Finance Bill 2012: Committee Stage
Before welcoming the Minister of State at the Department of Finance, Deputy Brian Hayes, I wish to express, on my own behalf and that of members of the Select Sub-Committee on Finance, deepest sympathies to the Minister for Finance, Deputy Noonan, on the passing of his wife, Florence. The Minister of State, Deputy Brian Hayes, is substituting for the Minister at this sad time and our thoughts are with the Minister. The Minister of State is welcome and I thank him for stepping in at such short notice. I also welcome the departmental officials who will accompany the Minister of State during the select sub-committee's consideration of the Finance Bill.
The purpose of this meeting is to consider the Finance Bill 2012. The Bill was referred to the select sub-committee by Dáil Éireann on 16 February 2012 and the sub-committee is required by the Dáil to report the completion of its considerations of the Bill not later than Friday, 2 March 2012. The times by which the sub-committee must have completed its considerations of specific groups of sections and the amendments addressed to those sections are determined by an allocation of time order made by the Dáil on 23 February 2012 and this order has been circulated to members. The order of the Dáil further provides that any division claimed on the proceedings of the Bill must be postponed until immediately before the time set for the relevant guillotine or, if proceedings conclude before the time of the guillotine is reached, on completion of those proceedings. The putting of any question that is contingent on a postponed division must be similarly postponed.
Before we commence, I remind everyone that mobile telephones must be switched off. In addition, we will try to get through these amendments as quickly as possible because we have approximately 30 amendments to consider this afternoon.
Section 1 agreed to.
NEW SECTIONS
I move amendment No. 1:
In page 11, before section 2, but in Chapter 1, to insert the following new section:
2.—The Minister shall within 3 months from the passing of this Act prepare and lay before Dáil Éireann a report on a cost-benefit analysis of tax expenditures provided for by this Act, setting out the costs of tax foregone, and the benefits in terms of job creation or otherwise.".
I am delighted to be involved in the Committee Stage debate on the Finance Bill and am highly impressed by the array of officials before members. While I am unsure how much hope members on the Opposition side should have of getting any change through, hopefully the Minister of State will have an open mind on some of their ideas.
Each year, during the Committee Stage debate on the Finance Bill, whoever is in opposition appears to table this amendment and whoever is in government appears to oppose it. The purpose of amendment No. 1 essentially is to request the Government to justify the new tax reliefs that are being proposed in the Finance Bill and to justify any expansion of existing reliefs within the Finance Bill, of which a number are included in the Finance Bill 2012. It is important that we are very clear as to the purpose of such reliefs and that their outcome can be measured in respect of the amount of increased investment within the economy to which they lead and by the number of new jobs that are created. A number of new tax incentives are proposed in this Finance Bill, including the new capital gains tax incentive for the purchase of property in Ireland and abroad up to the end of 2013. Fianna Fáil proposed that the Government should consider targeting the enormous amount of activity in the black economy in the construction sector, particularly in respect of small-scale jobs, repairs and maintenance work to private dwellings, of which a great amount is being done under the radar, and we tabled an amendment that has been ruled out of order but which would be relevant to this area as an alternative to the capital gains tax incentive the Government has proposed.
We have some concerns about this capital gains tax incentive. It is not limited to one transaction per person. Someone could avail of it on a multiple number of properties in Ireland and abroad. I am sure the Minister of State would agree the purchase of property abroad by an Irish person will not yield any economic dividend, and that is a concern. I am also concerned that introducing such a relief could represent an attempt by the Government to put an artificial floor on the property market, which it is attempting to kick-start. It is an important sector and we all want to witness an increase in construction activity. However, I am of the view that the property market should be allowed to find its own floor over time.
There are other reliefs contained in the Bill which, in our view, the Government should justify by bringing forward a cost-benefit analysis such as that proposed in amendment No. 1. I am sure we will engage in a more detailed discussion on the new special assignee relief programme, SARP, proposal. That is one obvious incentive the Government is putting forward to which very strong economic justifications should be attached. If the purpose is to bring additional inward investment to Ireland to facilitate the creation of further jobs, then why not include the conditions relating to such a scheme in the text of the Bill? Other reliefs available include the foreign earnings deduction, enhanced research and development tax credits, royalty pooling, renewable energy generation relief, etc. The central thrust of amendment No. 1 is that it seeks the bringing forward of a cost-benefit analysis such as that to which I refer in order that where tax expenditures are incurred by the Exchequer, there will be clarity regarding the purpose of those expenditures and that their success will be measurable. That is why we tabled the amendment.
I support the amendment. As Deputy Michael McGrath indicated, similar amendments are regularly put forward by Opposition parties. I put forward a similar amendment in respect of the previous Finance Bill and it was rejected. During the year we were able to tease out the actual cost of some of the tax expenditures that exist in the State. However, we were not able to identify the cost of others because the Department of Finance has not carried out costings in respect of some existing tax expenditures. Obviously, this is not good in the context of there being transparency regarding the identities of those who are benefiting from the tax expenditures to which I refer.
I tabled a parliamentary question last week in which I asked the Minister for Finance to provide details on the net cost of each section of the Finance Bill. I presumed it would be quite easy to provide such details because I am sure it is necessary to ensure that the Bill is costed. It would be good if we could be provided with a net figure in respect of each section but I accept that some sections may not involve a net cost. Astonishingly, the Minister was not in a position to furnish the information I requested in my parliamentary question. He stated that we would go through the figures on an item-by-item basis when this committee dealt with the Bill. I do not want to be asking the Minister of State what is the net cost of each individual section. Would it be possible, therefore, to take it as read that I wish to know the net cost to the State of every section of the Bill? Perhaps the figures in that regard could be furnished to members prior to the second session because if they are not, proceedings will merely be delayed.
Amendment No. 1 refers to the Minister laying before the Dáil a report on a cost-benefit analysis. In 2009 the Think Tank on Action for Social Change, TASC, estimated that the tax expenditures in question cost the State approximately €7.4 billion. TASC also put forward the argument that if personal income tax breaks and corporation tax breaks were based on the EU average, these expenditures would only cost €2.2 billion. This would give rise to a saving of €5.2 billion. It is important, therefore, that the type of cost-benefit analysis to which the amendment refers should be provided. When indirect taxation is being increased in respect of the majority of people in the State, we should at least know the cost of the expenditures in question and the number and identities of those who will benefit from them. Will the Minister of State indicate the number of new tax expenditures that are being introduced in the Bill?
The hallmark of the recent budget - which sets it aside from previous budgets - is its emphasis on the key proposition that income tax should not be increased in order that work would not be taxed. One of the measures we introduced relates to job creation and is a slight variation on that which is contained in the amendment, which refers to "the benefits in terms of job creation or otherwise". The Government wanted to ensure that it would not place an unfair burden on those who seek to create jobs. The hallmark of the budget is the fact that we did not increase income tax.
I thank Deputy Michael McGrath for tabling the amendment, which rings a few bells in the context of what happened when I was in opposition. I recall similar amendments being tabled in previous years and I suspect the Deputy will recall the replies that were delivered in respect of them.
