I move: "That the Bill be now read a Second Time". This Bill provides a statutory basis for the taxation provisions which were announced in the 1987 budget. It also contains a number of other taxation proposals, mostly of a technical nature, which will improve the operation of the system and eliminate some abuses. I would like, in the first instance, before discussing individual aspects of the Bill, to refer to developments since the budget and to outline the Government's general approach to taxation policy.
The essential strategy underlying the budget was to restore confidence in the economy, bring down interest rates, reverse the trend of outflows of capital and encourage investment. To achieve this we had to demonstrate clearly our determination to improve the public finances and we also had to focus special attention on opportunities for development in productive sectors of the economy. The budget strategy is working even at this early stage. Already interest rates have fallen significantly and further reductions are expected as the year progresses. Money is flowing back into the economy and this will be reflected in new investment and new job opportunities. There can be no doubt about our commitment to reaching the targets we have set for the public finances. While this policy has led to some cut backs in services, the reality is that there are no reasonable alternatives. Excessive borrowing would simply drag the economy into a downward spiral and the consequence of this would be intolerable reductions in services at a later stage.
We have recognised, however, that control of the public finances is not sufficient in itself to create the new sense of direction that the economy needs. There must also be specific initiatives to promote development and new openings for employment. We have wasted no time in taking these initiatives. To illustrate what we are doing, I would draw your attention to the provisions in the Bill before us today to promote the new financial services centre in the Custom House area and to encourage more investment in shipping, tourism and the food processing sector. This is by no means a comprehensive list; we are exploring specific possibilities in a whole range of sectors and the Government are regularly monitoring progress in each case.
Despite the adverse reaction to specific measures, the general response to the budget has been encouraging. There is a recognition among the public that something had to be done to stop the rot and that the Government have grasped the nettle. There is now hope again. It is early days to expect substantial results but I am confident that, as time progresses, people will come to see more and more the wisdom of what we are doing. We are not out of the wood by any means. I am already on record as saying that we will take whatever steps may be required as the year goes on to adhere to budget targets. So far the indicators are that we are firmly on course. The policy of correcting the public finances, however, will have to be continued into 1988 and later years, as necessary. Otherwise, we will not succeed.
The subject of today's debate is taxation. The Government have identified reform of the taxation system as a priority because this is an essential element in achieving the scale of economic progress that we need. There is, it seems, a general consensus on the need for reform. There would seem to be wide differences of opinion, however, about the appropriate thrust of any such reform.
I am very conscious of the reality that our tax levels are high, that they have a negative effect on economic activity and that they are a source of frustration to many people who feel overburdened. Too many people pay income tax above the standard rate and it is demoralising for the average worker to have such a high proportion of his earnings siphoned off through taxation. High indirect taxes push up retail prices unduly and we have experienced the huge distortion of trade that this can cause. The restriction of duty free allowances to genuine travellers has eased this situation to a significant extent but the underlying problems will remain if we continue to have high indirect taxation.
High taxes are the price we have to pay for continuing high public expenditure. In the short term, the poor state of the public finances does not allow us to make any substantial reductions in tax revenues. This does not mean, however, that tax reform must be put on the long finger. On the contrary, we can and we must make progress, however modest, within the constraint imposed by the budget.
It is a precondition for tax reform that the tax base should be widened and I think there is general agreement about this on all sides of the House. A wider base allows for a better and fairer distribution and a consequent lowering of rates. This can only be to the benefit of the economy and it will also remove much of the present frustration with the system. A wider base, however, requires new or increased taxes in some instances and an increasingly efficient collection process to ensure that all who are liable pay their due taxes.
I do not intend here to set down priorities for extending the tax base. This is a matter for Government decision in the context of preparations for the budgets of 1988 and later years. I would point out, however, that taxes on some activities and goods and services here are much lower than the public perception and that it is wrong to suggest that we have high taxes across the board. The contribution from the business sector is low by international standards. This is due in no small part to the very generous allowances that are available and I mentioned in the course of my Budget Statement that a review of corporation tax is being undertaken. The contribution from some other sectors is also decidedly low. These are just examples of areas where taxation cannot be presented as a problem. There are others but it is not my purpose to be comprehensive here or to identify priorities. Specific steps have been taken in the recent budget to widen the tax base. In particular, the steps taken to check unreasonable losses of trade through travellers' allowances, and the assignment of additional resources to the Office of the Revenue Commissioners will make a useful contribution in this respect.
