I move amendment No. 229.
In page 137, subsection (1), line 21, to delete "the passing of this Act" and substitute "1st January, 1994".
This amendment seeks an operational date. What are the Minister's views on this matter?
SECTION 138.
The enactment seeks to backdate to January the clearance certificate requirements which section 138 proposes for the registration of title based on possession. The clearance certificate requirement, being for the protection of the capital acquisition tax yield, should operate from the earliest possible date. It is not possible to have a retrospectively operating clearance certificate requirement since on the passing of the Act the effect of such retrospection would be to invalidate registrations that have already taken place. During the lunch break I was dealing with this section, as the Land Registry had some difficulty in regard to it. I am considering introducing an amendment on Report Stage to section 138 of the Bill, as initiated, which deals with the requirement to provide a revenue clearance certificate for registrations of title to land based on long possession. The amendment I am considering is in response to suggestions made by the Land Registry as regards the commencement date for new requirements. The Land Registry has a huge backlog. If the commencement date was retrospective it would create long delays and it is not practicable.
Will the Minister's amendment propose the passing of the Act for 1 July or the appropriate date?
It is not possible to include the amendment I had sought. The Land Registry has to deal with approximately 2,000 cases.
If on Report Stage the Minister tables an amendment which moves in a direction opposite to that which I propose, he should specify a date. The date will be put on the never-never if it is dealt with by order.
Deputy Yates wants a retrospective date?
Yes.
If a retrospective date is given, the large number of cases on hand would have to be processed and tax certificates would have to be obtained for them. I will specify a date, but the people awaiting the processing of their applications may not have been aware of the position.
Amendment, by leave, withdrawn.
Question proposed: "That section 138 stand part of the Bill."
The section is provided to ensure people do not avoid making wills or destroy those already made in order to succeed to land by the process of law and thereby avoid liability to tax. How serious is that problem and is it worthwhile including a provision to deal with it? This provision will treble the work of the Land Registry, which already has a large backlog.
I am advised this is a growing problem. The provision is needed because one can avoid paying probate tax or capital acquisitions tax if one waits 12 years and registers a squatter's title rather than taking out probate. Twelve years is not a long time when dealing with this problem. The indications are that since the introduction of the probate tax there is a growing trend to avoid tax. The inheritance of a farm can be registered by the beneficiary as a squatter after 12 years without the Revenue having had knowledge of it. If it does not know about such inheritances it cannot collect capital acquisitions tax.
Would it not be preferable for the Registrar of Titles to be required to notify the Revenue of such matters?
I understand that is all that will happen.
One cannot be registered as a full owner unless one produces a certificate. It may be easier to require the Registrar of Titles to notify the Revenue Commissioners.
I am advised the involvement of the Revenue will only result in a two day delay and then the title will be registered presumably in the normal way.
I do not understand that. If I were to register full ownership to land on which I have been a squatter for 12 years, would I be asked if that land had been left to me by my grandmother or how I acquired a squatter's title?
One would have to complete a simple application form. Many applications for squatter's title to the Land Registry are for small parcels of land and the Revenue are not particularly interested in those. The Revenue has advised me that most applications for clearance can be dealt within a period of a few days and it will not delay matters.
If my grandmother bequeathed me in her will 300 acres of registered land in Meath or wherever, and if instead of paying capital acquisitions tax and others I waited for 12 years, given this provision in the legislation what is to prevent me to putting the will through the shredder and to declare I have been in possession of the property? How will liability to tax be proved based on the fact that somebody has been on the land for 12 years?
The tax charge is an automatic charge on the property. You will not get clearance until you prove you have paid the liability. The Deputy's concern is how one would know that the land was a gift.
Question put and agreed to.
Sections 139 and 140 agreed to.
NEW SECTION.
Amendments Nos. 230 to 239, inclusive, form a composite proposal and it is proposed that they be taken together, by agreement.