I do not propose to accept amendment No. 1 but I fully accept the principle of the need for an ex ante and ex post economic impact assessment, including carrying out a cost-benefit analysis, in formulating and evaluating tax policy. The major change to existing tax expenditures proposed in the Bill relates to the legacy property reliefs and this was subject to a full economic impact assessment. The latter was published with the Finance Bill.
Deputy Pearse Doherty referred to costings. It is not the case that each section has an enormous amount of expenditure associated with it. Where we have recognised the existence of a major expenditure item, namely, in the context of legacy property reliefs to which I refer, as already stated, a full and substantial assessment has been carried out and published. I am not sure how realistic it would be to provide full costings in respect of every section. There are no costs at all in respect of many of the sections. This is because such sections only involve small changes to or tinkerings with the system. A commitment was given in respect of carrying out a full assessment of the legacy property reliefs. That assessment has been concluded and it was published with the Bill. The economic impact assessment involved a full public consultation in order that the views of all interested parties might be taken into account, the publication of two reports - including an interim consultation report - an economic model and a substantial data analysis exercise. This was a transparent and comprehensive process which was in line with best international practice for policy evaluation.
As the committee will be aware, the issue of carrying out cost-benefit analyses in respect of tax expenditures was considered by the Commission on Taxation. The commission was of the opinion that tax expenditures should be the subject of ongoing evaluation and appropriate and timely cost-benefit analyses. This is to ensure that they are both economically efficient and that parliamentary oversight can be well informed.
I am, however, opposing the amendment on a number of grounds. First, as the experience with the impact assessment demonstrates, three months is insufficient in the context of undertaking the analysis required for the various measures. The second point is that there is an underlying principle of proportionality in cost-benefit analysis. In other words, the level of resources invested in carrying out the analysis should be commensurate with the scale of the expenditure involved. For example, the 2005 capital appraisal guidelines only recommend full cost-benefit analysis in respect of expenditures exceeding €30 million. In many cases, the figures at issue are well below that level. While the costs associated with the legacy property reliefs certainly justify a full economic impact assessment, many of the tax expenditures in the Bill are not of sufficient significance in terms of costs to make the completion of such studies cost effective.
We will consider these matters, in consultation with the committee, on a case-by-case basis. On major ticket items such as that under discussion, we are open to doing this. However, we are of the view that it would be slightly disproportionate to do so across the board and without any understanding of the full costs involved in respect of all of these items.
I thank the Minister of State for his reply. As he indicated, the Commission on Taxation indicated that there would be ongoing evaluation with regard to the impact of tax expenditures. I acknowledge there was a report conducted into the legacy property tax reliefs and the Government accepted recommendations that the process of shutting them down - which was already well under way - would be allowed to take its course and they would not be just ended overnight. There are very valid concerns and, in particular, I raised the issue of the new property tax incentive being proposed as it relates to capital gains. It has been indicated that the reliefs proposed are not as significant in terms of cost but the truth is that the cost is open ended, and there is no limit or allocation on the amount that can be drawn down under any of these new tax expenditures. They will be demand-led so the cost is unknown and open-ended.
A door has been opened, particularly with the capital gains tax for property relief, to speculators buying an endless amount of properties in Ireland and abroad, holding them for seven years and avoiding all liability to capital gains tax. The Government is refusing to accept the need for an evaluation of the effectiveness of that proposal, which is the core point I make, particularly with that relief. As the process would be open-ended a comment cannot be made on the likely overhead cost because it is simply unknown.
It is disappointing that the standard response from the Government is still applicable, given all the promises that we would do the Finance Bill differently. The Government has fallen at the first hurdle. I take the Minister of State's point with regard to a cost-benefit analysis on each section of the Bill but that is not what the amendment speaks to. I have asked a simple question on each section of the Bill and I cannot see why a table was not provided. Leaving this to one side, there is the issue of a cost-benefit analysis of tax expenditures.
I will ask again the question I posed at the beginning. How many new tax expenditures will this Bill create and how many existing tax expenditures does the Bill amend? The question concerns a cost-benefit analysis. Given that the Minister of State is refusing to carry out that cost-benefit analysis, would he at least be open to the idea of telling us the cost of those tax expenditures?
In the budget book published on budget day, there was a full assessment of the yield and cost on each of the measures proposed in terms of the estimate we gave. If we were proposing a tax expenditure item, the amounts would be set out there. It is a slightly different issue to Deputy McGrath's point but there was a full evaluation of the costs involved with the budget documentation.
Deputy McGrath has asked a question and the two biggest issues are the special assignee relief programme, SARP, and the foreign earnings deduction. It is our estimation that the SARP issue will involve a maximum of €5 million per year, which is on the basis of 100 people applying for it. On the foreign earnings deduction, we understand the expenditure will be approximately €2 million per year. Both of those would fall under the €30 million threshold.
It is €2 million. I was in Europe last week and we deal in billions over there. The €30 million threshold was a general principle provided in the commission.
Data are collected on a multiannual basis for many of these areas of expenditure and it is really only after a number of years that one can assess the full impact of an item in raising certain amounts. The difference between tax and expenditure is that we know how much money can be spent but on a tax measure there is never absolute precision because one would not know the full uptake of the amounts involved. For the information of the committee, with the film relief scheme it is our intention this year to initiate a major economic assessment, given the totality of the expenditure involved. We will partake in such processes on a case-by-case basis if the moneys are big enough and after a period we can consider issues again to see if a scheme can be altered.
Where the committee specifically believes there should be a major economic assessment of a headed item, I am sure the Minister would be amenable to looking at it. Perhaps what is required is a greater dialogue between the Minister and the committee, as it is the Government's strong intention that issues like this should be flagged to committees and there should be an immediate reply. If there are specific issues that have merit, we will consider them on a case-by-case basis. I cannot accept the amendment because it is open-ended and it does not seem to discriminate between expenditures big and small.
The Finance Bill introduces many new measures that were not included in the budget. Will the Minister of State inform us if there are tax expenditures that were not announced in the budget that are being introduced in the Finance Bill? Should I take it that the Minister of State might be open to an altered amendment on Report Stage that might refine the scope of a cost-benefit analysis?
For example, in questioning a Minister in the Dáil who was taking the Order of Business - it was Deputy Burton - I was told that the SARP would be measured by the IDA and each individual would have to create 30 jobs. I presume the Minister at the time was talking through her hat because there is nothing in the Finance Bill which speaks to job creation as part of SARP or that people must create 30 jobs. How will SARP be measured? There is an argument that this will cost €5 million, and one might think this is small potatoes but it is not in the real world. Why should 100 people be able to avail of this tax expenditure when the rest of the country is being told that an additional €100 household charge and septic tank and water charges must be paid, along with a 2% increase in VAT? People putting clothes on their children have found increases in diesel, petrol and home heating oil but the SARP individual would receive a tax write-down of €427,000, allowing him or her to fly the family home to America or whatever part of the world that person is from once a year. There is a tax deduction for sending children to private education at the same time that rural schools are faced with losing teachers, with DEIS rural schools having legacy posts withdrawn.