In our Programme for National Recovery we have given a commitment to rapidly reach the stage where two-thirds of taxpayers pay tax only at the standard rate. It was not possible to fulfil this commitment in this year's budget because of the extremely difficult situation we inherited. Income tax reductions, however modest, are expensive in budget terms. We had to make choices between lower borrowing and lower taxation and the priority had to be to reduce borrowing. As the public finances and the economy improve, we will be in a better position to reduce the burden of income tax and to fulfil our commitment.
There has been much discussion in recent years about inadequacies in our collection system. The feeling is widespread that arrears are on an enormous scale and that too many people can avoid paying a fair share of tax. There is considerable misunderstanding about the true situation and some of the figures mentioned about arrears are wild exaggerations. It is a gross misrepresentation to suggest that problems can be solved and the tax burden reduced significantly for all if arrears are duly collected. At the same time, it must be acknowledged that uncollected tax is a serious problem and any tax reform package must incorporate measures to improve collection. Significant progress has been made in this respect in recent years. There must be further improvement and this will be a priority with the Government. It is not enough to have an equitable tax system; it must be demonstrably clear to the public that the system is operated efficiently and that it does not pay to evade tax.
We have now reached the point of diminishing returns on some taxes. Our budget problems will not be resolved by higher taxes or improved collection procedures. The emphasis must be on achieving better distribution of taxation in the interests of equity and a more efficient economy. I am confident that substantial progress will be made in this direction in the 1988 and subsequent budgets. In the months ahead taxation will be on the agenda for discussion with the social partners. The Government will be anxious in these discussions to focus attention on the scope for better distribution within the constraints of the budget. Any discussion on taxation that ignores or sidesteps the budget realities is futile.
I would now like to speak on individual sections of the Bill and to draw the attention of the House, in particular, to the more significant items. The earlier sections of the Bill are concerned with income tax. Section 1 provides for the renewal for a further year of the special PRSI tax allowance, which was first introduced in 1982. The exemption from income tax available to lessors of agricultural land, who are aged 55 or over or who are permanently incapacitated, is being raised from £2,000 to £2,800 in section 2.
I would like to draw the particular attention of the House to the arrangements in section 3 for the credit on farm tax. While the farm tax has been abolished, a small number of farmers are required to pay it in respect of 1986. To qualify for a credit against last year's income tax, however, the farm tax due should have been paid by 5 April 1987. The deadline for payment is now being extended to 30 June. There have been substantial payments of farm tax in recent weeks but there is still up to £3.5 million due for payment to local authorities. I expect that the extension of the deadline will now secure the early payment of farm tax still outstanding; there will be no further extensions.
Section 4 abolishes in relation to Irish people working abroad the "place of abode" test for residence in the State for tax purposes. Under that test people working abroad are deemed to be resident in Ireland for tax purposes, if they maintain a place of abode here and return, even for a short period, during the tax year. In consequence, as residents, they are liable to Irish tax on their remittances home. This is unfair and the change now being made will enable people to visit home and transfer savings without being subject to Irish tax simply because they maintain a place of abode and made short visits home.
In section 5 the ceiling for relief on dividend income from an Irish manufacturing company is being increased from £7,000 to £9,000 where the company has an approved profit-sharing scheme for its employees. This is intended as an incentive to companies to introduce profit-sharing schemes which are of benefit both to the companies and the employees and do much to improve industrial relations. There is also a provision that this relief is to apply only in respect of bona fide ordinary shares.
Section 6 implements the restriction on mortgage interest relief announced in the budget. It provides that the relief will be restricted to 90 per cent of mortgage interest actually paid or 90 per cent of the tax limits of £4,000, £2,900 and £2,000 for married couples, widowed persons and single individuals respectively, whichever is the lesser.
This restriction is necessary in view of the high cost of this relief. Mortgage interest relief would cost about £160 million in the current tax year if we had not taken action. The restriction will claw back a small proportion — £10 million in 1987 — of this cost. This clawback has been designed very carefully, so as to ensure that the biggest clawback comes from those who have the biggest benefit from the relief.
The new restriction must, of course, be seen in the context of the recently announced cut in the mortgage interest rate. This cut alone goes a long way towards compensating mortgage holders for the reduction in tax relief. A primary objective of the budget strategy is to force down interest rates and the success of this strategy in the home loans area will continue to be of substantial benefit to mortgage holders generally.