I move amendment No. 230:
In page 138, before section 141, but in Part VII, to insert the following new section:
"CHAPTER I
Provisions Relating to Residence of Individuals
141.—In this Part—
‘the Act' means—
(a) the Income Tax Acts,
(b) the Corporation Tax Acts,
(c) the Capital Gains Tax Acts, and
(d) the Capital Acquisitions Tax Act, 1976, and the enactments amending or extending that Act,
and any instrument made thereunder;
‘authorised officer' means an officer of the Revenue Commissioners authorised by them in writing for the purposes of this Chapter;
‘present in the State', in relation to an individual, means the personal presence of the individual in the State;
‘tax' means any tax payable in accordance with any provision of the Acts.".
These amendments contain new provisions relating to the residence of individuals in the State for tax purposes. The amendments are in the form of a new Chapter — Chapter I of Part VII to the Bill. Chapter I of Part VII sets out provisions relating to the residence of individuals. For taxation purposes the general rule, both in this country and elsewhere, is that residents of a State are subject to taxation on income arising in the State as well as foreign source income, whereas non-residents are chargeable only on income arising in the State. Rules of residence — and ordinary residence — are, therefore, important in determining the scope of the charge to tax. They establish the extent to which Irish taxation can apply to the income and gains of individuals.
Until now Irish residence rules have been based on long-standing case law — in some cases extending back to the 19th century — and ongoing administrative practice. The purpose of the Chapter is to simplify, as far as possible, existing rules of residence and to place them on a statutory footing for the first time. Some of the existing rules are now inappropriate in the light of modern conditions, including international labour mobility, and certain modifications are, accordingly, being provided for in the Chapter as part of this statutory codification. Certain changes in the associated taxation arrangements are also proposed so as to achieve a balanced package of measures.
Deputies will recall that on Second Stage last year I indicated that the whole area of residence needed examination with a view to the Government's consideration of appropriate legislative amendments for the 1994 Finance Bill. The package thus represents the Government's response to over a year's deliberation by officials of the Revenue Commissioners and of my Department on this complex issue. These deliberations took account of submissions made by the Institute of Taxation among others. I am grateful for the amount of work undertaken by the institute in this complex area; almost its total submission for 1994 was on this issue. These people devoted a considerable amount of their spare time working on this issue, thereby greatly helping me and the work of this committee.
At present there are five separate tests of residence. These include length of time spent in the State in a tax year, whether a person habitually visits the State and whether a person has a place of abode in the State. The habitual visits test involves looking back and taking account of the duration of visits over a period of four preceding years. The place of abode test is quite severe, having the effect that persons with holiday homes in the State and making short visits here could be resident for tax purposes. Because of its severity, it was statutorily curtailed in 1987 and suppressed as a test in the case of Irish persons employed abroad.
In future there will only be two residence tests. These will be based solely on time spent in the state with the "look back" only extending as far as the previous year. The relaxations in the rules of residence are, however, balanced by the extended use envisaged for the criterion of "ordinary residence" for taxation purposes.
The term "ordinary residence" as distinct from "residence" relates to a person's normal pattern of life and denotes residence in a place with some degree of continuity. In this regard a person could be out of Ireland for a full tax year and thus be considered non-resident in that tax year, but still be considered ordinarily resident if the absence is temporary.
Ordinary residence is a key concept for capital gains tax purposes. An individual who is resident or ordinarily resident in the State is liable for capital gains tax on disposals of all assets no matter where they are situated. Under the present administrative rules a person acquires ordinary residence after being resident in the State for three consecutive tax years. Ordinary residence is broken if a person either clearly moves permanent residence from the State or has been non-resident in the State for three consecutive years. These rules are now being put on a statutory footing with the exception of the breaking of ordinary residence by means of moving permanent residence. This is being dispensed with. In addition, the concept of ordinary residence will now be used as the sole determinant for the purpose of taxing foreign investment income of persons who have ceased to be resident in the State.
A new relief is being introduced for those working abroad for more than three months in a tax year. The relief is by way of a deduction from annual income based pro rata on the length of time spent abroad. Certain improvements are also being made in the personal allowance entitlement of non-residents from other EU member states. An appeal provision is also included.
The provisions contained in this Chapter are long overdue. They will have the effect of putting in place a more transparent and equitable set of rules with more certainty and less complexity for the taxpayer and the administration. They represent a balanced package of measures, with some easing of the basic residence tests counteracted in a number of areas with a tightening of tax measures to close off exploitation possibilities. The overall result is a modern set of residence and associated taxation rules appropriate to the circumstances of today.
