits in this budget because failure to do that would be a de facto tax increase to Irish taxpayers? It would be some response to the concerns raised by the Irish Tax Institute paper today, which showed that the real problem is that we are going into the higher rate so early. Starting with proper indexation would at least allow us overcome some of the difficulties that come with that. I am keen to hear whether the Minister will consider the indexation of tax bands and social welfare rates, as has been recommended to us during our hearings.

I know there is a very extensive debate on the nature of child care support and whether it is targeted. We would support it on social justice grounds. I have an interest in terms of the income tax reform papers we presented. It reminds us that the Government has committed to improve the home carer tax credit to make sure whatever we do in terms of child care does not discriminate and that we are not saying to one class of parents that we do not want them or their parents looking after their children and that we want to get them out of that model. Whatever about targeted support for child care in a structured facility, will the Minister look to do something concurrently for parents using other models to make sure that whatever the Government does is not discriminatory in respect of certain types of parenting?

We received a very clear presentation from the Climate Change Advisory Council that showed that our current trajectory in respect of climate emissions will see us face a fine of possibly €5.5 billion from Europe.

We are clearly not on track to meet our renewables and emissions reduction targets. According to the Sustainable Energy Authority of Ireland, we will need a threefold increase in investment in the retrofitting of buildings, or a fivefold increase in investment in sustainable transport, if we are to get anywhere near where we need to go. I do not see any strategic direction in any of the papers towards a low-carbon economy.

The specific issue of local air pollution caused by diesel particulates and nitrous oxide is well presented in the papers, as is the need to remove the perverse incentive in our system towards the sale of diesel vehicles. Will the Minister consider adjusting VRT and excise rates to target people who are buying new cars? Will he look to do this in a revenue-neutral way? I know from past experience that it can be difficult to change tax arrangements if people believe they are being penalised after the fact for decisions they have previously made. Does the Minister think he will look to introduce measures in the budget to recognise that problem, as set out in the tax strategy group papers? Does he think he will be able to do this in a revenue-neutral way in order that motorists will accept that the adjustment which needs to be made is being made in a fair way without necessarily punishing them?

There has never been automatic indexation of tax bands, allowances or credits, or any other part of the tax code in Ireland. Of course, Ministers take account of various indices when introducing budgetary measures on budget day. Ministers and their officials, in addition to doing whatever they are claiming to be doing, are conscious that if there is significant inflation in the system, measures compensating for the lack of indexation should be included in the budget. However, this has never been made automatic, presumably because Governments like to keep policy control of events such as this. There are times when the fiscal position is so poor that automatic indexation would be a burden on the Exchequer. The movement towards automatic indexation, as happens in other countries, has not happened in Ireland and I have no proposal to introduce it at this stage.

A tax credit for child care payments was considered as part of the work of the interdepartmental working group on future investment in child care. When the working group published its report in July 2015, it advised against the introduction of a tax credit measure owing to the considerable risk that it would not achieve the policy aim of supporting the affordability of child care. The working group suggested it was possible that such moneys would be capitalised into the costs facing parents and that it was likely that any scheme that would have a meaningful impact would be very costly. Policy has moved in a different direction. The reasons for this can be set out in very simple terms. Parents on very low incomes who pay no tax would not benefit from a tax break on child care payments. Couples or mothers paying tax at the standard rate would benefit at the standard rate only. Better-off individuals on higher incomes who pay tax at the higher marginal rate would benefit at the higher marginal rate. It is clear, therefore, that an initiative giving tax credits for child care payments as the principal method of delivering affordable child care would fail an equity test very quickly. In the world in which we live it might also result simply in increases in child care charges. In such circumstances, the transfer would be to the provider rather than to the person availing of the service. That has been the considered policy position since 2015. The Minister for Children and Youth Affairs, Deputy Katherine Zappone, is introducing child care proposals - she has published some of them - but they are not tax-based.

The Deputy also asked about our position on emissions. The Department of Finance is not the main policy maker in respect of the country's compliance or non-compliance with European rules. Other Departments are responsible for that aspect.

We can do things around the edges. I refer to climate-friendly activities, machines, etc. We can provide for small tax breaks around the edges in the interests of reducing emissions. This has been done previously. Perhaps Deputy Eamon Ryan or his colleague, John Gormley, did this in respect of motor tax when they were in government.

It was John Gormley.

He provided for comparatively low rates of tax to apply to low-emission cars. There were big reductions. I think that initiative worked. Over 80% of cars now are low-emission models. The Deputy's big proposal with regard to diesel involves equalising petrol and diesel costs so there is no incentive to move to diesel. I think that would give a fair shock to the system because many people have bought diesel cars. Deputy Eamon Ryan might advise me in this regard in his report. I will consider his proposal and see what the committee thinks of it. I have no plans for equalisation at the moment. It is an interesting area of debate.

We will include that in our budget submission, which I hope to send to the Minister and his colleague, the Minister for Public Expenditure and Reform, Deputy Donohoe, tomorrow. I will respond briefly to the Minister's answers to the three questions I raised. On the indexation of social welfare and tax rates, I would argue that the failure to index the tax rates, in particular, would effectively be a tax increase. Therefore, I think that should be the first priority if changes are being made on the income tax side. I would make the same argument regarding the indexation of social welfare. This is a time when the recovery should be for everyone. I presume we have not indexed anything since the crisis took hold in 2009 or 2010. At a time of increased revenues, seven or eight years on, it is absolutely appropriate for social welfare and tax credits to be index-linked in recognition of the need for the recovery to benefit everyone.

While I absolutely accept the Minister's point about the slight discriminatory mechanisms that could exist if our approach to child care were to be based purely on tax credit changes, I would like to repeat my central question. When the Minister is considering what to do on the child care issue, will he seek to ensure that nothing which might lead to further discrimination - or any potential discrimination - between different types of parenting will be introduced? In other words, the State should not take a specific position, even if it might possibly be beneficial for the economy to say we want everyone to work. Is it not appropriate for the State to say that the manner in which children are raised is an issue for parents to decide on? The State should not discriminate in favour of one system by treating it as a better system. Surely that should be decided by parents, rather than by the State through its tax or other support measures.

As I have said, I will include in the Green Party's submission its proposals for tax changes. The Minister is right when he says that the expenditure side can have the most influence on climate policy. I would argue that this is an issue for every Department and every section of the Government. The State needs to make a strategic decision on whether it wants to go in a sustainable direction. At present, it is not going in that direction. We need something of the scale of what was done by Whitaker and Lemass in previous generations to place our country on a sustainable path. We are going in the exact opposite direction at the moment. Just as Whitaker led the change which gave rise to Ireland becoming an open economy, we need the Department of Finance and other Departments to make changes now to put this country on a sustainable path. That is the way the world is going but we are going in the opposite direction, which is not clever in financial or environmental terms.

Does the Minister have a response?

I think I have made my point. The Minister for Children and Youth Affairs, who is a member of the Cabinet, and her Department have primary responsibility for policies in the area raised by the Deputy. I cannot solve everything through the tax code. I can make a contribution through the tax code, but the lead role must be taken by the Minister with responsibility for child care. It is clear from what she has published that she is not moving towards tax-based solutions to this problem. We all know that child care is extraordinarily expensive and unaffordable for some people. There is a kind of built-in assumption in the claims about indexation that everybody is happy with the social welfare and tax codes and that these do not need to be reformed. I do not agree that we have the perfect mechanism and that all we need to do is index and let it off. Many reforms to the social welfare code could be introduced.

There are also many reforms that could be introduced to the tax code. Indexation removes flexibility from policy makers to some degree where they are of a mind to reform particular codes. This is not a simple debate.

Considerable progress has been made in moving towards a sustainable economy. The economy is growing strongly and it is doing so in a sustainable way. One of the key economic issues around sustainability, albeit perhaps not one that featured in the Deputy's catalogue of reference points, is to have an economy that is not dependent on one or two sectors. The growth figures for the past several quarters show the economy is growing across all 12 key economic sectors, which was not the case during the Celtic tiger when growth was built on one particular sector. This is fundamental to sustainability. With regard to sustainability in reference to climate change, it is the same word but a different debate.

It is incorrect to state there is no consciousness of building a sustainable economy or that this Government and its predecessor have not been building a sustainable economy. All the evidence shows that they have been doing so. We hope to put another few blocks on the wall in this budget to further reduce risk and ensure that what we are doing can resist shocks and is sustainable.

I thank the Minister and his officials and welcome officials from the Revenue Commissioners. The Minister referred to the strong metrics in the domestic economy. It is noticeable, however, that the tone on the international side speaks to a much greater degree about risk, uncertainty and concern. Will the Minister provide the Department's updated assessment of Brexit and other noticeable developments and their impact on the economy? We must wait for three weeks or thereabouts for the updated projections. Is it the case that if the assessment of fiscal space were being updated, it would not be as favourable as it was when the various factors that feed into the calculation were locked in? Will the Minister provide his assessment of these risks?

