On 22 November the Dáil referred to the select committee for consideration the following draft orders: Double Taxation Relief (Taxes on Income and Capital Gains) (Republic of Chile) Order 2005; Double Taxation Relief (Taxes on Income) (Portuguese Republic) Order 2005 and Double Taxation Relief (Taxes on Income) (Adjustment of Profits of Associated Enterprise) (Accession States) Order 2005. The select committee will now proceed to consider these proposals. I thank the Minister of State at the Department of Finance, Deputy Parlon, and his officials for attending and assisting in our consideration of the proposals. Before he commences, do we have permission to publish his opening statement? Following the opening statement of the Minister of State, I will call members in sequence.
Double Taxation Relief (Taxes on Income) (Adjustment of Profits of Associated Enterprise) (Accession States) Order 2005: Motion.
As part of the process of ratification of international agreements, we have various domestic procedures that must be followed. In this regard——
On a point of order, must the Minister of State read his statement or could he give us a one minute summary and then allow questions to be taken, as members have other commitments?
Could we bring people back?
No, it is better to continue as we do not know how the morning will go. Perhaps the Minister of State will go quickly through the statement.
I put a great deal of effort into preparing this statement for the committee. We are here to consider the various domestic procedures that must be followed. I wish to introduce the three draft orders and provide the committee with whatever assistance I can. The first two concern a double taxation convention between Ireland and Chile and a protocol to the existing double taxation convention with Portugal. The third concerns the convention to allow for——
The Minister of State is reading from his statement.
Let him proceed.
I have to tell Deputies what they contain.
We can read. Will the Minister of State summarise the content of his statement and allow us the time to ask questions?
The Minister of State to proceed without interruption.
I will be guided by the committee. I have gone into detail in my statement and expect Deputies will wish to refer to the detail of the orders.
There was a complaint that there was insufficient detail in the statement of a previous Minister of State. Now we have the opposite complaint two minutes later.
The third draft order concerns a convention to allow for the accession of the ten new member states to the European Union arbitration convention, a point to which I will return.
As Deputies are fully aware of the detail of double taxation conventions which very much follow the OECD model, this is exactly similar. We have 44 double taxation conventions and once the ratification procedures are completed between Ireland and Chile, we will have 45 such conventions. Chile will be the first South American country with which Ireland will have successfully concluded negotiations. The convention is expected to have a generally positive impact on trade and investment between the two countries, which are very substantial.
Other provisions of this new convention deal with the taxation of business profits, employment income earned by individuals and pensions paid from pension plans in one country to individuals resident in the other. Other important articles include non-discrimination provisions, which protect nationals from discriminatory tax provisions in the other country, and exchange of information provisions which are necessary to counter tax evasion.
Turning to the Portuguese protocol, the existing double taxation convention between Ireland and Portugal was signed in June 1993 and entered into force in 1995. It was similar to normal conventions. In general, Irish tax law provides for the taxation of gains from immovable property, irrespective of whether the person making the disposal is resident in Ireland. It also provides for the taxation of gains from all other property, including shares, for three years after an individual ceases to be Irish resident. However, the convention with Portugal does not mirror Irish domestic law with regard to the three-year rule — hence the modification. Given the absence of this and the fact that Portugal does not tax long-term gains, there was scope for Irish individuals to avoid any charge to tax on the disposal of share holdings. It is for this reason that double non-taxation of gains arising from such disposals of certain shareholdings can occur.
The protocol addresses this issue by inserting a new paragraph that deals with the taxation of capital gains in Article 13 of the convention. The new paragraph grants Ireland more extensive taxing rights in respect of capital gains arising from the disposal of shares for as long as Portugal does not have a comprehensive charge to tax on such gains. Specifically, in the event that gains from the disposal of certain shares are not subject to tax in Portugal, Ireland can tax such gains arising to an individual for a period of three years after he or she ceases to be an Irish resident. The new paragraph will apply to holdings of shares of at least 5% of the issued share capital or, where the individual's shareholding is less than 5%, the value of the shareholding exceeds £500,000.
