Select Committee on Finance and General Affairs díospóireacht -
Thursday, 25 Apr 1996

SECTION 120.

Question proposed: "That section 120 stand part of the Bill".

Mr. McCreevy

This section is the pre-consolidation provision to allow the consolidation process take place. As the Minister knows, I welcome the consolidation process and I will be delighted, as a practitioner, if we have a consolidation Bill next year.

However, as I said on Second Stage, when the consolidation Bill comes before the House there will be a certificate attached to it by the Attorney General to say it is purely a consolidation measure and contains no new legislation, and that it will be put through the House on that basis. It will also afford us the opportunity, if the House so desires at that stage, to change particular sections of the Bill. Consolidation Bills have traditionally been dealt with on that basis. We have not had a pre-consolidation measure to enable that. I readily see the reasons for so doing at this stage because, as the Minister said on Second Stage, the consolidation Bill will probably have over 1,100 sections.

However, I pointed out on Second Stage that while the Consolidation Bill itself will contain this certificate from the Attorney General, I was being asked to accept section 120 on a similar understanding but without anything from the Attorney General. I said on Second Stage that I can understand why this series of amendments is a convenient method of preparing for the consolidation Bill. However, when the consolidation Bill arrives in the House it will have a certificate from the Attorney General to the effect that it is a purely consolidating Bill containing no new measures. The Minister will appreciate my hesitancy in accepting section 120 of this Bill without a similar assurance, namely, that these measures in the Fifth Schedule are of no material significance.

I also pointed out at that stage that I was not competent, nor had I time, to go through the raft of legislation to find out if there were any changes. Since I made that public utterance, it has come to my attention that there are changes of the law in section 120.

Mr. Quinn

In the Fifth Schedule.

Mr. McCreevy

Yes. The section should be withdrawn and the changes should be made in the consolidation Bill itself. Some changes are being proposed in Part VI of the Bill and the Fifth Schedule. If we pass them today, it will be too late to do anything about them when the consolidation Bill is debated because the Attorney General's certificate will apply. If a whole section was left out of the consolidation Bill, such as a section of the Finance Act, 1967, either inadvertently or deliberately, a taxpayer could say in court that the consolidation Bill was improper and he could quote the antecedent Finance Act, no matter how far back it went. That has always been the situation.

Changes are being made to the law in section 120 which would necessitate a separate Bill. I am willing to give this documentation to the officials. Some of them seek to make new law and to charge extra tax. I suggest these provisions be withdrawn at this stage. In paragraph (12)——

Mr. Quinn

Can we have the page reference?

Mr. McCreevy

It is section 1(12) of the Fifth Schedule, it relates to section 241.

Chairman

We will take the amendments to the Fifth Schedule together with this by agreement.

Mr. McCreevy

These proposals contain some new legislation rather than merely restating existing legislation; it relates to the wear and tear allowances to which I referred earlier. In regard to hire purchase contracts, for example, it limits the amount of wear and tear allowance which can be deducted to the amount of expenditure which is incurred. It is a change in legislation.

Section 1(18), which repeals section 433, will have farreaching consequences. This is a technical area so I hope I do not confuse people too much. Section 433 relates to the payment of yearly interest moneys, etc. There is a change here which could have international consequences for some multinational companies. Since the Finance Act, 1974, interest does not have to be deducted from a yearly payment or annuity. However, this amendment to section 433 seeks to — perhaps inadvertently — say that because that no longer applies since the 1974 Act, it should be done here.

However, its effect could be that foreign investors in Ireland could, in consequence, pay tax at 27 per cent. It would be difficult to explain this to a foreign company. For example, a foreign multinational could set up an affiliated company in Ireland with the deal that, in exchange for its software or some process, the affiliated company will pay 3 per cent of its turnover to the company in the US. That is an annual payment, however it is not paid out of pure income profit. This could be interpreted as meaning that a tax of 27 per cent would have to be deducted. The Revenue Commissioners could issue a statement saying this was not their intention. However, in respect of foreign companies setting up here, the tax adviser would have to say that the effect of this change would be to do that. Ireland has a reputation for being a good place to tax business. Our competitors in the UK may advise their clients of these changes. This will have to addressed.

There are other examples in the Fifth Schedule. For as long as I have been attending Dáil Éireann Deputies have received representations from those seeking tax relief on their motoring expenses if, for example, they travel from Mullingar to Athlone every day or from Naas to Dublin, on the basis that Mr. X, who has a business, is allowed motoring expenses. The traditional rule is concerned with the performance of the duties, in the case of the PAYE employee, and wholly and exclusively for the purposes of the business in other areas.

These rules are set down as Rule 3 and Rule 4. In an often quoted court case in the 1930s, a teacher claimed he needed a horse to get to work and for the performance of his duties. The court upheld that he needed a horse to get to work but he did not need a horse in the performance of his duties. In Part II of the Fifth Schedule the words on horses are proposed to be deleted from Rule 3. It may be that nobody will use horses in the future to go to work, nevertheless this is a change to the legislation.

Mr. McCormack

There are a few cowboys out there.

Chairman

Have any of them visited the Dublin West constituency?

Mr. McCreevy

This section has been sold on the basis that it does not represent a change in the legislation, yet the provision on horses is to be deleted. In my constituency near the Curragh some people, for example trainers, could claim to use horses to go to their place of work.

This change to the legislation more often arises in the case of expenses, for example, motor expenses. The rule on this has not been changed. With regard to a company paying an employee wages and expenses for travelling, the rule is that the expenses are to be added to the wages which are then to be taxed in the same way as other wages. It is for the employee to prove afterwards that the expenses element was legitimate. Anybody familiar with this knows how difficult it is to prove this to the Revenue Commissioners.