I will first give the Deputy my assessment, after which we can ascertain how it dovetails with that of the Department. We are living in a very uncertain world. The result of the presidential election in the United States is unforeseeable at this point and we do not know what changes of policy could occur or what would be the impact if the Republican candidate were to win the contest.

Second, there is uncertainty across Europe. Colleagues in the Eurogroup and ECOFIN have been describing events in their countries. Europe is beginning to grow again but growth has not been strong and there is a lack of investment throughout Europe. While quantitative easing has helped, it has not helped as strongly as those who developed the policy anticipated at the point of development. We also have all the usual problems in north Africa and the Middle East. The main problems in Europe are low growth, political instability, a migratory problem that has not been resolved, a security problem which breaks out in many of the democracies and various threats externally.

When one brings the issue back home, Brexit is obviously a big issue from our point of view. The Department's initial assessment is that the announcement of Brexit or the UK's vote to leave the European Union will have an adverse impact on Irish GDP of approximately 0.5% for 2017. We have built this assessment into the figures. While there will be other consequences, we will not know what they are until the elements of the negotiation between the United Kingdom and European Union fall into place. We do not yet have a roadmap because the UK authorities have not yet indicated what will be their approach, much less its specifics. If one set of specifics were to come into place, it would give rise to a set of risks that we would have to measure. If the UK authorities were to pursue another set of priorities, the risks would be different, however, and we would have to assess what impact they might have on the economy. While we can foresee risk in general, it is hard to be specific until the specific outcomes of the negotiations are in place.

I met the British Chancellor of the Exchequer, Philip Hammond, MP, at the informal ECOFIN meeting in Bratislava and I will meet him again on Thursday in London, which I will visit tomorrow. I may have a better read of the position after I have met with Mr. Hammond for an hour or so to go through the details. There is currently no blueprint and we do not even know when the UK authorities will invoke Article 50, which is the trigger for withdrawal from the European Union.

Brexit carries considerable risk. What we can do in the budget is ensure we do not take chances and ensure the budget is low risk. We could, for example, include provisions for the future which would act as a form of shock absorber to risk, the proposed rainy day fund being one such example. This type of fund would help in an uncertain world. We can also do other things and I am working on what we can do on a macro level on budget day.

Deputy Michael McGrath is correct that it is a difficult world and most of the risks one can see on the horizon are not yet measurable. What we have measured is a 0.5% projected reduction in GDP for 2017. This reduction will still leave us with strong growth figures, however, and if we were calculating the fiscal space now, we would be in roughly the same position. The fact that it is locked in gives us less flexibility to move it around but the same numbers are solid. There are slight variations right up to budget day and there will be movement on the fiscal space but I do not expect it to be dramatic.

The 9% VAT rate on the tourism and hospitality sector is addressed in the tax strategy paper. Its cost is more than €600 million per annum. Is this rate a permanent feature of the tax system or does it require an annual budgetary decision? Will the Minister clarify its status? I am not asking him to reveal what will be in the budget but to clarify the status of the 9% rate, which I understand is built into the base. Does it still require an annual decision?

No, it does not but a specific decision would be required to change it.

On the suggestion of a sugar tax being introduced, notwithstanding what budgetary decision is made in three weeks' time and subsequently by the Oireachtas, would we have the technical capacity to implement such a sugar tax in 2017? It has been speculated that if such a tax were announced, its implementation would be delayed until 2018, possibly to coincide with the introduction of a similar tax in the United Kingdom. Would we have the capacity to introduce such a tax in January 2017? I address these questions to the officials from the Revenue Commissioners.

Mr. Gerard Moran

It would be extremely challenging to introduce such a tax in 2017. It is very important to nail down the precise scope of the tax in terms of what would and would not be covered by it and to put in place a regulatory regime around all of that to ensure compliance and protect traders who are compliant from unfair competition. An overriding concern would be that we could fall out of step with what the authorities in the United Kingdom are doing. Our working assumption is that if one were to introduce a tax on sugar-sweetened drinks, it would need to be at a material level to have an impact. If it is at a material level, one is looking at potentially significant discrepancies between here and the North of Ireland. That would give rise to obvious compliance problems, which would be extremely difficult to deal with in the context of the Single Market. Both countries are still in the Single Market and one cannot have border controls or checks on movement in it.

Essentially it would in all probability be a self-assessed tax where returns are made on the first supply in the State of the products that are liable to the tax. There would be a big concern that if there was a significant difference in price levels between here and the North, there would be diversion. I am not talking about consumers going up to buy soft drinks but a grey market could develop with illicit supplies in bulk going into the retail sector. That would be a very difficult challenge. There are several compliance risks and practical considerations in the design of the tax that in our view, from a tax administration perspective, suggest that 2018 would be a preferable date.

Several views on the USC have been expressed. It is quite wrong to bundle together people’s views on its abolition versus its reduction or phasing out. The total overall tax rate on employment in this country and the level at which it kicks in are very high. Something has to be done about that. Will the Minister comment on the benefits of a reduction in USC and the principle of putting money back into people’s pockets? The USC was a temporary draconian tax introduced to dig us out of a particular financial situation. It is regrettable, but this country has a tendency, whether by way of a tax break or a tax increase, to transpose very quickly a temporary provision to a permanent feature of our tax system. We should avoid doing that.

I am also interested in inheritance tax, particularly in respect of parents and children in Dublin and the constituency I represent, and the recent reduction. How will inheritance tax be treated in future versus changes in capital gains tax?

I would be opposed to any indexation of tax bands as a general principle. It is wrong, it takes away the ability to target and is a regressive way to do things rather than having flexibility. Does the Minister have any other thoughts on the indexation of tax bands?

Is there any thinking on the local property tax in respect of the budget?

We legislated on the local property tax last year to ensure there was no increase in valuation until 2019. There will be nothing in this budget and no separate local property tax amendment Bill being introduced this year because the principal issue was resolved last year.

On the USC and marginal rates of tax, the literature would say that once there are high marginal rates of tax, it begins to affect the economy in an adverse way. The argument then is about what are those levels. I do not know whether the Deputy ever read Professor Laffer who was a great adviser to President Reagan. There is something called the Laffer curve. I am not a disciple of Laffer but some of the things he says are interesting. If something is taxed at zero there will be no revenue, but if it is taxed at 100% there will also be no revenue. There must be a sweet point in between where it is possible to maximise the revenue.

Finding that point is a great skill and there are no rules about it. Many tax experts or economists would say that once one pushes one's tax over 50%, it seems to have some kind of psychological effect on people and that a marginal tax rate where one is taking half of what people earn might be just about manageable, but if one goes beyond that and one is taking in tax more than half of what people earn, then it has an adverse economic effect. As for where it hurts us, high marginal rates of tax discourage key employees coming with multinational investment into companies that set up in Ireland. I am talking about foreign nationals coming in. One aspect they look at is their take-home pay and the marginal rates of tax are important in that regard.

The other place where marginal rates of tax are studied carefully is in the context of the young Irish abroad who want to come home. Committee members will be familiar with the folklore that when the children are about primary school-going age and the eldest is four, the emigrant couple in Australia or the United States think of coming back to Ireland and start running the numbers, but they find they cannot afford it. One of the reasons they cannot afford it is the marginal tax rate. I suppose I am talking more anecdotally than giving the committee any proof, but there is no doubt at all that the marginal tax rate has an effect on economic behaviour, on choices and on the labour market. It is a question of where one pitches it to ensure that one eliminates the worst effects and at the same time protects the revenue.

The marginal tax rate is too high at present. There was never a policy intent to have it that high by the second-last Government. It was merely that it needed the money and USC was introduced as an emergency tax in an emergency situation. The reason I am reducing USC rather than income tax is before one starts looking at the income tax code, one should take out the emergency taxes first.

Much of this is theoretical in the context of this year's budget. We have €330 million or so for tax measures. Once one takes €1 billion and divides it two-to-one in favour of expenditure, which seemed to be one of the lessons of the election, which lesson is incorporated in the programme for Government, we have reasonably significant resources this year above last year's budget but the bulk of it is dedicated to increased expenditure - the committee can have that conversation with the Minister, Deputy Donohoe, tomorrow. No matter the theory, the affordability of implementing desirable measures will be the principal issue on the tax side in this budget and most of what I would like to do is not affordable. I do not have the money.

The committee can see it as a new start to a three-year phase of budgets, which Fianna Fáil states it will support. I do not want to be taking once-off initiatives budget to budget and changing my policy mind in different budgets. I would like to commence the process in this budget and signal that what we are doing here and now is the way forward, that we will build on this in budgets two and three, and we will see where we are after that. The resources are very limited this year, however, and I have no expectation that taxpayers will be throwing their hats in the air on budget night.