In addition, the protocol makes two other amendments to the convention. The first of these deletes the existing paragraph 2 of Article 13, which deals with capital gains, and replaces it with a new paragraph to put it beyond doubt that Ireland can tax gains arising from the disposal of shares where the immovable property is held by a sub-subsidiary of the company whose shares were disposed of. The second amendment is in the area of non-discrimination.
The arbitration convention deals with the new member states and extends it to them. It provides a mechanism for the resolution of disputes regarding double taxation of profits which may occur between the tax authorities of EU member states. The arbitration convention was signed on 23 July 1990 and came into force in 1995, following ratification by the then 12 member states. It was amended to include Austria, Finland and Sweden after they joined the EU and has now been amended again to include the ten new member states.
The same procedures are followed in respect of the two conventions and the protocol that are before the committee. We signed the double taxation convention with Chile on 2 June 2005 and the protocol to the Portuguese convention in November. Once the conventions and the protocol are signed, they must be ratified by both parties in accordance with their own rules of procedure. When this is done, both agreements will come into force on 1 January of the year following the ratification.
I commend these draft orders to the committee and would be happy to discuss any matters that members may wish to raise.
Regarding the arrangements with Portugal, does the definition of residency include the right of a person to retain residences or a residence in Ireland? Under the new arrangement, for how long must a person be offshore in Portugal in order to avoid a situation similar to that which obtained in respect of Eircom, whereby somebody sold extensive shareholdings in a company that was nationalised and then went offshore to Portugal for a couple of years? Under the new arrangement, are there any amendments to the definition or residency? What are the criteria for residency or non-residency? What is the minimum period people would have to spend in Portugal?
Is it correct that the Revenue is objecting to a legal challenge posed involving the well known case, already mentioned, with regard to Portugal and capital gains tax?
I am concerned about Chile, which I would not class as a very stable country but which is very rich in mineral wealth. It was very much in the news when a dictator was in charge. The latter caused disruption and difficulties. How satisfied is the Minister of State as regards our protocol with Chile on the basis of that country's history? What kind of justice system does it have? Could there be any irregularities on this side for them in respect of any of our people? The gentleman in question was Pinochet, a dictator who caused a great deal of trouble. There are difficulties in Chile for ordinary, plain, honest and decent people. If the Minister of State could elaborate on the history of Chilean democracy in the context of financial and taxation affairs, I would be grateful.
Deputy Burton asked about the details of residency. One must opt to be a resident of either Ireland or Portugal. Under the current rules, a person is regarded as a resident in Ireland for tax purposes in a particular tax year, if he or she spends 183 days in the State or 280 days here in aggregate in that and the preceding tax year. The aggregate rule does not apply if he or she is in the country for less than 30 days in the tax year under consideration. A person is regarded as having spent the day in the State if he or she is present at midnight, which is an issue that has arisen previously. The 183-day rule, which contributes to determining residency in Ireland, is also a core policy of a number of other countries including Australia, Canada, the Czech Republic, Denmark, Finland, Germany, Italy, New Zealand, Norway, Portugal, Sweden and the United Kingdom.
That is not the question I asked.
I definitely remember the Deputy asking about the details of residency.
No, I asked how long, under the new arrangement, someone will have to stay offshore in Portugal if he or she is liquidating a significant shareholding and wishes to become non-resident in that or a similar jurisdiction, which, as the Minister of State outlined in his note, does not tax long-term capital gains. The construction used to be that three years was required. Is it now four or five years?
On the definition of residency, I did not ask about the number of days involved. However, as the Minister of State raised the matter, it is appropriate to note that I have yet to receive clarification from the Revenue Commissioners on two issues. Does the maintenance by someone of a residence or residences in Ireland have any impact on his or her non-residency status while he or she claims that status for tax purposes? If someone is out of the country by midnight, a day is not counted, which condition I have called the "Cinderella rule". What is the duration for which one must be out of the country in that case? Can one take a helicopter ride for ten minutes over Dublin Bay or across the Border? Have the Revenue Commissioners reached a conclusion as to what being out of Ireland by midnight means?