Outside of the economic argument being given that it may be too costly to carry out a cost-benefit analysis, there is a bigger question in that such analysis should be about more than just money. There should be an examination of the social consequences of a Government introducing expenditures for a cohort of people at the top of their earnings capacity while asking the rest of the public to pay for those expenditures.
I will answer Deputy Doherty's question directly of whether there is substantial change in the Finance Bill compared with the statement by the Minister in December. The answer is "No." Any of the changes announced in the Finance Bill were alterations of proposals set out originally by the Minister. There is no major new expenditure item.
The Deputy asked if a more specific Report Stage amendment with regard to scope of the assessment would be accepted but that is a matter for the House to decide. I do not know if I would be replying to the amendment on that day so I could say to bring it forward by all means. I suspect the boss might be back on that occasion. As a general rule we are not against this in principle and where there is merit, it is useful. In regard to the amendment under consideration, we take the view it would not be beneficial to do this for every headed item. The Deputy referred to sections 9 and 10 in particular, which we will discuss. There are other sections in this Bill which paint a very fair picture for people, in the circumstance where there is no money in the country.
The next section will deal with taking out the universal social charge for more than 300,000 people, in a very progressive and substantial amendment which the Government is pleased to bring to the committee's attention. We can discuss that later but I cannot accept Deputy McGrath's amendment No. 1. However, if he recasts it I am sure the Minister for Finance will look at it.
I will withdraw the amendment and reserve the right to bring in a variation on Report Stage.
Amendment, by leave, withdrawn.
Amendments Nos. 2 and 3 have been ruled out of order.
Amendments Nos. 3 and 4 not moved.
I move amendment No. 4:
In page 11, before section 2, but in Chapter 1, to insert the following new
section:
2.—The Minister shall within six months from the passing of this Act prepare and lay before Dail Eireann a report detailing the financial impact of all measures contained in this Act on the general population by income group broken down by decile including all categories of earners including PAYE, self-employed and social welfare recipients and by household income type broken down by decile based on gross household income.".
The standard reply from the Government is it will accept this amendment, at least for one year. There is a precedent in that the Government accepted an amendment at the time from the Minister for Social Protection, which I believe is word for word the amendment I propose here, so I advise the Minister of State not to disgruntle the Minister, given it is her amendment. At the time it was supported by Fianna Fáil, perhaps because there was nobody in the Chamber or for some other such reason. It slipped through.
I ask the Minister of State to consider this amendment which asks for a report detailing the financial impact of all measures contained in the Act on the general population, based on income group, broken down by decile, for all categories of earners, including those on PAYE, the self-employed, social welfare recipients, and by household income type, broken down by the decile, based on the gross household income. If we are to do our job differently in terms of how we deal with financial legislation, beyond what is contained in this Finance Bill, we must have a different approach. The Opposition needs information which is held by the Department. It is important that we look at the impact of the measures we are introducing, have a chance to evaluate them properly and thoroughly and then, if need be, seek to amend them.
I raised this issue before and do so again. It is appalling - I use the word carefully - that the members of the finance committee have not yet had a briefing on the substance of the Finance Bill, bar the briefing provided today which was on the proposed amendments only. In spite of repeated requests from my office and perhaps others, since the publication of the Bill officials in the Department have not been available to meet with Opposition spokespersons to discuss sections of this Bill. It makes a mockery of political reform to ask committee members who do not have a financial background to argue and articulate in the best way we can without the benefit of information that is held within the Department or without an understanding of the rationale behind the introduction of these measures. It is just not on.
This amendment seeks to build on that. If we are to have proper information and disclosure we need to look at the potential impacts of the budgetary proposals. We already know that different groups are looking and assessing budget 2012. For example, there is the ESRI study which, in its consideration of the impact of budget 2012, states it is clear that the greatest reduction in income is for those with the lowest income. It continues by-----
It also states something else.
-----stating there is a fall of 2% to 2.5% for the poorest 40% of households compared with a fall of 0.7% for the top 30%. The poorest 40% therefore will take four times the hit the top 30% will, according to the ESRI. We have not had the opportunity to discuss this with officials from the Department of Finance to find out if they dispute these claims. There is a need to look at and assess the impact these budgetary measures are having on the basis of the different deciles.
In section 2 I welcome that there has been a change to the universal social charge, in that a large group of people have been taken out of that category. If previous Governments were able to show within three months of implementing budgetary measures their effects on the different categories we might have been able to form a more reasoned opinion, or to have convinced the Minister at the time there was a need to do this. The money which would have been saved by taking so many people out of the USC is small enough in proportion to the actual amount of money being taken in but the social consequences would have been much greater.
This has been done before and is therefore possible. The Department produced a report on this in 2010 or 2011. There is a precedent. In the spirit of trying to change the way we do business I ask the Minister of State to accept this amendment.
I call Deputy McGrath before the Minister of State.
I support Deputy Doherty's amendment. A more meaningful measure, however, would be to show the impact of all the budgetary measures on the different categories of people, as outlined by the Deputy. The Finance Bill accounts only for a portion of the measures that affect them. The household charge is not mentioned, for example, nor are the various welfare changes, and the increases in a whole raft of Government charges would not be included in such an assessment. A more meaningful and helpful portrayal would be to show the impact of the entire budget package on each of these categories of people by income group.
Would the Minister of State like to respond?
Yes. Much of this has already been done by the ESRI. There are now two Departments where previously there was one and the smaller is the actual Department of Finance, compared with the Department of Public Expenditure and Reform. If one were to do this work on a regular basis it would tie up an inordinate amount of time for officials who, in any event, are preparing the budget and the assessments regarding the decisions that must be taken. One must ask whether this would be an appropriate way of acting when we already have another vehicle in place such as the ESRI, to which Deputy Doherty referred. It is amazing how two different people, reading the same report, can come to two different conclusions. It always happens in politics.
I saw a headline last week following the publication of the report and had a chance to read the piece last weekend. I will read from what Mr. Callaghan, the senior ESRI research officer who wrote the report, stated. Speaking of budgets from 2009 to the present, he wrote: "The net effect over the whole period is strongly progressive, rising in line with incomes and is among the most progressive in six EU countries examined in a recent study". He refers to the fact, which is stood over by the ESRI, that when one looks at the different income groups or cohorts, the biggest reduction is found in the incomes of the top 10% of earners, those who have more than €3,000 spending per month. These incomes have fallen by 13% in real value, or spending power, since 2009. Meanwhile the bottom 10% of earners, with disposable income of less than €900 per month, suffered a 5% drop in real terms. The net effect is that it is the view of the ESRI as a result of the most recent assessment, which is better than anything that could come from the Department of Finance and which is totally independent of it, that this and recent budgets have been progressive in the sense that those at the top have paid more than those at the bottom. The six countries involved were Ireland, the United Kingdom, Spain, Portugal, Greece and Estonia. The adjustment made by Ireland is substantially greater than that in the other countries analysed.
The second point is that the distributive impact of the policy changes in Ireland is among the most progressive. The position on taxation is totally different from what it was some years ago because of the collapse and the overall effect of this change in the independent view of the ESRI is that these measures collectively have been progressive.
