I move: "That the Bill be now read a Second Time."
I am glad to be able to introduce my third Finance Bill to the House since taking office. The Bill is one of the largest Finance Bills ever published and contains a series of important initiatives which reform the tax system in favour of the lower paid, cut personal taxes for all taxpayers, introduce significant new tax reliefs, set a new agenda for tax relieved pension provision and strengthen considerably the powers of the Revenue to combat tax evasion.
I believe in making radical change when such change is desirable – not by short steps but by pushing out the frontier and challenging the accepted approach. I pursued this strategy in moving to tax credits – a move which was uni versally welcomed. I am making the same structural changes in the pension area – changes which will be a challenge to the existing way of doing things and present new opportunities to providers of pension products. The changes, however, are in the interest of those who count, that is, the pensioner who has worked and saved to accumulate the pension fund.
The proposals I set out in some detail last Thursday, when the details were published, and which I will introduce on Committee Stage, are fair, reasonable, balanced and well thought out. I was struck by the trepidation of the pensions sector which, before the Bill was published, rushed uncharacteristically to comment on proposals it had not even seen. I was also struck by the representations I have received from, and on behalf of, the pension clients who feel strongly that the current system offers too little choice and flexibility and, accordingly, does not seem to operate sufficiently in the customer's interest. I will return to this issue at a later stage.
There are nearly 200 sections in the Bill. I do not intend to give a guided tour of each. Such a tour de force would take some considerable time. Much of the content of the Bill in volume terms is accounted for by a limited number of subjects – the dividend withholding tax, profit sharing schemes, stamp duty preconsolidation measures, rural renewal reliefs and Revenue powers, including measures in relation to offshore trusts, and I will concentrate on these. There are other provisions which occupy less space in the Bill but are, nonetheless, of significance and I will highlight them.
The first part of the Bill deals with income tax, corporation tax and capital gains tax. The first six sections set out the basic elements of the personal tax package announced in the budget. This package of nearly £600 million in a full year will cut the tax bill of every taxpayer, in particular the over 65s and those on lower pay. It removes 80,000 taxpayers from the tax net, 15,000 of whom are over 65.
It delivers on the promises made to reduce the tax burden and to improve the position of the less advantaged in the community. It does so by a radical equalising of the benefits of personal tax allowances by converting these into tax credits at the standard rate of income tax. I signalled in my first budget that such a move was on the cards but this prognosis seems to have gone unnoticed in the commentaries by pundits on my 1998 budget.
Other income tax changes include an extension of the tax allowance for the employment of a carer by wider family members. Employment of a carer will now also extend to the hire of a carer through an agency. Section 11 introduces a new tax relief in respect of funds raised by public subscription for persons who are totally and permanently incapacitated. This relief recognises both the needs of such persons and the desire of those who responded to the public appeal that the entire funds raised should be applied, without deduction of tax, for the relief of the distress of the person concerned. The House will welcome this initiative.
I also propose to increase substantially the amount of the basic tax exemption for non-statutory redundancy payments with effect from 1 December 1998. The basic exemption will increase from £6,000 plus £500 for each complete year of service, to £8,000 and £600 respectively. The increases reflect the change in the general level of wages and salaries since this relief was last amended in 1993.
Other changes in this part include the removal of BIK on child care facilities and travel passes provided by employers and a reduction in the BIK charge on preferential loans.
Part one of the Bill also makes a number of changes in tax administration by tightening up in section 16 the relevant contracts tax system, whereby tax is deducted at source in the case of certain subcontractors in the construction, meat processing and forestry industries. It is also proposed to level the playing field by requiring subcontractors from outside the State working here to produce tax clearance from their own tax authorities.
Sections 18, 19, 20 and 21 make a number of changes to tax law to facilitate the introduction on a phased basis of new Revenue computer systems for dealing with taxpayers, the implementation over time of a consolidated tax billing procedure, and to tailor the penalties for late filing of the end of year return by employers – the P35 – to the length of the actual delay in meeting the due date for receipt of the return by Revenue.
