Dáil Éireann díospóireacht -
Tuesday, 25 Nov 1997

Vol. 483 No. 3

Double Taxation Relief Orders: Motions.

Minister of State at the Department of Finance (Mr. Cullen)

I move the following motions:

That Dáil Éireann approves the following Order in draft:—

Double Taxation Relief (Taxes on Income and Capital Gains) (Republic of South Africa) Order, 1997.

A copy of which Order was laid before the House on 17 November, l997."

That Dáil Éireann approves the following Order in draft:—

Double Taxation Relief (Taxes on Income and Capital Gains) United States of America) Order, 1997.

A copy of which Order was laid before the House on 17 November, 1997."

The new convention between Ireland and the United States for the avoidance of double taxation of income and capital gains was signed in Dublin on 28 July 1997. It replaces an existing convention which was ratified in 1951 and is the oldest treaty both countries have. The new convention is comprehensive in scope and generally follows the OECD Model Convention.

The primary purpose of a double taxation convention is to eliminate the double taxation of income or gains which arise in one country and are paid to a resident of the other country. The convention achieves this by either giving one country, normally the country of residence of the taxpayer, the sole taxing right for items of income or gains or, where income or gains remain taxable in both countries, by providing that the country of residence will grant credit against its tax for tax paid in the source country on the same income or gains.

There are several important provisions in the new convention that were not included in the old one. First, the new convention covers Irish capital gains tax, which was introduced after the old convention came into force. That will avoid situations of double taxation arising in the taxation of capital gains.

The new convention also includes provisions for the settlement of disputes concerning its interpretation. This is an important remedy which allows taxpayers to request their Revenue authorities to take up grievances concerning the interpretation of the convention with the Revenue authorities of the other country.

There are also provisions in the new convention which preserve Irish taxing rights in relation to offshore oil and gas exploration. The new convention also exempts Irish recipients of US social security pensions from US withholding tax on such pensions. This will be a most welcome benefit, particularly for the many people of Irish descent who have returned from the US to Ireland for their retirement. It means such pensioners will no longer be subject to the 25.5 per cent US withholding tax currently imposed.

The new convention not only seeks to avoid double taxation but also to prevent fiscal evasion. There are enhanced provisions governing the exchange of information between the tax authorities of both countries. However, the most significant change is the inclusion of an extensive Limitation on Benefits Article which, in accordance with US tax policy, is included in all modern US tax conventions. Its purpose is to limit the persons who can avail of benefits under the convention to those that have a qualifying nexus with Ireland or the US. It therefore seeks to restrict the benefits available to certain foreign-owned entities established in either country.

While the limitation on benefits provisions in the new convention are similar in concept to those contained in other recent US treaties, there are some important differences which recognise Ireland's position as a small open economy heavily dependent on inward investment. Thus, ownership of companies established in Ireland by EU and NAFTA country residents is expressly recognised and is known as derivative benefits. Also, the benefits of the convention do not generally depend on income being taxed at normal rates. This meets a key Irish goal of protecting companies benefiting from our incentive regimes. The new convention is expected to have a generally positive impact on US companies investing in Ireland. It will also facilitate the continuation of investment into the US from Ireland for the majority of investors established in Ireland.

The US has for many years been Ireland's largest single source of inward investment. The investment comes from a wide range of sectors, including electronics, consumer products, pharmaceutical-health care, financial services, software and other internationally-traded services. There are more than 450 companies established by US investors in Ireland employing more than 65,000 people. US companies account for a quarter of the workforce employed in manufacturing activities. In 1996, US investment accounted for almost 70 per cent of new jobs created in IDA assisted companies. These statistics speak for themselves and underline the importance of US investment for Ireland. Ireland values the commitment that US companies have shown to Ireland and the Irish Government will do everything possible to assist and safeguard their investment.

The new convention will enter into force in both countries for the tax periods beginning next year. Where the provisions of the existing convention would have afforded greater relief from tax than this convention, they will continue to have effect until 1999. A longer transition period of three years is provided before the provisions of the Limitation on Benefits Article become fully operative.

The convention between Ireland and South Africa for the avoidance of double taxation of income and capital gains was signed in Pretoria on 7 October 1997. It is the first such convention between both countries. Once again, the new convention is comprehensive in scope and generally follows the OECD model convention. It covers Irish income tax, corporation tax and capital gains tax. Important features of the convention are that it provides for exemption from tax in the source country for payments of dividends, interest and royalties to residents of the other country. This will greatly encourage investment and trade between the two countries. There is also provision for exemption for lease payments in the source country, which will assist the Irish aircraft leasing sector.