The Deputy has asked who is doing the work for us. An agency is producing reputable work which can feed into our deliberations either at this committee or throughout the year. It is not a good use of taxpayer's money to replicate something being done and, for that reason, I do not accept the amendment.
There goes the second hurdle. The amendment does not refer to the budgetary effects between 2009 and 2012.
My amendment refers to the 2012 budget. I do not dispute what the Minister of State read from the ESRI report, but what I referred to in it deals with this year's budget and this legislation. Does he agree with the ESRI's assessment in this regard, given that he has stated it is the independent expert? The report states it is clear that the greatest reduction in income is for those on the lowest incomes, a fall of between 2% and 2.5% for the poorest 40% of households. This compares with a fall of close to 1% for the fifth to seventh deciles and approximately 0.7% for the top 30% of households. That is the ESRI's assessment of budget 2012. We do not have the budgets of 2009 to 2011 in front of us; we are dealing with this year's budget. Does the Minister of State accept that the institute states the poorest 40% of households in the State are four times worse off than the top 30%? Does he agree with this assessment?
No, I do not agree with it because the focus of the Government's decisions on the budget was on trying to keep the 1.8 million in employment working. The Government's considered view is that the way to reboot the economy fundamentally is to keep them at work and not increase the tax burden on them. The budgetary decisions are not only about keeping these 1.8 million people at work but also about trying to bring forward other measures for which there is little money available to create more jobs in the economy. The real inequality in Ireland lies in the difference between those who can find a job and those who cannot. That is the fundamental equality test in terms of whether people have access to a good life and the opportunity that goes with it.
I do not dispute that that is the Government's view and that that is what the budget is based on, but whether I agree with it is a separate issue. However, that is not the one we are discussing. The ESRI has stated boldly and bluntly in its report which the Minister of State claims has been compiled by independent experts with no axes to grind that the Government's budget has reduced the income of the poorest 40% of households in the State by 2.5% compared with a reduction of 0.7% for the richest 30%. That the Minister of State is disputing the ESRI's assessment is precisely the reason the amendment should be made. Initially, he argued that the ESRI was in place to do this work and asked why should the Government replicate the work being done. The reason we have to replicate its work is that the Government does not agree with its assessment and, because it does not, the Department has to do the work. Does the Department dispute the assessment that the budgetary measures reduced the income of the poorest 40% of households by four times the amount for the top 30%?
The Deputy referred to the impact of the VAT reduction. I am aware of what the ESRI stated, but it is only one of a number of issues that dictate whether people are well off or whether they have suffered disproportionately in comparison with other cohorts within the population. Our view is that as a means of keeping direct tax on income down, we have decided this year to increase indirect taxation. That is what the Minister said. We made that decision and it was crucially important not to reduce basic social welfare rates and not to increase direct tax on work. That was the policy decision the Government took. We are conscious, however, of what the ESRI and others say. These reports continue to be part and parcel of our deliberations, but we stand over the decision we took in the budget. I do not suggest the Deputy disagrees, but we think the best way to keep people in work in the current circumstances when there is little money around is to make sure we do not increase income tax. The only way to do this and make the numbers stack up is to increase indirect taxes such as VAT.
Does the Minister of State accept that the policy of the Government has reduced the income of the poorest 40% of households in the State by between 2% and 2.5%, while reducing the income of the richest 30% by 0.7%? Does he accept the ESRI's finding regarding the budget? If not, there is a need for the Government to carry out its own assessment of these deciles.
The Minister of State would strengthen his own argument if he were to accept the ESRI's analysis of the budget on a stand-alone basis because the context he used was the impact of the adjustments made since 2008, which has been highly progressive. However, the ESRI conducted a stand-alone analysis of the budget and its clear conclusion was that its impact was regressive because it impacted most on on low and middle income households. The Minister of State should accept this. The ESRI's other conclusion is also recognised, that if one examines the entirety of the adjustment process, it has been highly progressive. The Minister of State cannot say, on the one hand, that there is no need for Deputy Pearse Doherty's amendment because the ESRI is doing the work and, on the other, that the Government does not agree with its conclusions.
It is not just that report; there are a number of others. If that were the case, one could equally quote from a number of OECD reports on the taxation system and its view, based on the model it has established, that our system is highly progressive, given the adjustments made.
The VAT change was the least harmful way of balancing the books this year and making sure we did not deliberately affect economic recovery, difficult and all as that would be to achieve. That was the assessment we made at the time. If other agencies, independent of the Government, come to another view, that is their right, but the Government must make decisions. The decision we took, which the Deputies accepted, was related to the need to maintain employment. One cannot do otherwise. Equally, one could make the case that if there was to be a change to direct tax on income, it could have a harmful effect on employment opportunities. We take all these issues as they arise in the round, but more than one agency is involved. The Deputy raised the issue of the ESRI initially and I replied, but a number of agencies are involved.
I acknowledge the position the Minister of State is in. However, the ESRI has stated clearly that the budget is regressive and that the impact will be four times greater on the poorest 40% of households in the State than on the richest 30%. The Minister of State does not want to say publicly that he accepts that this is the consequence of the budget. The Government has taken decisions because it believes in X, Y and Z, but the consequences are in black and white. Whether we agree with increasing VAT or not taxing work is a different issue. The issues we are trying to establish are the effects of those policy decisions. What will be the effect when we decide to opt for VAT increases instead of wealth tax increases, for example? That is what the ESRI has calculated. The Minister of State is saying now that the report from the OECD and other reports will give us a calculation for this year, but my amendment is the reason the Department of Finance should carry out that work. The Minister of State said that to carry out that type of an estimate would tie up many staff and involve a great deal of time-----
It is a smaller Department now.
-----in a smaller Department, but if the Department of Finance has not examined the impact of budgetary measures on the percentage of the population and if it has not carried out that assessment prior to enacting these measures, the entire process is flawed. That a Minister or a Government would sign off on measures without knowing the impact they will have on the poorest in society compared with the impact on the richest in society shows that this is a Government that is more interested in the pounds and pence and is forgetting about the social consequences. Is the Minister of State telling me the Department has not carried out any assessment of the impact of these measures on the different deciles or would that have to be done from scratch? I would imagine that any Government worth its salt has already ensured there was evidence and data to show the impact of that, and we are asking the Minister of State to publish that in a comprehensive way.
As I stated at the outset, the ESRI has published its work and the totality of its work, not just one aspect of it or one comment it may have made on whether it is progressive or regressive, will be taken in the round. It would be silly for any Government to replicate that. I appreciate that the Deputy's comments about the ESRI relate to this budget and in particular to the VAT changes, and that will feed into our ongoing analysis in terms of where the economy is and as we frame the budget for next year, but he cannot focus on one aspect of one budget when our rationale in making the decisions we made on income tax was based on a clear view as to where the economy should be. All of these things will be taken in the round but it would not be an effective use of the public sector resources, particularly in terms of the limited resources we have currently, to replicate all of that throughout the year. That would not make sense.