Section 17 increases substantially the annual amounts which may be claimed as a deduction for funding of retirement provision and the new pension arrangements which I announced last Thursday. The new limits range from 15 per cent of net relevant earnings to a maximum of 30 per cent, depending on the age of the contributor. The 30 per cent maximum also applies to persons in certain occupations and professions, irrespective of age, where there is a limited earnings span. The Bill lists a number of such occupations, relating to professional athletes in the main, but allows for this list to be extended by regulations to other specific occupations, if the Dáil approves. These limits will be subject to an earnings cap of £200,000 per annum.
These increases in limits set the scene for the more basic changes in pension provisions which I intend to introduce on Committee Stage and which I set out in some detail in the summary of Finance Bill measures which I published on 11 February. These new pension measures give effect to the principles I set out in my budget day speech as my guiding aims in reforming the rules in this area. These principles were that the individual will not be restricted to only one pension option on retirement, will have the option of retaining ownership of' the capital sum invested on retirement, and will have a greater role in the investment of accumulating funds during the contribution period.
The new rules seek to give greater choice in how persons plan to fund their retirement, greater flexibility in how they use their accumulated funds and a greater say in how their pension scheme is run. At the same time, I will set down prudent requirements to preserve pension assets via the approved minimum retirement fund. I am also seeking to preserve the taxation principle whereby pension contributions and the investment fund, as it accumulates, are tax exempt while the draw-down or realisation of the fund is subject to tax. The system is usually referred to as exempt, exempt, taxed or EET for short.
I will nonetheless take account of particularly sensitive areas in this tax treatment, namely, the position of the surviving spouse and minor children. I will also remove the rule which forces pensioners who wish to access their lump sums to take out an annuity at the same time. They will now be able to choose between the annuity and the new pension option for which I am making provision.
Some will call these proposals radical. I call them sensible and pro-consumer. I have had a considerable input in forming my views from Members of this House, pension commentators, the pension industry, the experts in the Revenue Commissioners and the advisers in my own Department. In the final analysis, these proposals have my stamp on them and the approval of the Government. I look forward to the views of Members opposite on these proposals and to their constructive examination on Committee Stage.
Section 22 inserts 13 new sections into the Taxes Consolidation Act, 1997, to implement the budget day announcement of the new withholding tax at the standard rate of 24 per cent in respect of dividends paid and other profit distributions made from 6 April 1999 by companies resident in the State. The Explanatory Memorandum sets out in some detail how the new tax will operate. The obligation to withhold tax is placed on the company paying the dividend or on an authorised withholding agent acting for the company.
Certain exemptions are provided for in the case of dividends paid to Irish resident companies, charities, pension funds, certain persons resident in EU or tax treaty countries and to publicly quoted companies in such territories. Entitlement to these exemptions will have to be supported by particular documentary evidence from the recipients of the dividends.
The rules for the application of the tax are thorough and detailed. They have been drawn up in consultation with company registrars and intermediaries who will have to apply the tax. The rules seek to ensure the relevant tax will be deducted and returned to Revenue while at the same time applying a system that takes account of the commercial realities and practical issues involved in the payment of dividends and distri butions by, or on behalf of, companies in the State.
The Bill provides that, in the case of Irish resident shareholders, dividend withholding tax deducted in a year of assessment can be set against the shareholder's tax liability for that year – the shareholder will be taxed on the gross dividend at his or her marginal rate and will get a credit for the tax withheld. Where the tax withheld exceeds that liability, the excess can be repaid to the taxpayer. A person who is not liable to tax and who has been charged withholding tax will thus be entitled to a full refund of the tax withheld.