There was a whole area concerning the thinking on capital gains tax or inheritance tax which was not answered at all.

I answered it partially when I said there are many matters that are desirable but which are not affordable. This was my oblique answer to the points the Deputy made.

That is as close as we are going to get.

I have only a couple of points. The Minister said there was no real roadmap in relation to the risk the country faces.

He also stated he wanted to have a low-risk budget. It is extraordinary that all the representatives of the various interest groups that appeared before the committee, including trade unions and employers, focused on the current very low levels of capital expenditure which are a consequence of the crash of 2008. Inflation in construction costs is running at approximately 5% and in some cases it is even higher. There is also a visible slowing down by either the Department of Finance or Department of Public Expenditure and Reform or both in forwarding and commencing construction of key projects such as schools and facilities for older people who may need care. To give an example, while I am aware that the development of a new purpose-built Garda technical headquarters is the subject of an ongoing legal dispute, the decision to build the facility was taken a long time ago and no moves have been made to commence building work.

If things turn out as projected, and leaving out of account those things the Minister will decide as we approach the budget, public expenditure in the period until 2021 will be potentially lower than in most other European countries. While this is a matter of statistics, the delay in the capital programme is heartbreaking for many people and deeply disappointing. In that context, will the Minister confirm that he has abandoned the idea, at least in this year's budget but hopefully permanently, of establishing a rainy day fund? Why would we start saving billions of euro every year when interest rates are so low that we would not make much from any savings we made and we have, at the same time, a crying need for capital investment?

Public infrastructure in transport and housing is vital if our large cities are to continue to attract multinational companies, which understandably complain about infrastructure in terms of the quality of life for the employees they are trying to attract. Does the Minister intend to review the public expenditure capital programme before the budget to ensure spending is pitched at a reasonable level and moves towards average European levels as the economy hopefully continues to grow in strength? Does he also accept that the idea of a rainy day fund is entirely inappropriate in policy terms?

To add to the point made by the previous speaker, the real difficulty with the income tax system is that single people enter the higher rate of tax when their earnings reach approximately €38,000. Even if it were to take him five years, would the Minister be inclined to move the level at which people, particularly younger people who find the task of buying a house very difficult, begin to move into the higher tax bracket? I assume he wants younger people to continue to have a capacity to own a home?

To return to the earlier questions asked, I assume the Minister's focus in the area of housing will not be entirely on real estate investment trusts, REITs. While this type of structure has many advantages in certain circumstances, it does not replace home ownership.

The public capital programme is within the remit of the Minister for Public Expenditure and Reform, Deputy Paschal Donohoe, who will appear before the committee tomorrow. The Minister is better positioned than I am to answer questions on capital expenditure, how it is progressing and whether there are barriers to the system. All I know is that, as the fiscal space expanded and resources became available, we increased the amount of funds available for the public capital programme from what the level agreed when Deputy Brendan Howlin was Minister for Public Expenditure and Reform and Deputy Joan Burton was in government. Expenditure on that programme, which is to roll out to 2021, has been increased.

There is a difference in the manner in which capital expenditure is calculated under the fiscal rules where only one quarter is booked up front. Deputy Burton can ask the Minister for Public Expenditure and Reform about that tomorrow. He has a little more leeway on capital expenditure than on current expenditure.

The rainy day fund will only arise when we balance the budget and start running surpluses. It cannot arise this year because we are still borrowing and in deficit. However, it is proposed to put in place a rainy day fund from around 2018 and I will continue the work being done in the Department on this issue to ensure such a fund is put in place. One of the things that has bedevilled macroeconomic management in this country is the theory that, regardless of external or domestic circumstances, I will spend it if I have it. We have all deplored the boom and bust cycle in the economy, which has occurred in every generation and twice in some generations. All members are familiar with the theory of counter-cyclical interventions, according to which one does not stimulate an overheating economy and one stimulates an economy that is entering recession. Everybody has known this theory for years but in times of crisis, for example, the crisis that occurred in 2008-09, no money was available for the demand side of the economy. The purpose of a rainy day fund is to have money in place, which, if spent at the time the surplus accrues, could lead to overheating of the economy. The fund is used on the day the business cycle goes down and more spending is needed on the demand side. It would probably be spent on capital. I will not change the work being done on this matter in the Department. However, a rainy day fund will not arise until surpluses are recorded in the system. We believe we will be very close to nominal balance at the end of 2017. Under the new European rules, a balance is deemed to be plus 0.5%. It is not balance in the way we would traditionally understand it but it is in accordance with the rules.

A structural balance is more complicated and will probably be achieved in 2018. All going well, the economy will continue to grow at approximately 3.25% through the forecasting period and surpluses will accrue some time in the course of 2018. The Minister and Government of the day will then have choices to make. Will they spend everything they have, use the surplus to reduce taxes or put some of it aside? I believe it is possible to spend some of it, reduce taxes and put some of it aside, provided one does not try to do everything. A rainy day fund is a very prudent concept. The circumstances in which it would be spent would be a matter for the Government of the day. However, drawdowns should not be automatic but should proceed on the basis of criteria. We will work on that issue. That is my position on the matter. The rainy day fund will not start in this year's budget and will not arise-----

I did not suggest it would start this year. My understanding from the Minister's statements-----

Please allow the Minister to conclude his contribution.

It will not arise until surpluses are recorded.

I understand from memory that the capital programme will run until 2021. The Minister did not say whether he believed, in light of population growth and demographic pressures, whether it is necessary to invest in schools and facilities for older people, in other words, the built economy as opposed to employment of staff and so forth.

Our road infrastructure and public transport, particularly in our bigger cities, need further improvement. My colleague may not agree. If in 2018 we come into a surplus, is the Minister suggesting that from then on, rather than funding the capital programme, we would stand aside? We will be in a situation where we are able to get our financial stability back and, as a country, can borrow at close to 0%. I will not forecast what interest rates will be in two or three years. The Minister is essentially talking about taking several million towards the latter end of the capital programme. I appreciate the Minister's comments about overheating. That has to be managed but there are other ways of doing it. I understand why the Minister is attracted by the sound of a rainy day fund but many people will need things such as housing and schools.

I want to explain my point of view. I respect what the Minister has done on the economy but the proposal is not sufficiently thought out. I am putting it forward, as a member of the committee, for the Minister's consideration. It is inappropriate at this point in time when our capital deficit is so low. I will go further - I hope the Minister is having a detailed conversation with our interlocutors in the European Union. I am sure he is. The Minister said some revisions will take place. In terms of the financial rules, we are in a German model but we are not Germany. We all accept that we have to have rules and structures but in terms of the capital investment to provide for growth in the country, a certain amount of leeway is necessary. This was a submission from almost everybody but particularly from the two sides of social partnership - the employers - IBEC - and the trade unions.

My position is that if we are running surpluses, the Government of the day would need to consider how it will spend them. We should not automatically spend everything we have at the top of the business cycle. That is not the way to behave. I want to build in another option for the Government of the day if there are significant surpluses. In the 2000s, I saw Ireland building the most expensive roads in Europe because there was too much capital being spent. All that happened was tender prices went through the roof. I saw us building the dearest schools in Europe because tender prices went through the roof. It was a transfer of surplus funds from the taxpayer to the developers and builders. One has to manage capital programmes the same as any other programme and this is one mechanism for managing it. The Government of the day may decide to do something different but I do not want them to be left with their hands hanging if something unexpected happens. I am trying to build in another policy instrument that a future Government could use. It would be a matter for the Government to use it or not.

On the second part of the question-----

May I ask the witness from the Revenue Commissioners a brief question?

The Deputy can ask a brief question.

Can the Revenue Commissioners give us here or subsequently details of the capital losses that have been built up in the Irish taxation system since the crash, specifically with regard to banking and finance and secondly in construction? I presume that at this point in time, with people returning to profit, some tax is now being paid. I am a long-standing proponent of a minimum effective tax system. The capital losses issue is detracting heavily from that. Will the Revenue Commissioners supply us with those details?

Mr. Gerry Howard

Unfortunately I do not have those details to hand but we will endeavour to get the information.

I am glad to see the Minister is well. Deputy McGrath mentioned the 9% rate on the tourism sector earlier.

It is widely acknowledged that there has been growth in Dublin that has not been seen throughout the country. Is there any scope for a city tax like there is in other European countries based on the nightly value of accommodation? It would be specifically for Dublin and maybe other cities depending on the growth in the sector but it would keep the 9% rate as it is. In Holland, they also tax the Airbnb nightly rate. There are a couple of positives to that. It may level out the growth throughout the country and not have Dublin running away with itself. It would also allow us to quantify the number of beds in circulation in Airbnb and get a tax rate we could use in the city or throughout the country. Has that ever been considered in Ireland or would the Minister consider it?