However, Rule 4 of Schedule E distinguishes between the treatment of public servants and the treatment of private sector employees with regard to expense allowances. This is to remain undisturbed. It is why, for example, an inspector of taxes who travels to audit a person's books will get subsistence allowances and motor expenses and would not be taxed for them at all, while this is not the case for the taxpayer he is investigating. There is one claim in my office where Revenue are claiming that the person concerned was not entitled to motoring expenses, yet the tax official who investigated these expenses is entitled to them. This is ridiculous.

This is an unsatisfactory route on which to proceed. The Minister should withdraw these changes. Section 120 cannot be sold on the basis that it will tidy up the Act. There are changes in the section. If they are passed in this Bill they may not apply to the consolidation Bill, although under previous consolidation Bills there was a mechanism to deal with changes.

There are specific changes. It has not been possible to go through them in detail as Acts going back approximately 30 years are involved. I know it would not be the intention of those making these proposals to make specific changes. However, there have been some unintentional but significant changes and there may be others.

Mr. Quinn

We are not suggesting that the consolidation legislative process could be done easily, as was the case in previous consolidation legislation such as Social Welfare, which was essentially a cut and paste proposal. However, given the complexity and the nature of the task going back as far as 1967, there were interconnecting blocks that had to be legislated for in the first instance in order to link different sections. On the basis of all of the legislation that has been enacted it would not be possible to undertake a consolidation process within the meaning of consolidation as we know it and meet the criteria, obligations and requirements as set out by the Oireachtas and the legislation under which we must function.

From the outset it was communicated to me that it would be necessary to bring in new provisions or change some existing provisions and legislate them in this year's Bill to enable next year's consolidation Bill to be effected and to comply with the requirement and procedures governing consolidation legislation.

I am informed — this would appear to be at variance with remarks made by Deputy McCreevy — that nothing contained in the Fifth Schedule or in the enabling section 120, which opens the door to the Fifth Schedule, alters the existing body of legislation in any material way. There have been changes. This is not a mere recycling of what has already been legislated for. There are new provisions here. However, I am informed they are all necessary to make the main body of consolidation work come into play and that none of them of themselves is material. There is no significant change as such because they are all dedicated towards an act of consolidation of the existing legislation.

There are some deletions and amendments, including the provision regarding horses to which Deputy McCreevy referred. We do not need to enter the next century on the basis of travelling expenses being related to a school teacher and a horse.

The Deputy has brought our attention to a couple of other points. We will look at these for Report Stage. If there are components which, in his view, constitute material change we will look at them.

Mr. McCreevy

Many people may be affected by them.

Mr. Quinn

We will examine them.

Mr. McCreevy

Section 433, referred to in the Fifth Schedule, may be inadvertently and mischievously used by our competitors to denigrate us.

Mr. Quinn

We will look at these technical observations.

Mr. McCreevy

I will provide them. There may also be others.

Mr. Quinn

The Deputy will be aware that it was our intention to make provision to facilitate consolidation, not to slip through new provisions.

Mr. McCreevy

I am aware of that.

Mr. Quinn

However, if some aspects have been brought to the Deputy's attention, either directly or indirectly, as needing examination, we will do so.

Question put and agreed to.

NEW SECTION.

Chairman

Amendments Nos. 93 to 96 form a composite proposal and, with the agreement of the committee, we will take them all together.

Mr. McCreevy

I move amendment No. 93:

In page 116, before section 121, but in Chapter I, to insert the following new section:

"Chapter II

Income Tax, Corporation Tax and Capital Gains Tax: Company Splitting

121. — Section 127 of the Corporation Tax Act, 1976 is hereby amended by the addition after subsection (3) of the following:

‘(4) In the case of a relevant reconstruction the provisions of this section shall apply notwithstanding that as a result of the arrangement the identity of the shareholdings as between the first and second companies has not been preserved.

(5) In this section—

"relevant reconstruction" means a reconstruction of a family company carried out for bona fide commercial reasons;

"family company" means a company the voting rights in which are as to not less than 75% exercisable by members of a family;

"members of a family" means individuals who are relatives or the husband or wife of the individual, or a relative of the individuals husband or wife, and "relative" means brother, sister, ancestor or lineal descendant.'.".

I will give the Minister's officials the background and explanatory notes on this matter. It relates to company reconstruction. In other jurisdictions statements of tax have been entered into where there are is no tax avoidance measures. This scheme does not relate to tax avoidance.

I admitted on Second Stage that I have a specific case in mind. My company does not act for this firm but it has been brought to my attention. In this case there are two separate halves to the business which was set up by two brothers many years ago. They now have families and want one family to take one end of the business while the other takes the second half. I do not want to be too specific in case people will be able to identify them. If they proceed under existing tax law there will be a tax charge because a third generation is involved. This reconstruction will be for the purpose of streamlining the business to let both businesses continue.

In other jurisdictions, such as the UK, this has been facilitated. I do not think there is much objection within the Revenue Commissioners to making changes in this regard. I will give the Minister's officials all the documentation which has been given to me. The Minister might note that the amendments were drafted by a person whom the Revenue Commissioners probably know very well. That is why they are drafted in that particular manner. I would like to reenter or discuss them on Report Stage.

Mr. Quinn

There is some familiarity with this case. We are not unsympathetic but I am not sure we will have the time to address it between now and next week. However, it may be possible to address it next year. We will certainly look at the Deputy's documentation.

Amendment, by leave, withdrawn.

Amendments Nos. 94 to 96, inclusive, not moved.

Section 121 agreed to.