Sections 36 to 40 extend the termination dates for a number of tax relief schemes aimed at developing particular areas or locations in the State. These are the urban renewal scheme, the Temple Bar area scheme, the seaside resorts scheme and islands reliefs. In particular, following agreement with the EU Commission, section 36 will extend capital allowances in the Customs House Docks area from the scheduled termination date of 24 January 1999 up to 31 December 1999 and, in certain cases, where work on a project is well advanced at that latter date, the extension will run until 30 June 2000. This will allow the remaining development of the area, and the 12 acre extension to the area, to be completed.
There has been much comment on our recent difficulties with the EU Commission in this matter. While the Commission has opened a procedure under the rules for State aids to investigate the applications of double rent relief and rates reliefs since 1993 in the area concerned, I believe we can defend this successfully and get a favourable outcome. These matters have to be negotiated, in the same way as the approval for the extension of the capital allowances was secured.
My Department has been active in pursuing these issues as constructively as possible with the Commission. We have held detailed discussions with the interested developers here to keep them in the picture. Officials are in Brussels today to progress this case and to continue discussions on the commercial tax reliefs under the new urban and rural renewal schemes yet to be brought into force.
Let us be clear on one matter. Approval for State aids must be sought and secured from the Commission under Article 92 of the Treaty. These rules apply in the same manner to all member states. Ireland is not being singled out. The Commission has complete discretion in the granting or refusal of State aid approval. It is not an EU Council of Ministers matter.
The Commission is becoming increasingly vigilant and pro-active where State aids take the form of tax relief. It produced new guidelines on State aids in this regard which it published last November setting out its approach and policy in regard to special tax reliefs and reductions. It has indicated that it will monitor, from a State aids point of view, those tax relief measures notified by all the member states under the EU code of conduct on harmful tax competition. However, I should stress that in spite of our proposed single rate of corporation tax and the phasing out of our 10 per cent regime for manufacturing, the IFSC and Shannon have State aid clearance under the agreement between the Commission and the Irish Government last July.
The Commission has not regarded tax reliefs for residential development as requiring State aid approval and, accordingly, I brought in these reliefs in the case of rural renewal last June and the introduction of the corresponding residential reliefs in the case of the new urban renewal scheme is under active consideration.
In relation to the rural renewal scheme, I am proposing a number of changes to the scheme in section 41 to enhance the residential tax reliefs in particular. The main changes involve the granting of a relief in respect of expenditure, incurred by an individual in the period 6 April 1999 to 31 December 2001, on the construction or refurbishment of owner-occupied residential accommodation in a qualifying rural area.
The relief consists of an annual deduction from total income for tax purposes of an amount equal to 5 per cent in the case of construction expenditure and, in the case of refurbishment expenditure, 10 per cent of the expenditure incurred. The individual incurring the expenditure must be the first owner and occupier of the dwelling after the expenditure has been incurred. The relief available under the section may be claimed in each of the first ten years of the life of the dwelling following construction or refurbishment provided the dwelling is the sole or main residence of the individual.
In addition, I propose changes to the section 23 relief for rented residential accommodation in the area. At present, to qualify for the section 23 type allowances available under the rural renewal scheme, the lease of the property in question must be for a minimum period of one year. This minimum period is now being reduced to three months. Again, to qualify for these allowances, the premises were restricted to a maximum floor area of 125 square metres. This limit is now being increased to 140 square metres for newly constructed premises while, in the case of converted and refurbished property, the maximum increases to 150 square metres. I view these extensions as a major fillip to the scheme and a clear incentive to investors to invest in the development of the areas in Leitrim, Longford, Cavan, Sligo and Roscommon covered by the scheme.
Sections 42, 43 and 44 provide for the new capital allowances for expenditure on private convalescent facilities and on employer based child care facilities and the granting of section 23 relief for third level student accommodation. I accept these new tax reliefs may run counter to the general policy aim of reducing the range of reliefs and widening the tax base. Nonetheless, if there are clear and desirable social objectives to be secured, as all will agree is the case with health, child care and housing, we should not rule out the use of tax reliefs in a targeted and prudent manner to achieve those aims.