On the investment funds coming in and paying 0%, the Minister referred to the curve as the point at which people will not pay tax. Is there scope there? Would it be true to say these investment vehicles were established when nobody in Ireland had the money to buy the property and there was stagnation in the market? Is there scope now to go to a 12.5% rate as opposed to a retrospective change in the tax band?

I have written to the Minister before about our VAT bands. It comes as a surprise to many people that there is a 23% VAT rate on injections in Ireland. For me, as a medical person, to have a VAT rate of 23% on a preventative medicine like a vaccine seems regressive. Oral medicines have no VAT on them. This is a huge issue in the agricultural sector where bulk antibiotics are being put into animal feed. Taxation needs to gather revenue but also influence behaviour. To try to influence people's behaviour, I would love to see scope to put a VAT rate on oral antibiotics in light of the huge antibiotic resistance issue we have coming down the line and to remove the 23% VAT rate on vaccines. For children getting the meningococcal vaccine, it would reduce the cost to parents. The advantages of immunisation against meningococcal disease in terms of hospital stay time and savings to the State are well documented. Within the same field, we have a 13.5% VAT rate on barrier contraceptives such as condoms in Ireland. There is a massive rise in sexually transmitted diseases in the country. With a nod towards this and preventative health measures, would it be possible to change the 13.5% VAT on condoms to 0% to highlight this very important public health issue?

I do not want to go on too much about the USC. I agree with Deputy Cullinane who has now left. Pretty much every expert who has come in here has spoken about the broad tax base that the USC created and told us it would not be such a good idea to erode that base. As somebody who pays a lot of USC, I can understand why many people would like to see it removed from their pay check or reduced over time. To address the massive hole we have in our pension fund in Ireland, is there any scope to divert a portion of the USC over a period of time over the next few budgets and change it to a PRSI style of tax? This would cushion against the pension timebomb coming down the road.

My question concerns the 9% VAT rate, the city tax option and the potential tax rate on foreign investment funds at 12.5%. We could even consider an increased stamp duty for foreign investments coming in. In addition, my question concerned the movement of items around VAT bands to influence behaviour.

There is very little domestic flexibility on VAT which is controlled by EU directives. For example, one can only have two lower rates, so we cannot introduce a 0% or 5% rate for items that we think should be taxed lower. When we moved from 13.5% to 9% on certain services, activities and goods, that was the second low VAT rate. It could be moved back up, of course. There have been a lot of complaints about the price of accommodation, including hotels in Dublin, particularly when key events are taking place. However, to move it up does not solve that problem, it just adds 4.5% to the cost of the bedroom. One would get a bit of vengeance but it does not reduce costs. It is very hard, therefore, to change VAT.

We can compare with other countries and see differences, but the key year was 1991. Anything that was in place before 1991 could continue. If there was a lower rate on something at that stage, it prevailed, but after 1991 we could not readjust.

Profits from Airbnb are subject to a Revenue ruling on income tax. Income tax would be at a higher rate than VAT anyway, but there is something I want to look at in the budget. One of the reasons, but only one, that the amount of rental accommodation in Dublin has been reduced is that quite a number of rooms that were traditionally rented, maybe for students, have become Airbnb rooms, so there is a transfer from the rental market to the tourist industry. The numbers are beginning to stack up. I suggest it is something the committee could have a look at and perhaps suggest ways that we could compensate for the reduction in rooms. I think that is fairly important.

As regards oral medicines and vaccines, I am not familiar with the details, but in general terms there is very little flexibility for varying VAT rates on such things. We could do a general review of VAT in Ireland but it would be opening up Pandora's box whereby the whole country would want to be on the lower rate. I am subject to advice on this, but I do not have a ready-made solution of any sort on this matter.

Some things are not price sensitive. People may propose to take such and such an item from 13.5% down to 9%, but some things have no market effect because they are not that price sensitive. For example, I doubt very much that if contraceptives were moved from the 13.5% VAT rate to the 9% rate, it would change behaviour very much or have a big impact on the transmission of sexually transmitted diseases. Maybe it would, but I doubt it.

It is an interesting debate and if the committee wants to make submissions on it to me, members should make them fairly quickly because there are only three weeks left to budget day.

I welcome the Minister and thank his officials both from Revenue and the Department in assisting me and my party in preparing our alternative budget.

I know that this is the first time the Minister has appeared before the committee. I look forward to him enlightening us when he has made up his mind whether to appear before the Committee of Public Accounts.

I would like to get into some of the issues before us. I have a long list and obviously will not have enough time to deal with all of them. The work of the committee should be evidence-based. As the Minister mentioned, we all have our own political opinions on the USC. We have engaged in a thrash-about, but Fine Gael, Fianna Fáil and the Labour Party broadly agree on the USC.

When we investigated the banking crisis, a number of eminent individuals produced reports and it was called the group-think or herd mentality. Is there any paper within the Department of Finance, the Central Bank, the European Commission, the IMF, the ESRI or the Irish Fiscal Advisory Council in which the Minister is advised that it would be prudent to abolish the USC over a period of time?

I am not aware of any such paper, but there might be; I do not know. There are a lot of things on which they do not advise. The approach of the international bodies is that it is a matter for national authorities to make up their minds on it and decide.

We are aware that there is a Department of Finance paper which states phasing out the USC would be of little or no benefit to low and middle-income earners.

I think that was stated in a paper generated a long way back. I know what the Deputy's and Sinn Féin's position on the USC is. It is a matter of opinion, not evidence. I have a different opinion and until the Deputy's party is in a majority, my opinion will carry more weight.

I accept that, but I have sat at tables such as this and questioned other Ministers who wrecked the economy because they cut taxes to an unsustainable level and relied on property-related taxes. Corporation tax receipts are now in excess of the amount produced by property-related taxes at the time. The responsibility of the committee is to ensure that, regardless of our own political or personal opinions on what should happen, there is evidence when discussing matters with a Minister or suggesting a course of action. For example, in its presentation to the committee, the ESRI stated the argument that a high marginal tax rate affected employment needed to be tested. There is the counter argument that supporting child care payments could have a better impact on employment creation and the economy. I will give the Minister some figures. As we know, by 2021 the USC will be bringing in €5.4 billion. To provide free child care services 52 weeks of the year, for 50 hours per week, for every child from the age of six months to schoolgoing age would cost €4.1 billion. I am not advocating that we should do this, but they are the choices against which the Minister has decided to turn his face. He has instead gone with something of which everybody has been critical and nobody has suggested this is prudent. People have continually warned him that this is the wrong direction to take, but because of his political ideology, he has decided to continue down this track.

The Deputy made pressing remarks at times when he claimed great powers of prophecy. He reminded past Ministers of the evils of their approach. He was dumping, in particular, on former Fianna Fáil Ministers who he claimed had ruined the economy. I want to remind him that the republican movement made a fair shot at ruining two economies and continued to do so for 30 years. Therefore, he need not be so haughty about Ministers who made decisions in the past because his political progenitors made a fair shot at ruining two economies.

I am not saying anything that is different from what the Minister and the Taoiseach have said. I think everybody accepts that political decisions made by Ministers at the time led to the economy going off the cliff.

Others are waiting to speak also.

You will get your opportunity.

Through the Chair, gentlemen, please.

I am sitting here waiting. We do not want to be lectured.

Will Deputy Pearse Doherty, please, ask his question?

Do not shout at me either.

I asked if the Minister had any evidence within the Department and he does not. I want to ask the representative of the Revenue Commissioners about section 110. The Government's amendment will allow section 110 companies to mark to market. Is it Revenue's view that this has to be allowed such that capital gains accrued by such companies until 5 September will not be taxable?

Sorry, this is to the Revenue Commissioners.

I want to answer.

I am directing it at the Revenue Commissioners.

No. I want to answer the first point the Deputy made. Again, you are passing remarks.

I ask everyone to speak through the Chair.

The Deputy said there was nothing in the Department of Finance which justified a reduction in USC. That is not true. Acres of paper has been generated on the adverse effects of high marginal rates of tax on economic activity and, in particular, on employment. The USC, on top of income tax, gives us marginal rates of tax which are too high and I intend to reduce them. There is plenty of evidence to suggest that is a valid economic and fiscal approach. I am sorry for interrupting the Commissioner.

Mr. Gerry Howard

Apologies. I do not think as Revenue it is for us to decide what should be taxed and at what rates. Our job is to enforce the law and that is really where we come into the equation. On a technical note, it is not capital gains tax, it is corporation tax one would be talking about. Our view is that we do not form views as to what rate of tax should apply.