Another important feature is the granting of tax sparing by Ireland to South Africa. South Africa is an emerging economy. To promote economic investment and development, the South African Government introduced tax incentives for manufacturing companies which are planned to last until the end of 2009.

The convention recognises these incentives by providing for a limited form of tax sparing, subject to a number of conditions. This means 75 per cent of dividend income paid by a South African company to an Irish direct investor, out of profits that have been relieved from tax in South Africa under the incentive provisions specified in the convention, will also be exempted from tax in Ireland. Because South Africa operates a territorial tax system, that is, it does not generally tax foreign source income, the tax sparing granted by Ireland is effectively reciprocated by South Africa. Thus, the benefits of Irish tax incentives are preserved for South African investors. The convention expressly includes trusts within the definition of persons covered by it. This will be of particular benefit to Irish collective investment undertakings that are constituted as unit trusts as it should remove doubts concerning their eligibility for treaty benefits.

The convention also preserves Irish taxing rights in relation to offshore oil and gas exploration.

Other important articles in the convention include the non-discrimination provisions, which protect nationals of each country from discriminatory tax provisions in the other, and the exchange of information provisions, which are necessary to counter fiscal evasion. The new convention will enter into force in both countries for the tax periods beginning next year.

The putting in place of modern tax conventions between Ireland, the United States and South Africa is an important contribution to the fiscal infrastructure that investors require in order to give certainty in relation to the taxation of their investments. As such, these conventions will facilitate the growth of trade and investment between Ireland and both countries.

Accordingly, I commend both of these important new tax conventions to the House and I formally move the resolutions for the passing by Dáil Éireann of the draft orders containing both conventions.

Mr. Noonan

I thank the Minister of State for going beyond the explanatory memorandum in explaining the effect of the double taxation conventions, particularly in respect of the United States.

The Minister of State is hard working and I would not be surprised to see him here next Wednesday reading the budget statement. We all aspire to permanency in politics so I suppose the Minister for Finance has become one of the Department's permanent staff and that is why he is not appearing in the House.

Mr. Cullen

The Deputy can be assured that the Minister is preparing an interesting budget.

Mr. Noonan

I compliment the Minister of State who appears here on all occasions. We rarely see the Minister but, no doubt, that will be corrected next week.

I welcome the double taxation treaty with the United States. The treaty was negotiated and approved by the rainbow Government, of which I was a member, and it is generally perceived in a favourable light by business people and the professions who will be advising those who benefit from its provisions.

The main new item in the treaty is the limitation of benefits or LOB clause. In essence, this clause stops Third World businesses using Ireland solely because we have better tax treaty arrangements with the United States of America than their own countries. It stops profits being laundered through Ireland solely for USA tax arbitrage reasons. All modern double taxation agreements with the USA have LOB articles or clauses. However, our negotiators at the Revenue Commissioners have succeeded in negotiating an article in our treaty which is more favourable than the generality. I compliment them on that.

The treaty should be ratified as a matter of urgency. I recall that in respect of previous inter-State treaties, particularly on extradition, even when there was no direct charge on the Exchequer, we were told we had to make sure such treaties were ratified. I am glad it is now the practice that interstate treaties such as this one concerning taxation, are debated in the House.

The debate is timely because of the Government's hesitancy in confirming the new 12.5 per cent corporate tax announced by the previous Government, of which I was a member, with the agreement of the European Commission. The Government has seriously bungled matters in respect of the 12.5 per cent tax rate. The fact that it is still bogged down with that issue in Brussels will be further magnified if it becomes an issue with the United States of America prior to the ratification of this treaty. The treaty should be ratified before whatever announcement is made on budget day.

The United States is the most important source of foreign direct investment in Ireland. US companies are vital to the increase in jobs in manufacturing industry that we have experienced in recent years. The US is also an important contributor to the financial services sector, even though the impact in financial services is less than that in manufacturing industry.

The Minister indicated that 450 manufacturing plants in Ireland are of US origin and 70 per cent of all total direct foreign investment is sourced in the United States. That shows the importance of clearly defined law on taxation in terms of money earned in Ireland to the corporate sector and to American businesses, in particular, which have located here and whose parent companies are in the United States.

Traffic is not all one way, however. It is a measure of our success as a modern economy that there is a growing number of Irish controlled businesses operating in the United States. This treaty is as important to those businesses as it is to American businesses operating here, although on a smaller scale. I am sure the scene has changed dramatically since the first treaty was negotiated and agreed in 1951. On that occasion, few Irish controlled businesses operated in the United States. However, in recent years it has become a significant outlet for Irish businesses which want to expand beyond the borders of our small economy.