Will the Deputy make a final comment because this issue is going around in circles somewhat and I would like to finish it?
It is a pity that an amendment which was proposed by Labour in opposition and supported by Fine Gael, and by Fianna Fáil and the Green Party at the time, is now being rejected-----
That is perfect symmetry.
-----by the Minister of State. Regarding the VAT increase which amounts to approximately two thirds of the additional taxation that will be brought in by the State, has the Department carried out the assessment I have mentioned? Has it examined the financial impact of the VAT increase on the general population by income group, broken down by decile? If the Minister of State is saying that will take days upon days and nights upon nights and tie up many officials, I can see the logic in that. While I appreciate the Department of Finance has a huge job of work to do outside of this issue, I would be astounded to learn it has not already carried out an assessment in regard to increasing VAT by 2% and the impact of that on the population broken down by decile.
I ask the Minister of State to be brief because I want to move on.
Our VAT experts are not present because that is another part of the Bill but I can get the information on that to the Deputy. My understanding is that the ESRI did publish information in advance of the budget on the different options that were to be taken. We went with the options we set out on budget day. That is an issue in which we are constantly involved in our discussions with the ESRI.
How stands the amendment?
I will withdraw the amendment and consider resubmitting it on Report Stage.
Amendment, by leave, withdrawn.
Amendments Nos. 5 to 7, inclusive, have been ruled out of order.
Amendments Nos. 5 to 7, inclusive, not moved.
SECTION 2
I move amendment No. 8:
In page 12, subsection (2), line 29, to delete "€10,036" and substitute "€17,000".
This amendment relates to the universal social charge. I support this subsection which would take in the region of 300,000 people out of the universal social charge net. It was one of the measures that bore down heavily on low income earners. There was no justification for bringing people who earned such a small amount of money into the tax net, and the impact was felt harshly by many people. I welcome the move. It is an issue we raised on numerous occasions along with a motion in the Dáil and I am glad the Government has agreed to remove a certain number of those who were outside the tax net from the universal social charge.
My amendment seeks to increase the threshold. The measure being brought forward in this Finance Bill is that those earning under €10,036 would no longer be subject to the universal social charge. My amendment proposes increasing that to €17,000. I chose the figure of €17,000 because those who are paid the minimum wage should be exempt from the universal social charge. The Minister of State will note that in our pre-budget submission, Sinn Féin examined the reconfiguration of the tax system in terms of abolishing the USC but reintroducing the income levy and the health levy and examining the different rates and exemptions. That is all in our pre-budget submission, and that would be our favoured option, but as a minimum step we should be looking to increasing the threshold to €17,000. The Minister of State might put the counter-argument as to the reason he believes that people earning under the minimum wage should pay the universal social charge. The threshold remains very small at approximately €198 per week. Why has he not gone to the minimum wage level?
I thank Deputy Doherty for his amendment No. 8. It is an attempt to amend section 2, which contains miscellaneous provisions regarding the universal social charge, by proposing that the exemption threshold for the universal social charge be increased from €10,036 to €17,000. The Bill already provides for an increase in the exemption threshold from €4,004 to €10,036. This measure will cost in the region of €47 million in a full year and will remove almost 330,000 people from the USC. While that is a significant cost, I do not expect it to result in a reduced yield for the Exchequer because of the switch on a cumulative basis of deduction and payment by the Revenue Commissioners from 1 January 2012. That will save a similar amount by avoiding the occurrence of underpayments of the universal social charge.
The cost of Deputy Doherty's amendment, if it were to be implemented, would be in the region of an additional €117 million for a full tax year and would remove an additional 273,000 people from the charge. He asked me to put the counter-argument to his proposal. It is a further narrowing of the tax base in a circumstance where we have a substantial deficit and the question must be posed whether that is wise when we must increase taxation and reduce expenditure. This is a significant net cost, particularly in the context of the current budget balance. Moreover, a figure of €17,000 would bring the exemption threshold for the universal social charge above the current entry point to income tax of €16,500. This would seriously undermine the rationale for the introduction of the universal social charge, which was to broaden the tax base from its narrow, unsustainable level, where a relatively small proportion of income earners were responsible for a disproportionate amount of the overall income tax yield, and to ensure most people would make some contribution, however small, to the provision of services and towards assisting the correction of the public finances. The removal of an additional 273,000 people - our estimate - from the charge would effectively reverse the base broadening already achieved. Therefore, I oppose the amendment.
Clearly, we would like to make further progress on this issue. The change the Minister announced on budget day was something we had highlighted in our pre-budget submission when we were in opposition. It was also part and parcel of the programme for Government. Of course, we would like to do more in circumstances where the tax base is under extraordinary pressure. Therefore, the matter will have to be reviewed in due course. However, with regard to the Deputy's amendment, we do not have another €117 million in a full tax year to remove over 273,000 taxpayers. I wish we did but we do not. Also, if one examines the totality of the tax yield, the top 1% of taxpayers pay approximately 20% of the total yield. Even if one considers those earning €50,000 per annum or less, the great majority of taxpayers, this cohort pays approximately 19% of the total yield.
We have two problems. We obviously must increase taxation and do so in the least harmful way to employment. Equally, however, we must do so in a way that is equitable, fair and broadens the tax base. A total of 38% are not making a contribution or paying any tax; they are paying other taxes, of course, but they are not paying income tax. That percentage has reduced from the previous level of 45%. Obviously, the 38% comprises those on the smallest incomes and it is only right that they, in so far as possible, would not be affected by tax. However, to do as the Deputy asks would cost us a further amount that we simply do not have. We would like to move in that direction, but we must see what happens.
I am glad the Minister of State acknowledged that the 38% pay tax. He started by saying this was about asking people to make a contribution towards the provision of services. Individuals earning €200 a week will, as a result of the measures introduced in the past and the fact that the Minister is not changing the threshold, pay the universal social charge. These individuals are paying a larger proportion of their disposable income in tax than other percentages at the higher end of the scale.
We can throw around figures and there is always a set that will counter an argument and support one's own. The Minister of State says this is fair and that they need to pay tax and so forth, but some of the people concerned simply cannot afford to pay additional tax. This is not the only tax they are paying. New charges have been imposed on them. The VAT increase, for example, will affect them disproportionately because of their disposable income. The reason the top 10% pay more tax is that they have larger disposable incomes. They have a larger income because they hoard more of the wealth. It is a sad fact in this state that 38% are earning so little they are outside the tax bracket which will be set at €10,036 after the enactment of the Bill. The Minister talks about fairness in terms of tax and work, but what about those who are not working, given the new raft of taxes introduced?
It is very simple to say the Government cannot find €117 million. This might be an ideological argument, but I have offered suggestions on behalf of Sinn Féin about where we could save millions of euro and bring the individuals in question out of the tax net. One of them is halving mortgage interest relief for landlords which would save €400 million, that is, three times the amount that would be required to remove 273,000 people earning the minimum wage from the tax net. This is about fairness. It is fine to say the Government will look at this issue again and would like to do more, but we have choices in terms of the impact of taxation measures. I agree the State needs to bring in more tax revenue, but I disagree that those earning less than the minimum wage should pay this €117 million in tax. There are other ways of getting the money at the higher end of the scale from those who have the ability to pay.