Section 45 is a similar type of relief under section 843 of the Taxes Consolidation Act, 1997, to encourage private investment in the provision of third level buildings by providing capital allowances to investors who put up 50 per cent of the funds. This relief was introduced in 1997. I am proposing two changes in this section. First, the termination date for the scheme of relief is being extended from 1 July 2000 to 31 December 2002. Second, the scheme will apply to projects funded by the research and development fund announced by the Minister for Education and Science last November and, to fit into the way the fund will operate, the section enables the Minister for Finance and the Minister for Education and Science to delegate the approval mechanism for such projects qualifying for section 843 relief to the Higher Education Authority.
Section 52 deals with a number of tax issues arising under the special Government bond exchange programme being undertaken by the NTMA. This will involve the exchange of certain high coupon Government bonds currently trading at a substantial premium for new bonds which reflect the current lower levels of interest rates.
The Bill contains provisions analogous to rollover relief to allow any tax change arising on the bond exchange to be computed at the current rates of tax but defer payment until the new bonds are either redeemed or sold. The interest on the new bonds will be taxed in the normal way. The aim of this tax treatment is to ensure that the net present value of the tax flow arising to the Exchequer from the new bonds is essentially the same as from the existing ones, thus preserving tax neutrality in the exchange programme.
Section 54 extends the tax relief on investment in films for a further year to 5 April 2000. The film sector is reading all sorts of unwarranted negative signals into this limited extension claiming that it puts the future continuation of the relief into question, but this is not the case. As I made clear in the summary of Finance Bill measures published on 11 February, there are a number of reports on the operation of the film relief which are to be published shortly and which the Government wishes to consider more fully. One such major report, the INDECON Report, which was received in November, supports the continuation of the relief subject to a number of modifications to help better focus and target Exchequer resources in this area. I hope this clarification calms things down in the film sector.
Chapter 5, that is sections 61 and 62, provides for the introduction of a new savings-related employee share option scheme and for changes to existing tax reliefs on employee share ownership trusts. I remind the House that in my Budget Statement I made it clear that there had been a number of calls for new profit sharing initiatives and that I was not opposed to reasonable proposals in this area.
I made the point that, if profit-related pay makes economic sense to employers and employees from a profit and pay point of view, it should need no tax relief from the State to encourage it to be put into practice. It should also be recognised by all that there are tax planning opportunities in schemes of tax-relieved profit-related pay.
My approach in this area is based on a number of criteria. First, any profit sharing schemes should be open to all employees on similar terms. Second, they should provide an opportunity for employees to acquire an equity stake in their firm. There should be a medium to longer-term aspect to profit sharing schemes in the form of the delivery of benefits in the future for efficiency improvements undertaken now.
Section 61 provides for a new save as you earn, or SAYE, scheme, which is modelled on a similar scheme in the UK. The SAYE scheme will provide for employees to save for a certain period to acquire shares in their employer company. The shares are acquired under options which may be granted by the employer at a discount to the market price at the start of the savings period. Any gain on such shares when the option is exercised will be free of income tax but will be subject to capital gains tax if the shares are sold.
The Bill provides that the SAYE scheme must be available to all employees on similar terms and that any minimum service requirement for qualification may not exceed three years. This is currently five years in other profit sharing schemes, but I plan to reduce this to three years for all schemes on Committee Stage. Employees may save for a period of three, five or seven years, the interest or bonus on such saving will be tax free, a wide range of financial institutions may qualify as savings media for SAYE and the discount on the price of shares at the time the option is granted may be up to 25 per cent. These terms and conditions were decided after consultation with IBEC and ICTU.
Section 62 contains a number of amendments to the legislation in respect of both employee share ownership trusts, ESOTs and approved profit sharing schemes. Specifically the Bill will allow those employees who leave a company in the first five years of the ESOT to benefit from the allocation of shares in the company to the trust for a period of up to 15 years after the ESOT is established. The normal benefit period for ex-employees in ESOTs and approved profit sharing schemes is 18 months after leaving.