The requirements for payover of retention tax by financial institutions are being altered in section 7. The arrangements for crediting interest adopted by some financial institutions meant that they paid over to the Revenue Commissioners tax on less than 12 months' interest for the year 1986-87. If this situation were not remedied, the 1987 yield from retention tax would be reduced significantly. The section provides that these institutions will have to make up any shortfall in their 1987 payment by an extra payment and it also protects the yield for future years.
I should say that the section does not alter either the level or timing of deduction of retention tax from interest on deposits. That remains as it was. It is concerned solely with the timing of the payover of retention tax to the Revenue Commissioners by some financial institutions. The retention tax is deducted at source, at the rate of 35 per cent, on interest. There are refund arrangements for companies and persons over 65 years of age and charitable institutions are exempted from the tax. There still appears to be some confusion about the impact of the tax on confidentiality and I would like to make the position clear once more. In so far as resident depositors are concerned, there is no disclosure of information following the introduction of retention tax. For non-residents there never has been disclosure and there is no disclosure now. Genuine non-residents can rest assured that their deposits are held in strictest confidence and are not liable for retention tax.
Chapter II of the Bill contains important amendments to the scheme of relief for investment in corporate trades — otherwise known as the business expansion scheme. The scheme provides for relief on certain conditions for an individual who subscribes for unquoted ordinary shares in an Irish resident company engaged in manufacture or in certain service activities.
This scheme has been successful to date in generating additional investment for the activities to which it applies. Since the relief was introduced in January 1985, over 120 companies and investments of about £12 million have been approved.
Up to now, the business expansion scheme has been confined to the manufacturing and international services sectors. The Government propose to extend it on a selective basis to certain other areas which we have identified as offering significant potential for increasing output and employment. The areas in question are shipping, trading houses and export tourism.
I do not need to outline to the House the difficulties which have beset the shipping industry in recent years. Positive action is required to enable the industry to recover from these difficulties. In order to revitalise the industry, shipping will now come within the ambit of the business expansion scheme and, furthermore, the 10 per cent rate of corporation tax will apply to shipping activities.
Deputies will note the provision that the acquisition of a ship will qualify under the scheme only where such acquisition would be eligible for a grant under a grants scheme administered by the Department of the Marine. This provision will ensure that all proposals to raise money under the BES to buy ships will be vetted in accordance with strict criteria by the Department of the Marine. This approach will also guarantee that revenue foregone under the scheme will be subject to the same level of scrutiny as the direct expenditure of Exchequer funds in the form of grants.
The business expansion scheme is also being extended to trading houses and to export tourism. I will return to the trading houses at a later stage. The Government have already highlighted the importance which they attach to tourism and they have demonstrated their commitment to the industry with the package of measures announced recently by my colleague, the Minister for Transport and Tourism.
The qualifying activities under the heading of tourism are set out in section 11. The term tourist traffic undertaking has been defined in very broad terms to ensure that a wide range of tourist activities can be covered. There is a requirement that in order to qualify for the benefits of the business expansion scheme a company must obtain approval from Bord Fáilte for a three year development and marketing plan which is primarily designed to increase tourist traffic and revenue from abroad. The purpose of this is to ensure that qualifying companies are committed to the essential purpose for which the scheme is being extended to the tourist sector, namely to bring in more tourists from abroad. It will also mean that the expertise of Bord Fáilte in the tourism area will be availed of in deciding on applications for relief under the scheme.
I am confident that this new incentive for tourism will give a major boost to the industry in its efforts to attract more foreign visitors to Ireland and that this in turn will have a significant impact on the economy generally.
Chapter III of the Bill gives effect to the scheme of tax deduction at source on professional fees paid by certain public sector agencies. These fees are paid normally to either individuals who are taxed as self-employed or to companies who are liable for corporation tax. Under the system of tax assessment for the self-employed current tax payments use as a basis for calculation earnings generated in a period which can date back over two years in some instances. Under corporation tax, payments are due six months after the end of the accounting period to which they relate. This contrasts with the deduction at source on current earnings under PAYE. The new system provides for deduction of tax on account, at source, on the publicly funded professional fee payments to which it applies. Accordingly, from 6 June tax on account will be deducted at source at the rate of 35 per cent from all payments for professional services made by the bodies specified in section 13 of the Bill. The new system is estimated to yield £25 million in 1987 and it is an important element of the budget for this year.