I genuinely welcome the fact, because it could have been a great deal worse, that the Government has moved to remove approximately 300,000 people from the tax net. The logic for this is that their incomes are so low that they should not be paying the universal social charge. However, those earning less than €16,500 per annum should also be exempt from the universal social charge. They are already paying taxes which have a disproportionately heavier impact on them. They are earning very small incomes and it is not right that the State should levy direct taxes on those earning as little as €200 a week.
Will the Minister of State clarify the 38% figure? Is it that after this proposed change by the Government 38% of income earners will still not be paying any tax, which implies that 38% of income earners are earning less than €10,000 from employment?
It is income tax rather than the universal social charge.
A total of 38% of workers are not paying income tax, but they are paying the universal social charge.
That is a tax. We need to look at its presentation because it is not a fair representation for somebody looking at his or her payslip.
One is not paying income tax at the basic rate of 20%. Of course, this is a tax, but it is not a direct income tax.
Does the Minister wish to respond to Deputy Doherty in order that we can conclude the debate on the amendment?
The essential point is that the entry rate for paying income tax is €16,500. The equivalent rate in the United Kingdom is approximately £9,000. We have a very high entry rate for those levied at the basic 20% rate. That is not sustainable in circumstances where the country has a deficit of €15 billion to €16 billion, which we all acknowledge.
Which experts does one believe, those in the ESRI or the OECD? The OECD has examined this issue across the broad range of taxation systems, particularly in Europe. In the context of whether a system is progressive, most European countries have a progressive rating of between 120 and 130. Ireland's rating was 178 in 2011. I suspect, however, that it was not always that way; in the alleged good times we were not that progressive. In more recent years, however, that has changed because more tax is being taken in owing to the increases in taxes across the board.
We have a very high entry point and one simply cannot balance the ultimate taxation position unless one widens the tax base. However, I wish to give some very interesting information. Those persons whose gross earnings are €200,000 or more represent 1% of income earners who pay 20% of the total amount paid in tax. Those persons earning €150,000 or more comprise 2% of the total number of income earners and pay 27% of the total amount paid in tax. The 5% of the population who earn €100,000 or more account for 44% of all tax paid. As one moves down the income levels that percentage diminishes. As I said, the 77% of taxpayers who earn €50,000 or less, the great majority of taxpayers, account for just under 20%, or one fifth, of the tax take. Deputy Pearse Doherty will say, rightly, that is the way it should be and that is the way it is - those who have more pay more. The problem is that the great majority are paying at the lower rate and, as a consequence, if we are to try to do something significant in terms of the overall increase in tax revenue, we have to broaden the tax base.
I appreciate that the Deputy recognises that we have made some progress this year in terms of the universal social charge. Those who will be affected most are in temporary or seasonal work who are taking home buttons. It is only right and proper that they be removed from the USC net. Recently when I asked how much was taken in by way of the universal social charge, I was told it was about €4 billion a year. That is a big chunk of money. If we were to break it up and do things differently, we would have to find other options to raise that €4 billion. Is it better to raise the money by this big measure, the universal social charge, or by a variety of other measures? We will always have to get in the money if we are to balance the books and widen the tax base. Would we like to do more on this issue? Yes, we would. Will it depend on what is happening in the economy? Yes, it will. Removing from the USC net that group of people who are on very small incomes and for whom a few euro one way or the other makes a huge difference is a progressive measure.
Since there is confusion and people will hear reports of the contents of this meeting on the 38% and 45% figures, will the Minister of State provide the sub-committee with figures for the percentages of individuals who, as a result of the changes to the universal social charge, will be paying direct tax?
We understand it will be almost 330,000 out of 1.9 million.
I thank the Minister of State. My second question relates to the high entry point. The Minister of State has said the high entry point-----
The Minister of State has said this is unsustainable. Can I take from his comments that we are looking at a future change in tax bands?
That will depend on what happens from one year to the next. I did not say it was unsustainable, rather I said it was a very high entry point.
The Minister of State said it was unsustainable.
All of this is unsustainable until the country finds its feet again and we can balance the books. That is why all of these measures will be constantly kept under review. The point about the figure of €16,500 is that it is a high point of entry. In other EU countries the income level at which one begins to pay income tax is significantly lower than this. That is the point I was making.
Can I take it from the Minister of State's comments that what he said earlier does not signal a change in Government policy which was to maintain tax credits and tax bands?
That is the commitment given in the programme for Government and the intention of the Government. I even point to comments made by the Minister for Finance in the middle of last year. We are not going to preclude any option in the run-up to a budget.
On entering office the Government did preclude it.
It was a commitment, not an objective.
It would be a rather ridiculous Minister for Finance who precluded any option.
That is what the Government did.
Whatever about other Ministers making those commitments, there is that option. We have to look at this issue on a constant basis. The Minister for Finance made it abundantly clear in the summer of last year that all of these commitments could be taken in the round, given that we had to wait to see what was happening in the economy.
Are we to take the commitment given in the programme for Government with a pinch of salt? The Minister for Finance is saying all options are on the table, despite the fact that the Taoiseach has said tax credits and tax bands are not to be touched. Is that correct?
No. What he is saying is that from year to year we will have to look at the issue. That is the right and prudent thing for any Minister for Finance to do.
How stands the amendment?
This is one of the measures I welcome and for which Sinn Féin campaigned hard. However, I am disappointed. I recognise the Minister of State's comments about people on very low incomes being removed from the tax net. Nevertheless, those earning €200 a week are in a similar position. I will withdraw the amendment, with the right to resubmit it on Report Stage.
Amendment, by leave, withdrawn.
Amendment No. 9, in the name of Deputy Pearse Doherty, is out of order. Amendments Nos. 10 and 11 are related and may be discussed together.
Amendment No. 9 not moved.
I move amendment No. 10:
In page 13, to delete lines 3 to 10 and substitute the following:
"(a) notwithstanding subsection (1) and the Table to this section, the individual shall be charged to universal social charge for the tax year in which the income tax is charged on the full amount so charged to income tax at the rate of 4 per cent, and".
Amendments Nos. 10 and 11 are to section 2 which contains miscellaneous provisions relating to the universal social charge.
Amendment No. 10 relates to section 17 which deals with certain taxation provisions concerning retirement benefits. It includes provisions to allow individuals in public sector pension schemes an option to encash some or all of any private sector pension savings they may have and, effectively, repay the tax relief provided on those savings so as to ensure the limit on the maximum pension fund allowed at retirement for tax purposes is not exceeded. This is known as either the standard fund threshold, which stands at €2.3 million, or the personal fund threshold, as appropriate. The purpose of the provision is to give affected individuals in public sector pension schemes some of the flexibility available in the private sector to avoid breaching the maximum pension fund limit. The exercise of this encashment option will attract tax at the point of encashment on the full value of the pension rights at a ring-fenced rate of 41%, plus USC. This will broadly neutralise the tax relief such individuals availed of when building up their private pension funds. The amendment will apply the universal social charge at a flat rate of 4% on the full encashment value of the pension rights where the option is taken and, together with income tax at the current higher rate of 41%, will represent a ring-fenced charge of 45% on such encashments. It may be noted that the nominal higher rate of income tax which would have applied to relieve many of the contributions to pension savings from tax has averaged about 45% in the past 20 years or so.