An ESOT will operate usually by borrowing funds to acquire shares in a company and releasing these to employees after several years when the debt to the lenders is run off. To acknowledge this structure section 62 allows employees to take up to £30,000 in shares tax free in year ten, or a later year. This ties in with the current Telecom ESOT and its likely timetable for distribution of shares in the ESOT as security for borrowings. In this situation the £30,000 limit will replace, on a once-off basis, the normal annual £10,000 limit.
The Bill will also provide an exemption to CGT for the trustees of the ESOT on the proceeds of disposal of shares to the extent that such proceeds are used to repay borrowings of the trustees taken out to acquire shares in the company concerned.
Section 63 provides 100 per cent capital allowances for the establishment of park and ride facilities in the larger urban areas to help alleviate traffic congestion. The principal change in this provision since it was proposed in the budget is the extension of the allowances to commercial and residential development associated with the park and ride facility subject to the residential element of any project not exceeding 25 per cent of total allowable expenditure and the residential and commercial elements combined not exceeding 50 per cent of that expenditure. It has been put to me that the park and ride facility on its own would not be attractive to investors without this associated physical development. The park and ride scheme will last for three years.
Sections 64 to 67 give legislative effect to the reduction in the standard rate of corporation tax on trading income from 32 per cent in 1998 to 12.5 per cent in 2003 and to the provisions of the agreement reached between the Government and the European Commission last July on the phasing out of the 10 per cent rate of corporation tax for manufacturing and for certified activities in the IFSC and in the Shannon Airport Zone.
Section 66 identifies income to which a 25 per cent rate of corporation tax will apply from 1 January 2000. These legislative provisions will copperfasten the corporation tax regime in this State. This new regime conforms to EU state aid rules and with the EU code of conduct on harmful tax competition.
Sections 75 and 76 deal with the problem of Irish registered non-resident companies. The use of such companies for questionable purposes by persons with no connection with this State was debated at great length and in some detail this time last year. The Government undertook to come up with a comprehensive package of company law and tax measures to get rid of the undesirable exploitation of such companies, while at the same time not ruling out the legitimate use of a non-resident structure for acceptable business purposes.
The measures in this Bill will be complemented by action to be taken by the Minister of State with responsibility for science, technology and commerce under company law in a companies Bill to be published shortly.
The company law measures will provide that as a precondition of incorporation, every new company must show that it intends to carry on an activity in the State before it will be registered; every company will be required on incorporation to have either an Irish resident director or to provide a bond to the value of £20,000 as surety in the event of the company failing to comply with company law and tax requirements; the number of directorships that any one person can hold will be limited to 25, subject to certain exemptions, to curb the use of nominee directors as a means of disguising beneficial ownership or control; and more effective powers will be available to strike off companies where they fail to make the statutory annual return to the Companies Registration Office or to register with the Revenue Commissioners for tax purposes.
On the tax side, section 75 will make registration in the State equate with tax residence for all companies. This will apply to new companies incorporated on or after the date of publication of the Bill and for existing companies from 1 October 1999.
This will not be the case where the company, or a related company, is carrying on a trade in the State and either the company is ultimately controlled by residents of an EU member state or a tax treaty country, or the company or the related company is quoted on a recognised stock exchange. In such cases, tax residence will continue to be based on where the company is managed and controlled.
Section 76 provides that a company which is incorporated but not tax resident in the State will be required to identify the territory in which it is tax resident, to say whether the company or a related company is trading in this State and to identify the ultimate beneficial owners of the company where the company is claiming non-residence because of treaty provisions.