There was initially a considerable amount of misunderstanding about the new system and some exaggerated comment as to its effects. I would like to stress the following points in relation to the scheme. First, no additional tax liability whatsoever is laid on the persons or companies affected. Tax deducted at source will be fully offset against tax liability based on the period of account in which the deductions occur. Secondly, there are provisions for the payment of interim refunds of tax. These have been included to mitigate refunds of tax. These have been included to mitigate some of the adverse cash flow effects which would otherwise arise from the new arrangements. Deputies can rest assured that the Revenue Commissioners will process applications for interim refunds with all possible speed, and, thirdly, while the position will vary from case to case it must be borne in mind that the cash flow gain to the Exchequer of £25 million will be spread across some thousands of individuals and companies so that the average charge will be small.
Notwithstanding the provisions for refunds and the fact that no additional tax liability is involved, some professional groups remain convinced that the tax will have serious adverse effects. I have met with most of these groups and am fully aware of their views on the matter. I am confident however that as the tax becomes operational it will be seen as a reasonable imposition. Claims that it will force people out of business and that it is discouraging professional people from accepting work on behalf of the State are without foundation.
Deputies will note that section 13 enables the list of accountable persons who will operate the tax to be extended by regulation. While the major public sector bodies paying significant amounts of professional fees are already included, I have arranged for a study of fees payable across the public sector with a view to possibly adding to this list at a future date.
I would now like to move on to Chapters IV and V of the Bill and to draw specific attention to the principal items under these headings. Section 24 provides that the restriction whereby capital allowances are determined on a net of grant' basis will not apply to companies in the food processing sector which purchase their own plant and machinery. This reflects the special priority which the Government attach to investment in the food processing sector. This is an area where, for export purposes especially, we have significant potential to achieve a higher added value content and large-scale investment is necessary for this purpose.
I referred earlier to the extension of the 10 per cent rate of corporation tax to shipping and this provision is incorporated in section 26. This concession is being accompanied by measures designed to curtail certain tax avoidance activities in the sector. These measures impose restrictions on relief for trading losses of shipping companies and capital allowances in respect of ships used in a 10 per cent shipping trade.
The intention underlying the anti-avoidance measures is to confine the tax benefit of capital allowances on ships and any accumulated trading losses within the shipping trade. It has been possible up to now to set these allowances and losses against income other than shipping income by means of group relief and, in the case of capital allowances only, leasing arrangements. The result is that other companies or individuals can reduce their tax liability artificially and the profits of shipping companies for tax purposes have been artificially increased.
The extension of the 10 per cent rate of corporation tax to the income of trading houses is proposed in section 27. Trading houses are defined as companies carrying on a trade which consists exclusively of the sale by wholesale on the export market of Irish manufactured goods. It is envisaged that these will be private sector companies with no State participation.
The aim of the Government in promoting the establishment of trading houses is to develop a co-ordinated marketing function for Irish manufacturing companies. Many such companies, although their products have strong export potential, lack the resources and often the capability to exploit this potential. This is largely a function of size, but the result is that smaller companies are put at a serious competitive disadvantage. Trading houses will act as conduits for goods manufactured by such companies.
I now turn to section 28 which relates to the establishment of an international financial services centre in the Custom House Docks site. The special needs of the Custom House docks site were recognised and provided for in the package of tax incentives contained in the Finance Act, 1986. These incentives were designed to foster the physical redevelopment of the site. In order to promote this redevelopment, however, it has been necessary to identify and target specific economic activity which can be attracted into a portion at least of the accommodation being provided on the site. It is obviously desirable that this activity should be incremental rather than that the site should attract operations already established elsewhere in Dublin or elsewhere in Ireland which might be willing to relocate. The Government believe that the establishment of an international financial services centre offers the best potential for development of the site.
A low rate of corporation tax is recognised to be a necessary prerequisite for the successful operation of such a development. Accordingly, provision is being made for the extension of the 10 per cent rate of corporation tax to income derived from certified international financial services to be carried on in the Custom House docks site. In defining the services to be permitted, certain services for Irish residents and certain dealings in Irish currency are not included. Furthermore, in so far as banking functions may be located in the Custom House docks site, they will be subject to the licensing and regulatory authority of the Central Bank on the same basis as banks located elsewhere in the State. The requirements of the relevant European Communities banking directives will be fully met.
The Government have notified the European Commission of the initiatives contained in sections 26, 27 and 28 and the normal procedures involved in such notification are being applied.