I am not questioning the rate. In the opening statement, it was stated that the Revenue advises in regard to loopholes, avoidance and so on. Is it the Revenue's view that the loophole, as we will want to call it, in terms of section 110 cannot be retrospective and that one has to allow for the mark to market opening?

Mr. Gerry Howard

I will pass a general comment as to my understanding without going into any specifics. Normally, we do not have retrospectivity. While it is not our role to decide it, retrospective taxation has never been a feature of the Irish tax system. That is our position.

This is not retrospective taxation. It is allowing the Revenue to mark to market. It is as if we were to increase capital gains tax in this year's budget, in which case we would not say that any gain accrued in terms of an asset could be written off.

Mr. Gerry Howard

In this instance, the Attorney General's office provided us with advice that there would be constitutional issues there.

The Revenue Commissioners issued two Revenue opinions to section 110 companies in regard to property in 2012. As such, the Revenue Commissioners were aware that section 110 companies were involved in property despite what we hear about this being an unintended consequence.

Mr. Gerry Howard

We started really to become aware of this as an issue in 2015. Irish section 110 properties only started to be sold in 2014. It would have taken a bit of time for that to filter through to the system. There might have been two rulings made but that was on small issues rather than on the substance of what was going on. It is important to note that section 110 companies generally have financial assets and do not normally take over real property. It is a difficult legal issue when one takes over distressed mortgages and the question arises as to whether one is taking over a financial asset or an interest in property. That is where the issue started to arise.

I move on to the funds which are actually taking over the property as opposed to the financial interest. I refer to the qualified investment funds. Does the Revenue agree that qualified investor, alternative investment funds are the vehicle of choice for buying up commercial assets in the State?

Mr. Gerry Howard

I could not comment on that at this point in time. We may do a bit of work on it.

These are public companies and we can look at their accounts. For example, Kennedy Wilson has €1 billion of assets in the State and made €26 million in profit in the first six months of the year while paying no tax in the country because it is structured as a qualified investor, alternative investment fund, which has nothing to do with section 110. Is the Revenue aware of that? That is just one example. There is €363 billion worth of assets in qualified investor, alternative investment funds. Not all of it is from economic activity in the State but I have looked at accounts which show that billions of euro worth of assets are being held by these funds. We have had the high profile issue where an ICAV, a form of qualified investor, alternative investment fund, was used by Denis O'Brien. That was reported in the media. How long has the Revenue been aware that this system is being used and that there is economic activity in the State whereby rent is being gathered by these funds from properties in the State while no tax is liable on the back of it or, indeed, on gains where the properties are sold on?

Mr. Gerry Howard

That particular vehicle was introduced in around 2008. We have certainly had knowledge over a recent period that some of these fund types were being used to acquire Irish assets.

If one looks at some of the public accounts of these companies, Kennedy Wilson for example, one sees reference to withholding tax on British assets of 20% and on Spanish assets of 25% and it will boldly state that there is no tax on their Irish assets. In Kennedy Wilson's case that is assets of €1 billion and rental income of €26 million in the first six months of the year. Is the Minister open to the idea of introducing a 20% or 25% withholding tax for foreign shareholders in relation to QIAIFs?

My interest is in closing a loophole which is being availed of by property companies. When the section was designed, it was not intended for that purpose. I have already answered Deputy Donnelly's queries in detail and I am open to considering suggestions made by members here. Deputy Donnelly has taken a lead role on this and seems to be very knowledgeable about it. As such, I take his submissions very seriously and will evaluate them to see how far beyond what has been published we need to go to secure the position.

As a point of interest, section 110 companies, which are what Deputy Donnelly has raised with particular reference to loopholes and the proposed amendment, have nothing at all to do with qualified investor funds. They are two separate entities. Sometimes they interrelate but it is seldom the case when one has a super QIAIF. They are not related at all and are absolutely two different investment vehicles. QIAIFs buy up the assets while section 110 companies buy up the financial debt. This concerns a different area. I gave the example of Cedarwood Real Estate, another foreign-owned QIAIF, which gets €2.65 million in rent every year from the Central Bank. That relates to just one of nine properties it owns. It pays no tax at all in Ireland because it is structured in this way. There are countless other examples of this sort of structure and they have nothing at all to do with section 110 companies. I am asking whether the Government will use the Finance Bill to close down this loophole, if one wants to use that term, or provision of Irish law which allows for economic activity in Ireland to go untaxed.

In my reply to Deputy Donnelly I said that what was published in respect of section 110s did not solve the problem in relation to funds. I also said additional work had to be done to address the funds issue. I invited Deputy Donnelly to make submissions so that we could address the funds issue. The Department of Finance and the Revenue Commissioners are looking at the funds issue and it is hoped that proposals will come forward before the Finance Bill is published, presumably two weeks after the budget, and be processed in this calendar year. We will be finishing up in the second week in December. I make the same offer to Deputy Pearse Doherty, on his own behalf or through the committee, to send in any solutions he would like to run by the Department and the Revenue Commissioners.

We certainly will. Can the Revenue indicate how many companies operate under the double-Irish tax structure currently? I am not looking for the identities of the companies. While it has been closed to new entrants, the Government decided in its wisdom to allow existing users of the facility to use it up to 2020. I am curious as to whether if we were to bring the date forward there would be a tax increase in terms of this year's budget.

Mr. Gerry Howard

I do not have that information with me. We can supply it.

If the shut-off date was brought forward, would there be an increase in revenue?

Mr. Gerry Howard

I would not like to speculate on something like that.

I direct the next question to the Minister. We know the position of the Government on water and will not rehash it in terms of the commission and a vote in the Dáil at a certain stage. I am curious about the fiscal space, however, given the uncertainty of that vote in the Dáil and whether water charges will be abolished or suspended indefinitely. They are currently suspended to 31 March 2017. If they were to be suspended for the remainder of the year, that would use up €58 million of the fiscal space.

Given the expenditure benchmark rule and the fact that it will be a decision of the Dáil and is outside the Government's hands as a minority Government, is it the Government's position that the €58 million to allow for the suspension of water charges for the remainder of 2017 must be factored into the budget?

Not explicitly. As Deputy McGrath said, the numbers on which the budget is being constructed have been locked in for some time. A variation of €58 million is significant because that €58 million is a significant sum of money. In the context of a budget that is €57 billion, it is within the normal movements around it.

Could Deputy Doherty be brief?

I will finish up soon. The Government has come up with the idea of a help-to-buy scheme. It sounds great - the slogan sounds great anyway. There is a lot of concern, which I share, that it will increase property prices. We know that 35% of new loans can be issued outside the Central Bank's strict loan-to-income and loan-to-deposit ratios. Can the Minister enlighten us as to what he intends to do in terms of this help-to-buy scheme? His colleague said that it would be a taxation-based system. Could the Minister point us to papers containing evidence suggesting that this will not cause an increase in house prices and point us to any concerns from organisations suggesting otherwise?

I think there is general agreement that the lack of supply in the private housing market is a major economic and social issue. Any measures that would increase supply without having adverse consequences elsewhere in the economy are to be welcomed. It is an open secret that we are working on a proposal to assist couples to buy their own homes. The details of it are still being worked on and it will be announced on budget day.

How can that be construed in any way as increasing supply? If the Government provides State money to couples, and there is an argument about whether this should happen or not, it will only increase demand because the Government is giving a tax credit to the individual. They are not going to go out and build all these houses by themselves. It just creates more demand in an area where there is limited supply. The Minister's statement makes no sense whatsoever.

Supply and demand are inextricably linked. I think the Deputy has an iPhone. Until the iPhone was invented, there was no demand for iPhones. It was the supply that caused the demand - the fact that it was produced. If we assist purchasers to acquire their first home, the market will respond and the demand expressed in cash terms by many young couples will drive supply. The two are tied together. It is a case of basic economic principles.

It is a bit mad. A total of 162 people-----

This is the Deputy's last interjection.

A total of 162 people lie sleeping on the streets in the immediate inner-city area of Dublin. There is a demand for housing and emergency accommodation. The supply is not there. A survey by KBC suggests that almost 250,000 people would look to purchase a house in the next three years. There is demand. House prices have been escalating because supply has not been forthcoming. If the Government pumps more money into the system, all it will do is increase house prices. To return to the basic question, are there any documents, papers or advice from the Department, the ESRI, the Central Bank or others that the Minister could give to the committee that suggest that this will not push up house prices? Such papers would inform our view as we carry on our work in terms of the preparation of the budget.

With respect, the Deputy is pre-empting the budget debate and I am not prepared to have a budget debate here. I have signalled that there will be measures in the budget that will be debated.

Under the new budgetary process, we debate in advance.

It is a valid question to ask. The Minister referenced the quote "If I have it, I'll spend it", which got us into trouble.