It has been public knowledge for a number of years that the Irish US treaty was being renegotiated. The approval of the treaty by the Houses of the Oireachtas will give certainty not only to Irish and American businesses which have invested in both jurisdictions, but also to those contemplating further investment. Often when a law or treaty is being renegotiated, people stall on making decisions until they see what the outcome will be. It is important to remove any uncertainty which may have arisen about the details. Although the agreement was signed earlier this year, it is now going through its final stage of enactment in the Houses of the Oireachtas.

Although the original treaty with the United States was 46 years old, it served its purpose well. However, like everything else, it has become out-dated. I understand from the explanatory memorandum that it no longer corresponds to the OECD model conventions, but the new treaty does.

I welcome the ratification of this new convention and I support a number of its features. The limitation of benefits clause recognises Ireland as a small open economy which is more dependent than others on foreign direct investment. So-called LOB clauses are a feature of all double taxation agreements into which the United States has entered in recent years. However, they are not all identical. I compliment the negotiators who framed and got agreement on this article in the treaty because it is more favourable to Ireland than those in other agreements. I also welcome the relaxing of the tests necessary to avail of the exemption or amelioration of the 30 per cent US withholding tax on interest dividends and royalties. These are critical elements in the conduct of international business.

For the first time the US treaty also addresses the issue of capital gains arising in Ireland. This is desirable as the realisation of capital gains is an increasingly common feature of business activity. It is time to take this into account in the double taxation agreement. We are often criticised in this House for conducting business irrelevant to the citizens. I am sure if someone made a list of such business, double taxation agreements would be at the top as people believe they only relate to multinational companies, their shareholders and senior management teams which have invested abroad.

I am especially pleased with one very practical provision in this treaty which deals with one of the long-standing anomalies for personal taxpayers, that is, it exempts Irish citizens from the 25.5 per cent US withholding tax on US social security pensions. The removal of this double taxation will benefit many who retired to Ireland after working a lifetime in the USA. It has an added social impact, which is worthy of comment with regard to the relevance of this House in that the rights and concerns of the small man were taken into account by our negotiators, the Revenue Commissioners and the Government of the day, in agreeing this treaty. While there may not be a huge number of persons who have retired in Ireland from the USA with social security pensions, there is a significant number. Persons in every parish, who will be known by Deputies and Senators, will benefit from this. While it is important that it be included from a democratic point of view, it is also important from the point of view of the individual beneficiary. It is a good signal from the Revenue and the Department of Finance that the concerns of the less powerful in the economy are taken into account even in international negotiations.

As financial markets become more complex and there is free movement of funds between jurisdictions, it is essential that revenue authorities can exchange information. This convention contains provision for such exchanges and I hope it will be used in the interests of tax compliance.

I welcome this convention and the provisions being made in the treaty with the Republic of South Africa, the strongest emerging economy in Africa. I am delighted that we now have a treaty with that country and that Irish citizens who invest in the Republic of South Africa or vice versa may receive 75 per cent of the profits tax free without the fear of being taxed in the other jurisdiction.

Mr. McDowell

This is my first opportunity to contribute as Finance spokesperson for the Labour Party and I must confess that I would have preferred had it been on a subject less complex and esoteric. I hope the Minister will bear with me and respond to some of my questions because most of my contribution will be in the form of questions rather than comments.

I welcome the fact that Ireland now has a double taxation agreement with the Republic of South Africa. Business has bloomed in the five or six years since democracy returned to the South Africa and trade between our two countries has increased significantly.

Perhaps the Minister could let me have some figures in relation to trade with the Republic of South Africa and investment by Irish people there and vice versa. It seems that these provisions, at least in the first instance, are more likely to be of benefit to citizens or residents of the Republic of South Africa than to citizens or residents of the State. Is it not the case that there are more Irish people and Irish companies investing in the Republic of South Africa than there are South Africans investing in Ireland? That is my understanding, although I may be wrong.

Is the Minister of State satisfied that the fact that the Republic of South Africa does not tax income which is earned outside of that state will not work to Ireland's disadvantage in future years? I am aware, and I am sure others have heard suggestions too, of Irish citizens, of whom there are many living in the Republic of South Africa, using the relatively beneficial rates of taxation there to their benefit and our disadvantage.

I want to ask a few precise questions in relation to the United States of America, but I broadly welcome the updating after 46 years of the treaty with the US. The Minister set out cogently and persuasively in his speech the level of direct investment in Ireland by American companies. If we needed a reminder of our dependence on FDI, and particularly FDI which comes from the US, the figures which the Minister set out are very persuasive indeed. Can he give me a brief lesson as to the exact taxation position in relation to profits which are repatriated from Ireland by American multinationals to the US? Some years ago the US tax authorities were very anxious to ensure that those repatriated profits were taxed in the US. I join Deputy Noonan in welcoming the LOB clause that is included in the treaty with the US. I take the Minister's point that it is more beneficial to Ireland than similar clauses in treaties with other countries.

