The House will be aware that the latest Credit Union Act was brought into force in 1997. The Act consolidated all previous legislation regarding the registration and supervision of credit unions with provisions for the expansion of credit union services in the future. The Act will allow credit unions to provide within a proper regulatory framework, financial services currently provided by the main financial institutions.
Since I became Minister for Finance in the summer of 1997, the Irish League of Credit Unions has made a number of representations both to me and to my Department. In December 1997, on foot of a request from the ILCU, I met its representatives to discuss the taxation treatment of credit unions. Arising from the league's representations at the meeting in December 1997, in the subsequent Finance Bill, 1998, published on 12 February 1998, I provided for the following measures: the continuation of the corporation tax exemption as requested by the league; the application of DIRT to credit union deposits at the special savings account rate, as requested by the league; and a requirement for credit unions to report members' dividends to Revenue in the same way as interest was reportable up to then.
These proposals had substantially met the league's requests. However, these measures proved unacceptable to the league and to its individual members. Following discussions with the league in February 1998, I agreed to withdraw these proposals, except the corporation tax exemption. Furthermore, I agreed to exempt deposit interest from the existing reporting requirement.
The present tax treatment of credit unions is therefore as follows: the surplus income or profits of credit unions are exempt from corporation tax; dividends and interest on credit union shares or deposits are liable to tax at the member's or depositor's marginal income tax rate – at present this rate can be zero, 24% or 46%; and there is no notification by credit unions to Revenue of dividends or interest paid to their members. However, the individual credit union member must report the income to Revenue as has always been the position under income tax law.
I also agreed in February 1998 to establish a working group to examine the taxation of returns on members' savings. The terms of reference of the working group were to examine the taxation of returns on credit union savings bearing in mind the special and particular nature of the credit union movement, their contribution to society and the wider taxation issues involved.
The report of the group was presented to me in October 1998. Early last year I made the report publicly available. The group, which comprised officials from the Department of Enterprise, Trade and Employment, the Revenue Commissioners and the Department of Finance, representatives of the Irish League of Credit Unions, the Registrar of Friendly Societies and an independent chairman, failed to agree on a set of findings. However, the chairman recommended that a certain amount of tax free savings for credit union members be allowed. The chairman's proposals were as follows: the first £375 of credit union members dividend income to be exempt from tax; any excess of dividends more than £375 up to £750 to be subject to 20% tax; where dividends are more than £750 the entire dividend to be taxed at 20%; all interest on deposits to be taxed at the 20% DIRT rate; and no reporting of dividends or interest by credit unions to Revenue.
My Department and Revenue did not agree with this recommendation. The Department made it clear that a convincing case did not exist for exemption of savings returns from income tax and the role of the credit unions was amply recognised by their exemption from corporation tax.
I am currently considering this report. As some commentators have mentioned also, given all that we have seen and heard on DIRT and tax evasion, it does not seem prudent to contemplate a new form of accounts on which the interest is neither liable to tax nor reported to Revenue. We had problems with tax exempt multiple accounts in the past and it does not seem wise to invite such problems again. In saying this, I accept entirely the bona fides of the credit union movement, which has made it clear that this is not something which it would wish to encourage or with which it would wish to be associated. My Department also pointed out to the working group that there were EU rules on the granting of particular tax treatment to certain bodies and that these rules also applied to credit unions.
The House will be aware from media reports and also from replies that I have given to a written parliamentary question that the tax treatment of credit unions in Ireland is now being closely studied by the Competition Directorate of the European Commission. I understand the matter was referred to the Commission by organisations which are competitors of the credit unions and that the complaint alleges that the credit union movement has benefited from preferential tax treatment by virtue of its exemption from corporation tax and its exemption from DIRT. The complaint asserts that this treatment of credit unions in Irish taxation law is contrary to EU law. I understand the EU Commission is in the course of investigating this complaint. My Department has not been asked, thus far, by the Commission to provide observations on the subject matter of the complaint.
If the existing taxation regime respecting credit unions and their depositors has triggered a complaint to the Commission, obviously any legislative initiative at this stage has the potential to aggravate the situation. This would not be of any service to the credit unions.
I am also conscious of the external environment within which we must frame overall taxation arrangements. Deputies will have seen that in recent years the European Commission, using the legal basis given to it in the various treaties, has taken an increasingly interventionist line in taxation matters in member states. Ireland has had its fair share of cases before the Commission and the Commission has, in some instances, deemed that certain taxation arrangements in this jurisdiction amounted to unacceptable State aid. Whatever the credit union movement may think or say, we must comply with EU rules on this matter. There is nothing to be gained by ignoring this reality. Against this background, I consider that a meeting between the Irish League of Credit Unions and me at this stage would serve no real purpose.