They did have a brief discussion about it. It was not as though no discussion took place. Other people wish to speak and the Minister must depart at 12.30 p.m. I have not cut anyone short. In fact, I should have done so. I want to allow Deputy Boyd Barrett in.

For clarification, if we are not debating the budget here, what are we debating?

We are debating options in advance of it. I know we strayed into expenditure but the subject of today's meeting is revenue raising relating to budget 2017. That is what we are discussing today so in light of that, I ask Deputy Boyd Barrett to-----

We are locked in, according to the Minister.

We are locked into revenue raising today.

Unlike some of my colleagues, I think the USC should be abolished or reduced for low and middle-income earners. However, I do not agree with moving to abolish or reduce it for people on higher incomes and I would like to hear what possible justification there could be for it. The justification for reducing it for low and middle-income people is the fact that we have chronically high levels of low pay and what I believe is a 30% increase in the number of people on family income supplement. People at the lower end have been hammered so I agree with giving them relief. However, I do not agree with reducing the income tax burden via USC or any other means on those earning in excess of about €70,000. Could the Minister respond to that and tell us what possible justification exists for reducing it for those on higher incomes, given the rate of income inequality?

In respect of revenue raising from other sources, as a general point, there is a general recognition that we need funds for capital investment. There is an investment crisis in vital infrastructure, be it housing, health or education. There is insufficient investment. The question is where we get the money from. I put it to the Minister that the answer to that question lies in the corporate sector and wealth and that this is the area in which we need to tighten up. Have we not failed disastrously in this area and been brutally exposed by the EU ruling on Apple, the scandal relating to section 110 and the scandal referred to by Deputy Doherty regarding the qualifying investor funds - another scandal that needs to be looked into?

We need information on all of these aspects. How many funds are there? How many of these qualifying investor funds are there? We need to know. How much income has been foregone as a result of the failure to impose a withholding tax on these qualifying investor funds? How much tax has been foregone because of the failure to apply the normal corporation tax rate to these section 110 companies? We need every bit of information that Revenue has on the corporate tax heading. We are getting the information two or three years behind so we are flying blind in discussing these matters. We need this information.

I am sure Revenue is aware of the comments I made about the deductions and allowances over the past few weeks but if it is not, I will repeat them. There was a shocking increase in the level of allowances permitted for the corporate sector post-2007. It jumped by €13 billion in two years. That is a tax loophole. My guess is that it relates to Google, Facebook or Apple. This is a huge jump in allowances. I cannot believe that this could happen without it being detected.

It took the European Union and some of us contrarians in here questioning these headings to force a serious examination of this. We are talking about billions upon billions of euro in profits that were being siphoned out of the tax system by the multinationals, with nothing being said. Was there any discussion about these matters? Critically, we need to know whether the double Irish is still operating. Despite the Minister having made public comments to the effect that the double Irish is gone, it is not and all the big offenders are still capable of availing themselves of it. We need to know whether they are still doing so.

Can we have all the figures that the Minister has and not be two or three years behind in respect of corporate tax? We need a forensic examination of all the deductions and allowances that are being given to the corporate sector and that allow it to write down the amount of profit that is actually being taxed. That is where the scandal lies at the back of the Apple story.

Are we now going to calculate the tax liability of all the firms in question from here on according to the decision of the European Union, or are we going to continue to calculate as we have been calculating previously? I acknowledge that the Minister is appealing the decision but there is now a ruling. We will see what the outcome of the appeal is. As those present know, I believe it is absolutely bonkers that the Minister is appealing the decision. How will he calculate the tax of the corporations this year, next year and the year after?

I thank the Deputy for his support for the Government’s approach to the reductions in the USC.

I think we were campaigning for the Minister.

We might have a vacancy in the Government shortly. The Deputy might give me his phone number.

I think my plans for taxes on wealth and corporations might stymy that offer.

We are in the same space in believing USC should be reduced progressively in so far as it applies to people on low and middle incomes. If one examines the Fine Gael election manifesto, one will note it was never the intention to abolish the USC for those on high incomes. There was a proposal to reduce it but it was to be replaced by another tax. It might not be called the USC but would have the same effect on income, and there would be the same flow. If one looks at the detail, one will see that while there was a commitment to some reduction for those on higher incomes, there was not a proposal to abolish the charge completely without substituting it with an alternative tax.

On corporation tax, the Deputy states that, with all the talk of tax, we should concentrate on the corporate sector to collect more revenue. That is essentially the point he was making. However, since 2014, because of the reforms we introduced, among others things, we have had revenue from the corporate sector. Corporation tax revenue has increased from under €4 billion to over €7 billion. That is a very significant increase. We deliberately discussed and brought in reforming measures that resulted in that. This was in light of the work of the OECD, in respect of which we are taking a leading role and are fully compliant. Companies are more profitable but they are also paying more tax now.

On the other series of questions the Deputy posed, they are a matter for the Revenue Commissioners the first instance.

Mr. Gerry Howard

I wish to ask Deputy Richard Boyd Barrett for clarification. In referring to the payments, I assume he was talking about the patent royalties-----

In Mr. Howard's tables, they come under headings such as “Deductions" and "Allowances”, which jumped to quite staggering levels after 2007, particularly in the deductions section.

Mr. Gerry Howard

As I said, we have already published the figures for 2014 on our website.

However, there are figures for 2015 and even provisional figures for 2016. They are not complete but-----

Mr. Gerry Howard

We do not have those, unfortunately.

A sum of €7 billion was just mentioned.

Mr. Gerry Howard

We have figures for the amount of tax people have paid because they are paying throughout the year. The returns for 2015 will only be coming in over the next few months.

It will be next year before we are really in a position to analyse the accounts and the returns of income.

This is where I want to be very specific. As I understand from reading the Revenue Commissioners' own papers, the deductions allowed under that section are allowed in advance, so the Revenue Commissioners do have a figure-----

Mr. Gerry Howard

No, we do not for-----

I am reading from the Revenue Commissioners' own papers.

Mr. Gerry Howard

Could I go into it in further detail and explain the background a little? Multinational groups with subsidiaries in countries in addition to Ireland incur bona fide expenditures of patent royalties that are paid to group companies in foreign jurisdictions for the use of intellectual properties in a business. They are based on an OECD arm's length standard for pricing. They are properly deductible in computing Irish profits. They would be deductible no matter where one was in the world, if one pays-----

I am sorry to interrupt. This is what we need to get to the bottom of. We are not getting to the bottom of it. What we get is commentary and speculation about what may have produced the €2 billion spike. However, we do not receive hard facts and evidence about it. We know it is a question of the patent royalties, but is what is happening legitimate? Are those concerned just saying whatever figure suits them in any given year-----

Mr. Gerry Howard

No.

-----and sending it to one of the subsidiaries that was incorporated here but not a tax resident here?

Mr. Gerry Howard

What I would suggest as the position is that there are businesses here in Ireland, particularly foreign direct investors, that, as with any of these technology companies, need intellectual property in order to make their products. That intellectual property is developed elsewhere. Therefore, these payments are legitimate payments to the other parts of these organisations.

I am sorry but I asked about the EU ruling. It stated it was not legitimate because the payments of royalties were in respect of companies that were not tax resident anywhere. That is not legitimate according to the European Union.

Mr. Gerry Howard

I will comment on the Apple case but I will leave that aside for the moment because it is a slightly different issue. Traditionally, we have not been particularly strong in the Revenue Commissioners on the transfer pricing. It was never particularly an issue because we had a low tax rate. However, over the past few years we have been increasing the resources we apply to this area. Certainly in the past three years, the Minister has given us additional resources, for which we are very grateful. The resources comprise highly skilled individuals. We have a special unit in our large cases division regarding transfer pricing. We also have expertise elsewhere in terms of transfer pricing. Therefore, we are ramping up the activity in these areas. What we are doing with these resources is ensuring the pricing is based on arm's length pricing mechanisms. That is our position on royalties. We are grateful for any additional resources that we can get to apply to this area. However, it is a highly skilled task and a difficult issue, as we see from examining these matters. We have been active in this space. At least in the past three years, we have got dedicated resources into the area.

With regard to the Apple ruling, I do not want to say much because there are ongoing court proceedings thereon. I reiterate the position of the Revenue Commissioners on the Apple case. There was no departure from our perspective in the Revenue Commissioners. I support this position. There was no departure from the applicable Irish law by the Revenue Commissioners in terms of Apple. There was no preference shown in applying that law and the full tax was paid that was due in accordance with the law. That is the position we have on Apple. The issue in question is a different issue. To speak in general terms, the issues concerning Apple relate to branches and how branches are taxed. The corporation tax law on that is quite clear. It is in original corporation tax legislation, the Corporation Tax Act 1976. If one looks back over an even longer period, as I did last week, one notes the first cases that set out the principles in regard to this matter were 1880 cases. There is a long-established principle as to how these matters are to be dealt with and what the normal practice is in terms of case law and statute law. That is our position on it. Obviously, it is now with the courts so it is up to them to make a decision.