I reiterate my thanks to the officials of Revenue, my own officials and the Institute of Taxation who worked on this matter for the past year. An administrative complex matter is being put on the Statute Book for the first time and will be transparent compared with the mammoth confusion that existed for all categories of people, whether residents in the State or outside it, working outside the State, partially working outside the State or on contract outside the State.
In recent days I had much contact with the staff in FAS, International Services, Telecom Éireann, ESB and other agencies who are concerned about matters that would affect them when going abroad on contracts of short duration. I hope we have dealt with all the points in this regard. I will consider other points over the weekend.
We had the benefit of a lengthy session with the Minister's officials on Tuesday afternoon set the background to this matter and, having listened to them, I was somewhat reassured. We must get a balance in this area. It is reasonable that Irish people who have left the country and have established non-residence should spend more time in the country. The country would benefit by these people coming home and having a greater interest in the Irish economy. Conversely, I would not like to see a position whereby the easing of eligibility for non-residency status would encourage wealthy people, people who have made a lot of money in Ireland, to move abroad. In other words, it will become so easy to become a non-resident that more will fly the nest. We have to strike a balance so that more money will be spent in Ireland by tax exiles rather than encouraging more to leave.
On first reading of the Bill it strikes me that the Minister has replaced a five rule system with a two rule system. Under the old rule if one broke any one of the following three, one could not get non-residency status. If one spent more than 183 days in the country, if one spent more than an average of 92 days over four years previous to the current year, or if one had a place of abode, one could not get non-residency status. Nowhere in the Bill is there a mention of the place of abode. How is it abolished if the Minister has not done anything about it? Perhaps the Minister would clarify that point.
I am concerned that people might seek to avail of the old rules relating to a clean break; one could make huge profits and pay no tax by staying out of the country for a year and a day. I welcome the Minister's clamping down on that. However, is it possible that if one were to leave before 5 April one could avail of the old rules to make a clean break and of the new rules to come back into the country? I am told that is not the case, that one must stay out for three years? Perhaps the Minister would clarify that, because I am not sure about it.
I am somewhat concerned about the application of Part III (Schedule C) . It has been argued that this has been more rigorous than anything we have had heretofore. People coming home for, say, 40 days, 180 days or 90 days do not take those days consecutively. They might come back for a meeting or to take in a particular event. If someone came home at 11 p.m. and left the country again at 6 a.m. the next morning that would count as two days, since part of a day constitutes a whole day. I do not think that is the intention of the legislation. That is worded in such a way as to be unfair. People have said that they would much prefer the old rules than have that clause in the legislation.
I am concerned about the countries we have double taxation agreements with. It seems we have double taxation agreements with 24 countries and they include countries that the ordinary man in the street would consider to be tax havens. I refer to Switzerland and Cyprus. If someone wants to go and live in the rest of Europe, in the modern era of the mobility of capital, labour and goods, we must look at that differently. Perhaps the Minister would let us know what is the procedure for reviewing double taxation agreements with other countries in the future. If they are trying to develop a niche by attracting overseas people, we could lose them from this country and they would get the benefit.
I think it is the case, and I am not alleging anything, that if someone makes money in Ireland they should pay Irish tax whether they live at home or abroad. The full rigours of Irish tax law should apply to Irish gains and there should be no escape from that fundamental principle. If someone lives in the Bahamas, in the Isle of Man, in the most established tax haven, Irish gains should be subject to Irish tax law. I think that is still the position, but I would like it set in concrete, as it were, so that we can be guaranteed that the only loss will be that of the Swiss taxpayer, because we will be giving credits for Irish tax paid and they will be foregoing the tax and not us. There are two aspects to a tax exile, his worldwide income and his Irish income. His worldwide income will be applicable to whatever country he now resides in, and there are ways of avoiding paying Irish tax on it. However, in regard to Irish income generated, be it on capital gains or on corporation profits, the full Irish tax should be paid and that fundamental principle should not be undermined in any way. My understanding is that if someone pays £4 million in capital gains tax he will get a tax credit against that to whatever country he is domiciled in. The loss then is to the revenue commissioners of the country the taxpayer is now domiciled in and not to the Irish taxpayer. We would, therefore, get the best of both worlds and there would be no loss to us.