Section 31 proposes a new rate of taxation of 45 per cent on the income of banks from home loan business granted after the publication of the Bill. Incomes from existing home loan business will continue to be taxed at 35 per cent as heretofore and costs on all home loan business will continue to be available to be offset against income from other banking activities subject to the normal corporation tax rate of 50 per cent. There is, therefore, no reason why those who already have home loans from banks should pay more, and a tax concession is still available in regard to new loans.
The existing arrangements result from section 28 of the Finance Act, 1976 which was introduced to bring the banks into the housing finance market at a time when they were reluctant to become involved. Over the years, however, the banks have expanded their share of this market and this year both the AIB and the Bank of Ireland have substantially increased their allocations for home loan schemes. Continuation of the section 28 concession is simply not justified in the present situation where the banks are setting out to be the major lenders in the home loan market and can use the favourable tax arrangement resulting from this concession to achieve this objective.
Under the heading of customs and excise, some relief is provided from excise duty on imported waste oil which is subject to processing to make it suitable for use as industrial fuel oil. This change corrects an anomaly and it also encourages processing of oil which otherwise would be dumped. The Bill also confirms excise duty increases on tobacco and certain fuels which were imposed by Order last January.
Part III of the Bill deals with value-added tax. As well as giving effect to the changes announced in the budget, the Bill contains a number of technical provisions. There is a reduction from 25 per cent to 10 per cent in the rate on photographic services, waste disposal services and driving instruction as announced in the budget. In addition, I am extending the benefit of the reduction to admissions to cultural, historical, artistic and scientific exhibitions. These reductions will have effect from 1 July and are intended as a further stimulus to the important services sector of the economy where, I believe, there is significant potential for job creation. I am confident that this will improve the competitiveness of this sector and help combat black economy activity, as well as contribute to employment growth in the economy.
The Bill also confirms the reduction in the farmer's flat rate VAT addition to prices from 2.4 per cent to 1.7 per cent which I announced in the budget. This change, which has had effect from 1 May, is being introduced in order to compensate the Exchequer for the revenue foregone on the abolition of the farm tax. As I indicated in the Budget Statement, farmers retain the right to register for VAT and recover in full any VAT paid by them on their farm inputs. I also mentioned in the budget statement that greater use will be made of the farm profile form in assessing smaller farmers for income tax. The existing form is being revised and the new arrangements will be put into operation shortly. The intention is that all farmers likely to have a taxable income should be assessed. The profile form will enable an inspector of taxes to determine in many cases that no tax liability will arise. For most other smaller farmers, the inspector will be in a position to assess the amount of tax due, without the need for accounts. This simplification of procedures should remove the need for smaller farmers generally to seek specialist accounting advice in relation to their tax affairs.
The main technical VAT provision in the Bill involves an amendment to the rules for deducting input VAT by taxable persons. Sections 37 and 40 recast the existing provisions along the lines adopted by the European Community in the Sixth EC VAT Directive and these more precise definitions will facilitate both the Revenue Commissioners and taxpayers in operating the tax. The remaining provisions are of a minor definitional or technical nature.
Under the heading of stamp duties, provision is made for the continuation of the bank levy to yield £25 million and for an increase in the levy on life assurance premiums from 1? per cent to 3 per cent. The contribution from the financial institutions to corporation tax yield is decidedly small and, while this situation prevails, there is no room for any diminution of levies.
I propose to introduce an amendment on Committee Stage of the Bill enabling the making of regulations to allow VAT-registered garages a VAT credit in respect of their purchases from unregistered persons of secondhand motor vehicles for resale. This will eliminate a competitive disadvantage suffered at present by registered garages compared to transactions between unregistered persons which do not attract any liability to VAT.
There is one further item to which I would like to refer before concluding. The Government will be doing everything possible to increase industrial investment here by foreign-owned companies. Foreign companies already established here have surplus funds which they are, of course, free to repatriate to their parent companies. I am anxious, however, to increase the range of investment possibilities for these firms so that they may have the choice and the opportunity of putting their surplus cash to work in Ireland.
An enabling provision was made in section 69 of the Finance Act, 1985, for the issue of securities on a tax-exempt basis to eligible foreign-owned firms, thus matching what these firms can already do offshore. The Government have now completed the scheme for implementing that provision. Formal documentation is being finalised with the agent banks and I expect the first issue of the securities will take place in a few weeks' time.
In this opening address on the Finance Bill, I have sought to outline the Government's general approach to taxation policy and to explain, in brief terms, the more significant items in the Bill. There will be further opportunity, on Committee stage in particular, to discuss these items in more detail. I look forward to listening to Deputies' contributions to the debate and I commend the Bill to the House.