I ask Deputy Richard Boyd Barrett to conclude his questioning.

The problem is that in trying to scrutinise the budget, which is our job, we are flying blind on a number of key questions and under this key heading.

We just have to take Mr. Howard's word on certain things without up-to-date information. There is speculation about what may be happening under this critical tax heading. That is unsatisfactory and means that we cannot do our job properly. That is the bottom line. I am still not quite sure if it means that we are calculating. We have not had an answer on the double Irish. Is it still operating? Are companies still availing of it and will they be able to avail of it for the next few years? If we were to calculate the tax liabilities of the offending companies, as the European Union would have wished us to do in the light of its ruling, notwithstanding the dispute about what happened in the past, what would it mean for now, this year and next year? That question has not been answered.

There is one other thing I will flag because I do not have time to deal with it. There is an ongoing vociferous campaign by building workers who believe the RCT system is being abused on a rampant scale by building contractors. I have put various questions to the Minister on the numbers in the construction industry on RCTs which are usually subsequently answered by Revenue. In one answer I was advised that 35,000 people were on RCTs, but I was then told in another that there were 70,000 people on them, which is quite a big difference. As only 130,000 people work in the construction sector, it means, according to one of the figures, that two thirds of them are self-employed. I do not believe that for one minute. We then discover that virtually nothing is coming back under that tax heading. In some years there is a minus figure, but overall there is almost nothing, which suggests there is absolute rampant abuse of the bogus self-employment RCT system. I do not believe we are taking seriously the allegations that are being made consistently. The dogs on the street in the construction industry know that this is going on and still we do not seem to be doing anything about it.

I will flag one further issue. The Unite trade union, in particular, and some of the other unions have highlighted the very low levels of employers' PRSI as one of the big deficits in the tax system in terms of having a sustainable tax base. We have much lower levels of employers' PRSI than in most of the rest of Europe. This is at the heart at the tax battle or conflict about where we will get the money to have a sustainable tax base.

The Deputy asked many questions, most of which are for the Revenue Commissioners.

Mr. Gerry Howard

To respond on some of the issues raised by the Deputy, I do not have the figures with me and I am not trying to be evasive or anything like it. We will take away the issues about which he has asked us and undertake to give him the information we have as quickly as we can. I also need to tell him the information we do not have. That is just the nature of the tax system. People pay their taxes on a previous year basis. They will send in their returns now for 2015 and we will then have the information. That is why there is a gap in the information.

We will let the Deputy have the information he requested on the double Irish as soon as we can get it for him.

On the RCT system, in a previous role I worked in an operational area. It has always been one of the issues at which we have always looked. We have regular audit programmes to look into these matters and the issue is taken very seriously. We work with the Department of Social Protection and NERA on the RCT system, as well as with people involved in the construction industry. If there is any evidence, we take it seriously and where we have it, we change people's status from being a subcontractor to an employee. That happens regularly also. If anybody has information, we invite him or her to pass it on to us and we will act on it.

I thank the Minister and the officials from Revenue for providing some very informative material this morning to help us with our deliberations.

The Minister spoke recently about a possible sale of the State's stake in AIB in 2017. He seems to have decided that any such moneys that would become available would go directly to debt reduction. However, given what many colleagues have said this morning, is there not a huge case to be made-----

We are dealing with the current budget. By bringing that in-----

I am asking the Minister because he made a comment about it.

I am talking about the capital budget. Is there not a case for using some of that money for an injection into national investment, particularly as there have been abysmally low levels of capital investment during the Minister's time in the Department of Finance?

In light of Brexit, I do not think we will be selling AIB or any tranche of shares in it for the remainder of this year in any event. However, I am leaving the possibility open for 2017. What will be done with the receipts? Some time ago - in 2012 or 2013 - the Government decided that moneys that would come from the sale of bank shares would be used to reduce the debt. The reason for this was that the money that was given to the banks was either borrowed money or money that had to be replaced by borrowing. It seemed reasonable, therefore, that when shares were sold, the money accruing would be used to alleviate the debt.

However, the Minister did hypothecate, for example, in the context of the sale of the national lottery. We are all aware of the disastrous record regarding housing, health and capital investment in the past six years. Surely there is a strong case for a boost for the capital budget?

Certainly a case could be made. Of course, any such large sum of money that would come in would be governed by fiscal rules. There is a key distinction in modern budgets. The money we have that we can spend is one thing, but we also have to take into account what we can spend under the fiscal rules.

In one sense this morning's presentation is very dismal - almost fatalistic - in pointing out all the things that are not affordable. We seem to be locked in, with the budget already decided, and that we will just be making time in 2017. Perhaps that reflects the current Dáil, which is in a kind of political stalemate. The vote on the Apple case, as some commentators noted, showed the real divide in Dáil Éireann and highlighted that fact that the minority may not have the power to change things.

Is there not a case for going to Europe and suggesting that we are entitled, and should have scope to, deviate from the medium-term rules in 2017 because, for example, Brexit may affect us more profoundly than any other country? The Minister has not spoken about how we might expand the fiscal space. Surely we can expand the fiscal space. Certain colleagues mentioned equalising the price of diesel, petrol and so on. The bodies that have appeared before the committee - the Irish Fiscal Advisory Council, IFAC, etc. - have suggested that if we had more revenue we would have more fiscal space, but the Minister does not seem to have any plans regarding revenue.

It is possible to expand the fiscal space by increasing taxes and if this committee recommends increasing taxes, obviously we will consider the recommendation.

Every year I submit budgets to the Minister. They are all in his bottom drawer, I think. He told a few of us down through the years that he puts them all in his bottom drawer. For example, is there not a case for having a higher rate of tax on those who are very highly paid - the tranche of taxpayers including Deputies, principal officers and so on - and earn more than €80,000? Is there not a case for grabbing more of that fiscal space?

I was going to send the Minister something on the health front and the waiting lists, which make for dismal reading, as does what we heard last night from Dublin City Council regarding 29,000 families and individuals on housing lists. Surely we need more fiscal space. As I suggested to IFAC and other bodies, is the economy not operating at well below maximum output if one considers housing and other capital expenditure?

As an example in that context, I point to our still very flimsy public transport system.

It is possible to increase taxes in any budget, which has the effect of increasing the fiscal space. Spending the yield from the increased taxes is always an option. However, the decision is whether that is economically prudent or good management of the economy. I happen to think that there is no problem in coming up with new taxes, but we have enough of them. The tax burden is a fairly heavy burden on the shoulders of those in question.

That is not true. Sure, it is the lowest proportion-----

I do not particularly want to get into an argument with the Deputy. All I am saying is that he is taking up a valid position to the effect that we should increase taxes, which would give us increased fiscal space and we would spend more. That is a valid position; it is just that I disagree with the Deputy's standpoint.

Is there any scope for the Minister to ask his European colleagues about the medium-term objective?

No, but I would not think we were fatalistic or dismal. The Minister for Public Expenditure and Reform, Deputy Donohoe, will appear before the committee tomorrow. With a combination of what is available to him, approximately €860 million, and what is already built into the base for demographics and for the Lansdowne Road agreement, there is another €860 million or so. Tomorrow, the Minister, Deputy Donohoe, will outline having the capacity to increase spending on services by approximately €1.7 billion or €1.8 billion. That is a significant chunk of money for one budget over the other. However, because of the decisions we took in designing the programme for Government, the space I have for tax is much more limited. It is not that there is no money, but we have decided - quite deliberately - to use more to repair the services. It is quite significant - €1.7 billion is a big chunk of money for extra services.

The problem is it is not enough.

If the economy continues to grow, there will be more next year and in subsequent years.

Where do we stand vis-à-vis our European colleagues on the financial transactions tax? While I know we have the stamp duty, this is another possible revenue raiser.

We have disagreed with it. A group of colleagues adopted a special provision under the procedures in Europe to advance the financial transactions tax. Under that provision, a group of nine countries can come together. It is going nowhere. There is no agreement in respect of the proposal; and even its advocates cannot agree. The best they have come up with is to move forward with something similar to stamp duty on shares at a very low percentage level. However, we already have a 1% stamp duty on share transactions. So, what we have in place is more significant than any of the proposals coming through. While I think one or two countries have dropped out, there is a group of nine or ten that have been working on this. They have been working on it since Ireland held the Presidency in 2013. The first meeting on this was in January 2013.

We are not part of that.

No, we are not. We do not disagree with a financial transactions tax in principle, but we want it on an international basis or, at a minimum, on a trans-European basis. If we introduce a financial transactions tax on financial activities in Dublin and the people in the City of London refuse to introduce such a tax, activity will move from Dublin to London; at least that would have been the case before Brexit. One could probably make a different case now; we will see what happens.