In regard to the definition of part of a day, I may put down an amendment for Report Stage. As it is phrased, it could be very draconian. It could be much worse than anything we have had if it is to count as two days in the case where a person comes in at night and leaves early the next day. There is a later section which deals with the night which should be dealt with. I defer to the wisdom of the authorities here, but that is my only concern on that side.
Is Deputy Yates saying that the section, as drafted, worsens the position?
Yes. My final point relates to my difficulty with the bringing in of major policy decisions on Committee Stage. I asked last week in the Dáil that the Minister would not do this on Report Stage, which would have been worse. The Minister did kindly fax us these proposals. I am aware that there was a request for a White Paper and separate legislation. I do not mind amendments or adjustments in the light of new information. However, this is a whole new chapter which is being introduced. Given the resources we, as Opposition spokespersons, have, an effort should be made in future to put such things in at the earliest possible stage of the publication of the Bill.
We did everything we could to finalise this matter. It was based on work done by the Revenue Commissioners, by the Department of Finance and by the Institute of Taxation. Because there was no previous legislation and this was based on case law, the sheer amount of time it took to bring it forward and get it through Government meant I was a few days late in publishing the Bill. A few years ago the principle of self assessment was introduced by way of amendment and that is probably one of the biggest things we ever did. I accept the Deputy's point but there are problems when so many people want to contribute on so many issues. I do apologise for the delay.
I do not wish to labour it, but I wanted to begin with that point. To be perfectly truthful I, unlike my colleagues, did not know about this until the Minister kindly informed me of it. I gather there was some reference to it in the newspapers which I did not pick up. In the nature of things, I think one could be forgiven for being suspicious about getting a major item like this on a holiday weekend by way of a last minute amendment. The more serious aspect is that one does not get an opportunity to take any advice on it. It is a fairly technical and arcane area for most taxpayers, but it is highly relevant to everything we have been discussing here all week. I would like to have had the opportunity to take some advice on this.
I acknowledge the helpfulness of the Minister's officials, to which Deputy Yates referred but they were scrupulous to do no more than explain the meaning of the amendment. My natural instinct leads me to believe there might be a little more involved than merely the officials explaining how this will operate for the future and its implications. The Minister made various references to ESB employees working abroad, FÁS employees, and so on and one would like to have had time to assess that; but we have not had sufficient time. I suspect this might generate much comment after it has been enacted and, given the resources available to us, to expect us to respond to it is unfair.
I do not wish to digress from the amendment but in regard to section 145, I inquired at the time of the extension of the amnesty whether there were certain legal or constitutional cases about it. The Minister now has a section in the Bill retrospectively legitimising the extension of the amnesty from 30 November to 31 December and the section states: "This section shall be deemed to have come into operation on the 14th day of July, 1993". I have never had a satisfactory explanation — and I will not rehearse the arguments on the amnesty — as to why the amnesty was extended. I have my suspicions but I do not know the real reason. We then found we had to retrospectively legislate for it.
I totally agree with the principle enunciated by Deputy Yates that if someone is the beneficiary of wealth in this jurisdiction, they ought to be required to pay tax on it in this jurisdiction. That should be a cardinal principle of taxation. Perhaps I misunderstood them but I was not assured by the officials that that is the position. The officials took us through five criteria for residence, but the two criteria with which I was most interested were the criterion of abode being available and the look-back rule being changed from five to two years. If one takes those two criteria together, they are tantamount to a significant relaxation of the residence requirement. As I understand it, if one had a residence available in this jurisdiction, even for one day, one was liable for tax in this jurisdiction irrespective of the other criteria. I may be incorrect in that, but if I am I would like to hear the Minister's comments. Like Deputy Yates, I cannot find reference to "abode" in the amendment or the briefing note. The officials explained to us last Monday that the key requirement of a residence being available within the jurisdiction no longer exists. The look-back rule now applies over two years rather than five years — I believe it is 140 days in one year.