Other amendments have been tabled to section 17. I will address the provisions of the section in a more detailed way when we discuss those amendments.
Amendment No. 11 is a minor technical amendment to correct a drafting error in the Bill, as published.
As I am not a pensions expert, I ask the Minister of State to correct me if I make a statement that is not factually accurate.
Amendment No. 10 alters the universal social charge that would be applicable on encashment. The encashment provisions in section 17 are for individuals with a public sector pension and a private sector pension. Is that correct?
The value of the public sector pension would have to be in excess of €2.3 million.
Yes, €2.3 million in total.
That would be the equivalent of an annual pension of about €115,000. These provisions are for public sector employees who are going to receive a pension of more than €115,000 on retirement. Will the Minister of State tell the sub-committee how many individuals will be affected by these provisions? Which cohort of groups will it affect? I understand that this will affect a very limited number of public sector workers, some within the legal profession and some Ministers. Would that be correct?
This links to my previous argument about bringing persons under the minimum wage out of the universal social charge, USC. If we are devising a scheme to reduce the universal service charge by 3% on a group within the legal profession who will have pensions in excess of €115,000 and for a number of senior politicians, it is seriously flawed and it is an approach that should not be supported. Forgetting about the rights and whether we would agree to allow them to encash their private pensions so that they would not exceed the personal threshold limit of €2.3 million, it is wrong on the basis that if we allow them to do that, we are reducing their tax liability by 3%. One can argue that when they paid into the pension, the USC did not exist, but the effect of the measure the Minister of State is introducing today will allow public sector workers with pensions in excess of €115,000, of whom there are a few in the State and who fall only within probably two categories of individuals, to avail of a reduced universal social charge. This is in the context of the Minister of State refusing to bring people under the minimum wage out of the universal social charge net.
It is not a measure to reduce tax on public sector employees. The purpose is to bring a level playing field for those who had a private sector pension and who came into the public sector. I am not sure whether we have the numbers involved but I will see whether I can get Deputy Doherty that information.
The difficulty here, as the Deputy well knows, is that when the previous Government reduced the total pot involved from €5 million to €2.3 million, suddenly a group of persons who had come into public sector employment who previously had built up very substantial private sector contributions would obviously face an encashment value. This is being introduced to create a level playing pitch where otherwise they would have to find possibly up to €900,000 to give back when they leave.
As far as we are concerned, given the totality of it is close to 45% anyway and that was there previously, the difference is not significant and it creates that fairness for those who had come in on one scheme and then found, as a result of the radical reduction in the amounts involved, that they would have had to face this enormous additional cost. That is the issue.
The Minister of State is now starting to deal with section 17, which is about the encashment option and the fact that the changes in the previous Finance Bill, which reduce the threshold from €5 million to €2.3 million, resulted in some persons having to use their entire lump sum to pay their tax liability because their pension was above €2.3 million, and the difficulties such persons face as a result. Under section 17, the Minister of State has provided a range of options for persons who would find themselves in that position, whether they are private sector employees, public sector employees or those with public and private pensions. That is to one side. If section 17 were implemented in full, those who have pensions above €2.3 million would have a range of options to ensure that their lump sum would not be used up for tax purposes. For example, one measure is that a maximum of 50% can be used for tax purposes. That gets around the Minister of State's argument.
This amendment concerns one cohort of persons who are able to encash their pensions, namely, public sector workers with a pension the value of which is in excess of €2.3 million, which means the public sector pension the State will pay them on retirement is in excess of €115,000. It is a very small number of persons, an elite at the top end. The Minister of State is saying the reason we are allowing them the option to encash their private pension is in order that they do not exceed the threshold which would oblige them to pay the excess, and if they choose that option, he will reduce their USC liability.
Allowing them to encash their private pension is one argument which we will have when we come to section 17, but the point is, if the Minister of State allows them to encash their private pension in order that they do not exceed €2.3 million, he is proposing that the committee accepts that we reduce their tax liability. Their tax liability, if they encash their private pension, is 48% at present. It is 41% of tax plus 7% USC, and the Minister of State is suggesting we reduce their tax liability by 3%.
We are proposing a 45% charge for this group of persons. The effect of the amendment I propose applies the marginal rate of 41% plus 4% through the USC. We are proposing a 45% charge.
A 48% charge applies at present. What happens when encashing one's private pension is one must pay the tax relief. It is not as if they are giving the State something back. We gave them the 41% in the first place through a tax relief. They must pay the tax relief back and at present they also must pay a 7% universal social charge.
The Minister of State is saying that we will reduce their tax bill by 3%, after which their income is treated normally for tax purposes and they must pay tax on top of that again. It is unbelievable for these groups of persons, who are the most highly paid politicians in the land and the most highly paid persons within the legal profession, that the Minister of State proposes to decrease their tax liability at a time when he refused my amendment to bring persons under the minimum wage out of the USC net.
My understanding is that they have built up this and we are taking it back from them, and that is all we are doing. It is a clawback measure. The effect of the 4% on top of the 41% is to take back the tax forgone over that period of time.
The Minister of State is reducing the amount that we will take back. At present, we will take back 48%. The Minister of State is reducing it to 45%. Is that correct?
Why are we reducing the clawback on these persons who, we should remember, must have pensions in excess of €115,000 for this to kick in? They also must have a private pension on top of that for this to happen.
As we all know, when one pays into a pension fund, one gets tax relief on the contribution one makes as an employee. In effect, it is a deferral of tax because when one draws down the pension, one is subject to the tax regime. The Minister of State appears to be saying that because the tax relief was applied at a certain rate, when the income is drawn down the person should only be charged at the same rate. The net effect of what he proposes appears to be a preferential USC regime for certain very high income persons. There is an inherent question of fairness here. Why is that income not subject to the same USC regime to which every other income earner is subject?
The issue of fairness applies here. When they were making their contribution, they were making it at a different rate. Now that this change has occurred, they are already paying tax at the top rate and on the full amount. All we are doing is taking back what effectively was the full impact of that at the time. That is the question.
If a person comes into one system and there is one set of rules, and then he or she finds that the rules are changed which will lead to this abnormal tax liability on one side, the argument is that there should be some fairness in terms of the person's exposure, and that is the point we are making in the amendment.
Why are they any different to any other taxpayer who was paying into a fund and got relief at a certain rate, and then, in drawing down that particular fund, was subject to the new tax regime that applied at the time of drawdown? Why are they any different? I do not understand the distinction the Minister of State is drawing.
It is because, unlike any other taxpayer, they are subject to a penal rate of tax as they have gone over the threshold that existed. The question is how much penal tax we want to put on them.