Deputies Donnelly and Boyd Barrett have follow-up questions.

On section 110, Mr. Howard alluded to some advice he had received regarding the mark-to-market clause. I appreciate he cannot share the Attorney General's legal advice. I ask the Minister and/or his departmental officials and the Revenue officials to provide to the committee whatever rationale they have on the existing amendment. It sounds as if they have a rationale on mark to market. They probably have a rationale on restricting it to property and so forth. I ask them to provide this to the committee quickly so that we can assimilate it and reach an opinion.

The fiscal space is constrained considerably by the convergence margin. There is a clear difference of opinion. The Commission is suggesting that our economy has overheated and that therefore our structural deficit is bigger than our general Government deficit. Many in Ireland disagree with that and point to many indicators that our economy is not overheating. Is there any scope to push back on the Commission's view and point out that we do not believe our structural deficit is several hundred million euro greater than our general Government deficit, thereby increasing the fiscal space for 2017? The information the committee has this morning is that it would increase significantly if we were able to push back.

There is a debate and this is proposed by many European countries. If we harmonise the methodology, it could get a result. I do not think anything will happen in time to change the parameters of the 2017 budget, but I would be hopeful for 2018. There are many views now about how structural deficits should be calculated. There is an emerging opinion that if we just dealt with nominal deficits rather than structural deficits we might get closer to what the actual business cycle is and what the fiscal cycle is. I think there will be changes but not in time for the 2017 budget.

I have a very simple question. Given that certain tax heads are ahead of the projections - I know some are also a bit behind - does the Minister have a figure or will he have a figure anytime soon as to how much extra tax revenue may be available and spendable in the budget?

I think I gave it in my speech. I think we are just under €500 million ahead at the moment and at the end of the year will be nearly €1 billion ahead if things continue as they are now. It is back to the distinction between having money and having the capacity to spend it. The fact that it runs through does not change the fiscal space. The expenditure benchmark is in place so that we operate within fiscal parameters that are not entirely dependent on tax roll. Obviously, it is important. Money was committed in mid-June. For example, €500 million was given to the HSE. Obviously, that will need to be funded in 2016 and it will be. According to the forecasts we have we are in a pretty good position for 2016. We will meet our deficit targets and we will cover any commitments that have been made on the expenditure side. The budget will come in as designed.

The Minister is saying the fact that certain tax revenues are higher than expected will be traded off against certain expenditures.

Some. If we end the year with €300 million beyond what was forecast having met all our expenditure commitments, that €300 million will come off the deficit and so we will have a lower deficit at the end. That is how it will run into the account at the end of the year.

It is very important that we debate budget proposals in advance. We want to avoid those kinds of decentralisation surprises on budget day that end up being real mistakes. That is why I was slightly angry with the Minister's response to Deputy Doherty's questions about-----

The Minister answered the question that he was asked at that stage.

I wish to finish my point. The Minister said that sometimes it is necessary to stoke demand to create supply. Our experience of stoking demand is that it creates higher prices. I reiterate Deputy Doherty's point. In advance of the budget if there are papers or presentations from the Department of Finance that contradict the advice coming from the Central Bank on the point, I ask the Minister to provide them to the committee so that we can see them in advance of the budget.

First, when the housing policy document was produced in July, I asked the people in the Department with responsibility for the environment not to reveal any details of a help-to-buy scheme because it would interfere with the market. If the Deputy was one of the partners in the case of a young couple thinking of buying a house and if the prospect of getting a big chunk of money was held out to him, he would probably defer his plans to buy. I did not want to disrupt the market. To help ensure there would not be market disruption, we said it would be backdated to the date of that announcement. I am still reluctant to give the details and even though there are only three weeks remaining to budget day, I do not want people who have paid deposits to pull back from purchasing. Whatever we do will be retrospective. We have problems enough with supply without creating some kind of hiccup in the market by announcing a help-to-buy scheme prematurely.

Second, anything we are doing is with the full knowledge of the Central Bank. It knows exactly what I have in mind and it approves of it. The Deputy will see what is proposed on budget day when we will give the full details. I think it will be a pretty good scheme. We have to do things and we cannot nail things down 100%.

The Deputy referred to bringing the VAT down from 13.5% to 9%. I got no advice from anywhere to do that. It was a political decision by the Government but it took a tourist industry that was on the ground and put it back up on its feet, as it were. The same happened when we abolished the travel tax at a cost of €37 million. More than 2 million extra people have been flown into the country by Ryanair and Aer Lingus. There are things one has to do. Why have Ministers and Government if everything is based on the best opinion of officials? There has to be a situation where Ministers take political initiatives and hold themselves responsible and accountable for them. Obviously some things do not work and other things work and we try to evaluate them as best we can in advance to make sure there are many more pluses than minuses. However, with respect to anything one does on the property side, be it introduce a grant scheme or a tax break or whatever, there is no doubt it will have a possible price effect. Once more money is put into the system and if more money is available and more purchasers with money are available, there is a temptation for small builders to increase the price if they think they can get it. However, many small builders would say that what they need now is a price increase because they cannot deliver the supply at current prices. It is quite complicated, and I am sure we will have a full debate on it, but the Central Bank is in the frame.

Perhaps some of the distance between us is the Taoiseach's constant explanations and praise of the new politics, much of which includes total frankness. That is what we are told by the Minister's colleague.

I have been totally frank except for that issue this morning. There are market reasons for not being totally frank on it.

To return to the Revenue Commissioners, the issue of the knowledge box and the Minister's comment about more companies than multinationals establishing here - we all know many new Irish companies and start-ups have established - to what extent are Irish start-up companies versus multinationals and other Irish companies availing of the knowledge box? Will the Minister give me those figures? I accept he might not have them yet. My understanding is that cost is €50 million a year, which is an expensive enough tax break. The Minister referred in his comments on multinationals to perhaps €200 million or €300 million in potential refunds being in play. I am curious as to what that might mean.

Mr. Gerry Howard

On the figures and our estimates, in any particular year we get tax payments. People pay preliminary tax and very often they overpay the amount owed.

They overpay it.

Mr. Gerry Howard

They want to pay at least as much tax as is due, but often that leads to them overpaying or over-estimating what they will owe. Therefore, there is always a little extra paid that has to be repaid in many cases.

I also asked about the knowledge box.

Mr. Gerry Howard

The knowledge box was only introduced last year. We have issued guidelines.

We know there is a good deal of interest in it from foreign companies and domestically but we will not have figures on that due to the necessary time delays. They will claim it this year but they will not be sending in their returns on income in respect of the-----

Does Mr. Howard have a profile on it for next year?

Mr. Gerry Howard

We do not at this time because nothing has come in on it as of yet. I would say it will be next year or probably the following year before we have detailed figures.

This is a question for the Minister. There have been many references in the newspapers to his desire to reduce inheritance taxes. I have seen a value of €75 million attached to a potential reduction in inheritance tax in some of the presentations we got here. Is the Minister thinking of that or would he prefer if that there to happen over a period of time? It seems an awful lot in one year.

That issue came up in today's questions. Deputy Brophy raised it. This is a commitment in the programme for Government and that commitment to take threshold for category A from €280,000 to €500,000 is over the period of the Government. It would be very costly to do that in one leap, therefore, it is more likely it would be done gradually over a period of time.

Does that run contrary to what the Minister said earlier, namely, that he was not in favour of indexation in relation to either social welfare or other issues? That seems contrary to that view, given that it would be a very large cost at a time when we are very stuck. I totally agree with this being pegged to inflation. That is fine and I believe that was done last year and the year before that and the figure was probably a little higher than the inflation rate, but it was modest, whereas the material appearing in the newspapers indicates a potential very large give-away on that one.

No, I never said that it would be tied to inflation. When I talked about indexation, I said there was never automatic indexation in the Irish system but in budgets Ministers took rising prices into account when they were designing whatever personal tax relief they were putting in place, so the same would apply here. The commitment in the programme for Government is to increase the tax threshold for inheritances from parents to children, only that particular category, from €280,000 to €500,000, but all the commitments in the programme for Government are over a five-year period. The media may have picked it up as if it was going to happen in one budget but it is not going to happen in one budget; it is not affordable. I would like to do something on inheritance tax but, as I say, if the figure of €500,000 is to be the destination, it will be done in steps, not in one jump.

I thank the Minister and members. I thank the officials from the Revenue Commissioners and we look forward to receiving some of the documentation we requested which they should forward to the clerk to the committee. I thank the Minister and his officials from the Department of Finance. The committee is adjourned until 2 p.m. tomorrow.

The committee adjourned at 12.53 p.m. until 2 p.m. on Wednesday, 21 September 2016.
Barr
Roinn