The Bill will also enable the Revenue Commissioners to give the Registrar of Companies details of those companies which fail to comply with the new Revenue information requirements to enable such companies to be struck off the company register, if appropriate. I intend to introduce further provisions on Committee Stage which will complement the provisions to be introduced under the Companies Amendment Bill on the requirement to appoint an Irish resident director or provide a bond to the value of £20,000. The Committee Stage amendment will provide that, where a company fails to pay penalties for failure to meet certain tax and company law compliance obligations, these penalties may be recovered from an Irish resident director of the company. Where a company does not have an Irish resident company director, any such penalties will be recoverable from the £20,000 bond already referred to.
This is an extensive, comprehensive and focused set of measures to deal with the malpractices in this area and to allow Revenue identify and deal effectively with cases of abuse. It is a far better solution than that attempted in the Finance Act, 1995.
Sections 80 to 83 introduce new provisions dealing with offshore trusts and companies. These provisions will tighten up the legislation in place since 1974 to ensure that gains made by such trusts and companies are effectively taxed in the hands of taxpayers who are domiciled and resident or ordinarily resident in the State. The law in this area is in need of some up-dating.
Irish tax law is similar to the corresponding UK legislation but has not kept up with the changes and adjustments that have been made in that jurisdiction. There is some evidence that the use of such trusts is growing as a means of avoiding Irish tax and the present deficiencies in the Irish legislation compared to the UK are being taken advantage of and advertised by tax advisers.
The Bill tackles the main avoidance issue by imposing an exit charge under CGT on trusts moving offshore, applying more stringent provisions for attributing gains to resident beneficiaries, limiting exemptions from tax for beneficiaries disposing of an interest in a trust, and requiring more information to be returned to Revenue in relation to offshore trusts. I am happy these changes will close a potential avenue for tax avoidance which would have become increasingly attractive as personal wealth in Ireland continues to grow given our rapid economic expansion in recent years.
Under the customs and excise provisions in Part II, sections 84 to 99 consolidate and modernise the excise legislation relating to mineral oils, namely, petrol, diesel and other heating and fuel oils. This oil legislation has been amended and supplemented on many occasions since the original 1930s legislation to the extent that it has become very fragmented and difficult to follow. The various sections deal with the rates of excise, the charging of excise, reliefs and abatements, excise licensing requirements, control procedures, prosecutions and offences.
The excise duty and VRT changes are implemented in sections 100 to 106, as announced in the budget. In the case of the VRT changes contained in section 105, it is interesting to note that despite the increase in rates on cars over 1400 ccs from 1 January, the level of new car registrations in January 1999 was 21 per cent up on the same month in 1998. On the cut in betting tax, section 106 provides that the new rate of 5 per cent will come into effect by order made by the Minister. In the budget I linked the implementation of this cut to the agreement by the trade of satisfactory alternative arrangements to replace the on-course levy which funds the Irish Horseracing Authority and Bord na gCon. Discussions are at an advanced stage on proposals to put in place these new arrangements and I will announce these shortly.
The VAT changes in this year's Bill are limited in extent and mainly technical in nature, apart from the increase in the farmers' flat rate of VAT from 3.6 per cent to 4 per cent from 1 March 1999, and the associated similar increase in the VAT livestock rate announced in the budget. The VAT changes deal in the main with the removal of a double VAT charge on certain HP transactions and sales of secondhand agricultural machinery, the tightening up of certain VAT charging and control provisions and implementation of an EU directive on the VAT treatment of gold held for investment purposes.
A considerable part of the Bill, namely, sections 126 to 180, deals with stamp duty changes. This is an area of taxation which normally attracts limited attention. The present stamp duty code goes back to 1891. Stamp duties were first introduced to the UK by William of Orange who brought the idea from Holland where they had proved to be a very effective source of revenue. The application of stamp duties in the 1891 Act was seen as a radical and progressive form of taxation requiring those who transferred property by deed to make a substantial contribution to the Exchequer. This was a source of irritation to the better off at that time. I recognise the contribution William of Orange has made to the Exchequer in recent years, something which is appropriate given that he is often referred to in a less than complimentary light.