That seems to be a substantial relaxation. Why would tax exiles, if one may use that phrase — other phrases come to mind — want to pay tax to the Irish Exchequer? Are we relying totally on their sense of patriotism? As a general rule throughout my life I have had little regard for occasions when one has to resort to patriotism other than on holiday in Dingle after closing time in a sing song social environment. Other than that, patriotism generally cannot be relied on, certainly when it comes to paying tax.
On reading the papers recently one could not but notice that some of our prominent citizens have decided to fly the coop. Would the Minister give an assurance that the rushing in of this amendment at the twelfth hour has nothing to do with that or, if it has, that it is something of which I and other tax compliant citizens would approve? That is not an unfair question to ask. I was a member of a committee which examined the report of the sale of a site in Ballsbridge. The outcome of that report was referred to, among other bodies, the Revenue Commissioners. However, because of the rules relating to confidentiality, we will never know the view of the Revenue Commissioners on that matter. One can certainly infer that tax avoidance — to put it no stronger than that, although it may have been tax evasion — was one of the factors involved. I would be reluctant to believe now that it is easier, as a result of this change, for such people to fly the coop here, dishonour their obligations to the Irish Exchequer and re-enter the jurisdiction.
I would like the Minister to respond to that point because Deputy Yates put the point to him that, under the clean break system, a person could have several disconnections with this jurisdiction and will now have the opportunity to re-enter the country after the tax year 1994-95. The Minister referred to three years but I understood that after one year, the present tax year, they can re-enter this jurisdiction and have the best of both worlds. Without labouring the point, it is extraordinary that we extend tax liability to the unemployed and people on disability benefit while the super rich can leave the country under one rule, avoid paying tax, re-enter the country again and, under the new arrangements of having an abode available here, become permanent tax exiles who will probably pay no tax to any jurisdiction. If one accepts Deputy Yates' point about double taxation agreements, they can pick a tax haven of their choice.
The Minister may well have answers to all of these questions and, if so, I look forward to hearing from him. I also want to know whether we are likely to get those fat cats back here and get some money out of them that we would not otherwise get under the new proposals. I welcome fat cats who leave some money in the country, but I take a dim view of fat cats making profits here and paying nothing by way of return.
When I put forward my amendment on cohabiting couples, Deputy Connolly described it euphimistically as the new mobile situation. This is the real mobile situation and it has nothing to do with cohabitation.
It gives an entirely new meaning to the term "mobile home". No fat cat ever became fat by coming to Ireland for his tax treatment and no fat cats will come here to shed any of their fat in the near future. We should not fool ourselves on that. I want a clear, unequivocal answer. Is there anyone who, by reason of the passing of these measures, will be worse off and will be deemed to be resident in Ireland and who, in the absence of this measure, would not have been deemed to be resident either last year or this year? An accountancy firm asked me to put this point to the Minister because they are having a debate on the issue. Does this apply to people who left Ireland before 5 April 1994? Who is adversely affected by this and in what way? Will anyone who left Ireland prior to 5 April 1994 in any circumstances now be deemed a resident in circumstances where he would not have been if these measures had not been introduced?
If somebody used the clean break rule they would not have been disadvantaged.
What is that rule?
If they left prior to 5 April 1994 they would have done so under the old regime. I am grateful to all those who worked on this issue. It is a balanced package which recognises the realities of modern day life. It does not make it easy for tax exiles. They require three years of non-residence before they shed ordinary residence. Capital gains tax and foreign investment income charges are maintained in full for that period. There is no possibility of a clean break any more. A clean break was where somebody could leave for a year and a day and there was no further check on them. They could sell their home, redeem their assets and leave with their family. This rule was a nonsense. The provisions regarding place of abode were diluted in 1987 and further diluted last year.
The measure should facilitate wealthy people who wish to visit Ireland and spend money here but do not wish to be regarded as resident for tax purposes. The package is the result of careful deliberations over a long period. The Government took account of the internal Revenue review, the submissions from the Institute of Taxation and developments in comparable OECD countries. The Revenue Commissioners' central residence branch in Nenagh monitors the position and adjudicates on marginal cases. I will put down amendments on Report Stage regarding the definition of "day" because the way it is drafted worsens the position.