Articles 11 of the conventions, which deal with interest arising in the contracting state and beneficially owned by a resident of the other contracting state which may only be taxed in that other state. Does this provision exclude the Government from imposing DIRT on deposit accounts held here by residents of the Republic of South Africa or the US? I see no reason why Irish depositors should be subject to DIRT while foreign nationals living here should not. Will the Minister clarify the point?

Articles 20 of the conventions provide that students or business trainees attending recognised educational institutions in either state are exempt from tax on income provided for their maintenance and education. It is a welcome provision and one from which, in relation to Germany, I have benefited. There appears to be a discrepancy between the two conventions in that in the case of South Africa the exemption for tax on such maintenance income is not time limited, but in the case of the draft convention with the US the provision appears to extend for one year only. Will the Minister indicate why that is the case?

Articles 7 of the conventions deal with business profits and the deductions for expenses incurred for the purposes of permanent establishment including a reasonable allocation of executive and general administrative expenses. In determining these deductions the relevant authority in each country should pay particular attention to the savings which information technology can make to administrative costs within an organisation, particularly when that organisation must conduct business on an international level. The advent of e-mail, the Internet and other modes of information exchange must reduce substantially the costs incurred heretofore. We must encourage investment in information technology but it is also necessary for the tax authorities to bear in mind the reductions in administrative costs which such technology can achieve and to ensure this is reflected in calculating business profits.

I thank the Minister and I hope he will respond to the questions I raised. I welcome these conventions.

Minister of State at the Department of Finance (Mr. Cullen)

I thank the Deputies for their constructive contributions. I agree with Deputy Noonan on the importance of bringing matters such as these to the House. I congratulate Deputy McDowell on becoming Finance spokesman for his party. It is an interesting brief and given his vast experience and abilities I have no doubt he will master it as he has most others.

I agree with Deputy Noonan's points on the LOB provisions, which are significant from an Irish perspective. I join in congratulating the officials involved in the difficult negotiations. I have learned more about the negotiations through my discussions with them and extraordinary efforts were made. The way the convention was framed took account of the Irish situation and our relationship with the US. Credit is due to the officials in that regard because it is slightly different to the conventions with other countries. The provisions will be beneficial to us given the level of involvement we have with the US.

Deputy McDowell raised specific and complex issues and I will not have time to deal with all of them. I will, however, send him a note on the points he raised and if more clarification is required, I will consult him. South Africa is an emerging nation. There is obvious interest in South Africa from an Irish perspective and in creating the conditions for that relationship to flourish. I do not know the balance of trade between the two countries or what is happening but I will get those figures for the Deputy. We are trying to create investment opportunities for Irish companies and we have noted entities in Ireland who wish to go down that route. This convention creates a clarity and structure in which they may work that will benefit both South Africa and Ireland.

The Deputy raised a question on repatriated profits in relation to the US. Those profits are taxable in the normal way and always have been. Obviously, credit is given for taxation paid here. It is fairly straightforward and there is no mystery in this regard. I will send Deputy McDowell a note on the points he made and if anything else emerges, I will deal with it.

I echo what has been said about the importance of these conventions. It is important we continue to create conditions to ensure certainty in the future for our trading arrangements with various countries. Obviously, the US is an important factor and South Africa may become even more important than it is at present. It is sensible to have foresight in this regard and I congratulate the previous Government and Minister in moving these important matters on.

On numerous occasions I heard Deputy Noonan raise the question of a corporation tax and ask about the views in Brussels. I will not give an explanation on behalf of the Minister for Finance but I was with him at the ECOFIN meeting last week and I confirm what he said to the House. I ask Deputy Noonan, an experienced Member and, indeed, a former Minister for Finance, to take what the Minister said as fact. I was present at a number of meetings and, as the Minister said, on no occasion was there any discussion on a specific low rate of tax, whether 12.5 or 10 per cent. The question did not arise and the Minister confirmed this. What is at issue is the framing of and timeframe within which we reach this. I ask the Deputy to accept that in good faith as this involves a number of matters. It is wrong to suggest that it in itself is an issue because it is not and I do not expect it to become one.

Mr. Noonan

I will accept the Minister's explanation if he accepts that I was never Minister for Finance, although I should have been.

Mr. Cullen

I apologise. The Deputy's many portfolios elevate his status in the House.

Question put and agreed to.