I am very sorry that Deputy Ned O'Keeffe's colleague, Senator White, is not present. She has said very volubly on many occasions that there are many high profile people in Ireland who use the rule to live here all the time while managing to avoid paying any tax. The Portuguese scenario is probably the most staggering example of circumstances in which a person can get away with a huge tax-free capital gain. If accountants are seeking ways help a person who intends to liquidate shares in a business worth €100 million to escape taxation, what new provisions have been implemented to make Portugal a less attractive destination? How long does a person have to remain in Portugal and how often can he or she come back to Ireland, while observing the midnight rule? If a person maintains a home or homes in Ireland, will the fact affect their non-resident status?
My final question to the Minister of State was to ask whether the Revenue Commissioners were pursuing a case on the famous Portuguese example?
In accordance with the criteria for residency in Portugal, an individual must stay in that country for more than 183 days in a calendar year and maintain a dwelling there, which may imply an intention to use it as his or her habitual residence, or the individual's spouse may be resident in Portugal. Those are some of the criteria which apply internationally. The amendment is being introduced to close some of the loopholes which previously existed. The Deputy will recall that in the Finance Act 2003, we introduced in section 29(a) a charge to capital gains tax on an individual in respect of a deemed disposal of certain shares on the last day of the last year of assessment for which the individual is taxable in the State prior to becoming taxable elsewhere where the individual disposes of these assets while resident outside the State and returns to the State within five years. Every effort is being made by the Revenue Commissioners to close any loopholes. While I cannot comment on any case the Revenue Commissioners are taking, Deputy Burton can rest assured that they will follow matters up.
The Minister asked the chairman of the Revenue Commissioners recently to monitor the application of the current non-resident rules through examination of cases handled in their large cases division and to provide him with a report when the process is completed. The chairman has confirmed that the work is under way and that he will report to the Minister as soon as possible.
How many large cases are being examined?
A small number.
The fundamental point is to determine how long someone is now required to spend in Portugal and what limitations apply under the Cinderella rule on their return to Ireland for many days while leaving the country fleetingly at midnight before returning.
The Cinderella rule has come up here before and was the subject of a Fine Gael amendment. It is obvious that some criteria must apply to the 24-hour period and midnight was decided as the deadline. It is a typical standard internationally. The Revenue Commissioners are examining individual large cases to determine whether there has been abuse of the Cinderella rule. If it is deemed that there has been abuse, I am sure the Commissioners will take steps to deal with it.
How many years must someone now spend in Portugal?
More than three years.
But less than five.
That is correct.
Why was Chile singled out as one of the South American countries with which we are to adopt a protocol on taxation? Is the Department satisfied with that country's stability and the events which have taken place there to date? While it is not the Department's responsibility, does the Minister of State know if we have a full diplomatic mission to Chile? Is there a full ambassador or is one shared with another South American state?
We share our diplomatic facilities between Chile and Argentina. It is the first of the South American countries with which we are dealing and we have not got into the political situation. The policy relates specifically to trade and economic issues. I understand that we carry on a substantial level of trade with Chile and that it is our single most significant source of wine imports. Our combined trade with the country is worth over €70 million.
What is the level of trade coming in?
As I said, the single biggest wine exporter to Ireland is Chile.
I want to know what the balance in the trade is. Whom does it favour?
We have a deficit with Chile at present but trade with it is worth approximately €70 million.
What is the secret? What is the deficit?
It is approximately 40:30.
Are the Chileans the winners?
Yes. There are winners and losers.
Are we drinking too much wine? I am somewhat concerned because Chile is not a very stable country. Historically, it has not been very good.
Is the Deputy suggesting that a double taxation agreement with the country is a negative?
The stability of a country and its democracy is always very important in a double taxation deal. Chile would be suspect in international circles.
I thank the Minister of State, Deputy Parlon, and his officials for assisting in our consideration of the proposals.