Amendment No. 231 proposes a new section 142. The purpose of subsection (3) is to put beyond doubt the definition of "day" and bring it into line with existing Revenue practice and with the definition in the new section 146 which is the subject of amendment No. 235. Where a person left before 5 April the old rules will apply for 1994-95 in their entirety. The new rules will come into effect on 6 April 1995 for such persons, as regards the two new tests of residence — the 183 days and the two year look back of 140 days on average.
Does the three year requirement of non-residence in order to establish non-ordinary residence apply now?
Not if they had established a clean break prior to 6 April 1994.
Will someone who made a clean break between 6 April and whenever this becomes law be caught?
Yes. People who used the clean break rule always did so with a high profile. As regards the place of abode, the statutory rules will override the existing administrative rules based on case law.
Deputy Yates asked about double taxation treaties. They provide for an allocation of taxing rights between partner countries. Countries voluntarily give up taxing rights in the context of double taxation treaties. This is a normal feature of international tax relations between OECD countries. In regard to his point about other revenues suffering where Irish capital gains tax liabilities existed, this would be accepted in double taxation treaties.
Where a person is both non-resident and non-ordinary resident in Ireland they are liable to Irish income tax on Irish income except in the case of dividends from Irish companies. In the case of such dividends there are anti-avoidance provisions under the Finance Act, 1974 which I clarified in section 25 of this Bill. Regardless of where one is ordinarily resident one is fully liable for income tax and capital gains tax on assets in this country — lands, buildings and mineral assets.
Immovables.
And all Irish sourced income.
Income from these assets would be taxed?
Capital gains from those assets are taxed regardless of who owns them. The place of abode test was constructed following case law in the 19th century when conditions were completely different from what they are now. Mobility between jurisdictions then was not as easy as it is today. The new rules reflect modern reality.
People who left in 1993 or who will leave in 1994 cannot benefit from the new rules until 1995-96 as the commencement provisions do not apply in such cases until 1995-96. Moreover if they became resident under the new rules they are liable for tax.
If I receive a telephone call from a tabloid newspaper over the weekend asking me if I think this was brought in for "you know who" would I be incorrect in saying I think it was?
It might be unwise.
I will worry about the wisdom of it. What would I say in reply?
It is more likely the Deputy would receive a telephone call from someone complaining that the clean break, which was a system used by high fliers, has been done away with. While the clean break rule looked complex, it was very handy. Effectively, someone could leave the country on 4 April one year and return on 7 April a year later, so that they could dispense with their investments and not be liable for capital gains tax here. That system has now been abolished. The Deputy will argue that some people will still have three years, but one can never close all the loopholes.
I will table amendments on Report Stage to put beyond doubt that the 14 day continuous period spent abroad includes weekends or similar non working days. This is the amendment I mentioned in conjunction with the State bodies. I will consider amending the 90 day requirement to cater for cases where the 90 day period spent abroad straddles two tax years and also the case where there is possible transitional relief whereby the remittance basis could apply, for 1994-95 where prior commitments have been entered into for overseas assignments. These relate to Irish people working abroad on short term contracts.
As it now 6 o'clock I am required, in accordance with the order of the Dáil of 28 April to put the following question:
"That the amendments set down by the Minister for Finance to Chapter II of Part VI and Part VII and the Schedule of the Bill and not disposed of are hereby made to the Bill; in respect of each of the sections undisposed of in Chapter II of Part VI and in Part VII that the section or, as appropriate, the section as amended, is hereby agreed to; that the First, Second, Third, Fourth, Fifth and Sixth Schedules and the Title are hereby agreed to".
Question put and declared carried.
I propose the following draft report:
The Select Committee has considered the Bill and made amendments thereto and the Bill, as amended, is reported to the Dáil.
Report agreed to.
Ordered to Report to the Dáil accordingly.
I thank the spokespersons, the Minister and his officials for the courtesy they have shown us and also those involved in the briefing session.
I thank Deputies Yates, McDowell and Rabbitte who have been here since lunchtime on Tuesday. It was a long session. I also thank the Chair, my officials and the staff of the House who helped in the operation of the committee.
The Select Committee adjourned at 6.05 p.m.