Let us be clear about this. This is subject to section 17, which allows them a way of encashing their private pensions so they do not have the excess to pay, which is that clawback measure. We are allowing them to do that. It is beyond me that the Minister for Finance has proposed to reduce the tax liability on a group of people at the highest end in society.
For the purpose of clarity, if they cash in their private pension, they lose 45% of it. There is no tax-free lump sum at all.
Is the Minister of State suggesting that is because of the change in the threshold?
Under the existing circumstances, they would lose 48%. The Minister of State wants to reduce the clawback by 3%. There is no way to get around this. The Minister of State is proposing a reduction in the amount of money the State will get from individuals who have private pensions on retirement in excess of €115,000. These are public sector workers with massive, unbelievable pensions. There is no-----
It is not a speech. I am trying to get this point through. What is before us is a reduction in their tax liability. One can argue that their tax rate is penal. The effective tax rate they are paying is very high at about 68%. However, in the context where the Government tells us time and again that we have external funders here and cannot find money, it must make more sense to ask individuals at that level to pay under the existing circumstances. The idea of reducing tax for them is simply absurd.
Will the Minister of State respond? I want to conclude the amendment.
I repeat what I said. Effectively, we are talking about people who came into the public sector at certain levels, and who had already built up quite a substantial private sector pension contribution over time. At the point of retirement, as I understand it, we get 45% of that back. Effectively, that is the tax relief forgone coming back into the system as a result of the changes we are proposing. The question the Deputy is asking is whether they should pay more in that circumstance. The point of rebuttal is that, given the changes that have occurred, there comes a point where it could be argued that if this change were not introduced, there would be a difficulty getting people who have built up such contributions to come into the public sector at that level. It is a question of whether this would be more disadvantageous to the public sector with regard to access to such people. That is the logical argument.
These people find themselves in this position because of the change in the rules and also in the circumstance that the thresholds have been utterly diminished. On the basis of fairness, the point is that if one wants to continue to encourage people with this expertise into the system, this change should be made. That is the argument around it.
I would like to press the amendment. We can come back to it when dealing with a further section. We are half way through and only on our third amendment.
It is not my fault. I complained about the timeframe for dealing with these amendments.
I appreciate that. The situation is ridiculous. There is plenty of scope to tighten up on the later stages of the Bill. However, I have a number of questions on what is an important issue. To repeat the point, we did not even have a briefing on the existing sections.
I point out to the Minister of State that the only people who would be able to avail of the reduced universal social charge, USC, are those individuals who are availing of the encashment option, not those who would be subject to the excess.
We do not have the numbers involved, nor do we have their profession or background.
I am not looking for the numbers, just for the categories. To take a hypothetical case, for an individual with a private pension of €3 million, the excess would kick in at €700,000. Does this amendment affect such people or is it just the individuals who are public sector workers with private pensions and who are involved in the encashment option?
It will not affect them, as I understand it.
It is only in regard to public sector pensions.
I have been informed the number is approximately a couple of hundred. I do not have a categorisation of who they are.
It is not very hard to guess who they are. As I said, there are a couple of senior politicians who would be able to avail of this option, I would guess, and a couple of members of the legal profession.
I do not know if they would. They have all been affected by the issue of pay reductions and, in virtually all cases, they have not come into the system from the private sector and virtually all have been here as boy politicians, like the Deputy, for all the years.
Some may have come from the private sector. We are not ruling out in the future that some may become Taoisigh and I do not believe voluntary reductions affect the pension entitlements, as I understand it. We do not know what the terms of the payment will be in the future.
We do know. One of the decisions taken is that a higher contribution is taken off those over a certain level which the Minister, Deputy Howlin, has announced - I understand it is €100,000. I do not know if this would involve the politicians, although I am not excluding other groups.
The Minister of State said this is basically a clawback. Will he state clearly, so there is no confusion, that what happens at present, with section 47 gone through, is that they pay 48%? In other words, there is currently a charge of 48% and the Minister of State is proposing to reduce that charge to 45% through this amendment.
I genuinely believe that is appalling. I am sorry for using such language but I think this is wrong. I ask him to reconsider this amendment. It is only a small group of people. I asked the Minister who lobbied him on this issue and why we are introducing a reduction. If nothing else, the signal it sends out is terrible.
For the purpose of clarity, it is not a reduced USC, as the Deputy presents it. It is a ring-fenced 45% charge to recover the tax relief given at that rate on their pension savings over time.
No. In this case, the USC will not go above 4% but it does for everybody else.
The Minister of State is reducing the USC. Let us be upfront about it.
The USC would not have been charged as it was not in at the time.
We know it was not in at the time. I made that point earlier. People have to deal with the realities. No one can tell me that as there was no bloody household charge when I was born, I will not pay the household charge. We have to go by the-----
The USC was not there at the time, so that is now the argument around this. It is difficult to argue the case for the crème de la crème. I presume this was an unintended consequence because of the USC component on this group of people, who would be adversely affected. It is unfair to describe this as an issue of the USC by itself.
While I do not want to drag this out, the Minister of State's comments are not factual. The reduction from €5 million to €2.3 million had an unintended consequence, which was basically that it reduced the level in terms of the excess and, therefore, people had to use their entire lump sum to pay their tax liability and some had to pay more than their lump sum. That was the unintended consequence. The 7% USC is not an unintended consequence and is completely separate. This is a decision that has been taken outside of the fact the Government has now dealt with that unintended consequence to reduce their tax liability.
Amendment put.
In accordance with the order of the Dáil of 23 February 2012, the division is postponed until 5.30 p.m. or the completion of proceedings on the matters to be dealt with in this session.
I move amendment No. 11:
In page 16, subsection (13), line 1, to delete “Subsection (1)(l)” and substitute “Subsection (2)”.
Amendment agreed to.
Section 2, as amended, agreed to.
SECTION 3
Amendments Nos. 12 and 13 in the name of Deputy Pearse Doherty have been ruled out of order.
Amendments Nos. 12 and 13 not moved.
I move amendment No. 14:
In page 17, to delete lines 37 to 45 and substitute the following:
"(a) section 485C(3) and Schedule 25C (as if the references to the tax years 2006 and 2007 in that Schedule were references to the tax years 2011 and 2012, respectively) shall apply in determining the amount of any specified property relief to be carried forward from any tax year to each subsequent tax year, and”.
This is a minor technical amendment to correct two drafting errors in section 3 relating to incorrect cross-references.
Amendment agreed to.
Section 3, as amended, agreed to.
Sections 4 and 5 agreed to.
SECTION 6
Amendments Nos. 15 and 16 are related and may be discussed together.
I move amendment No. 15:
In page 20, column 2, line 26, to delete "€900.00" and substitute "€950.00".
These are minor technical amendments to correct typographical errors.
Amendment agreed to.
I move amendment No. 16:
In page 20, column 2, line 33, to delete "€900.00" and substitute "€950.00".
Amendment agreed to.
Section 6, as amended, agreed to.
SECTION 7
Question proposed: "That section 7 stand part of the Bill."
In light of the discussion we have just had, the provisions of this section seem somewhat harsh. We are opposed to the removal of the tax exemption which applies to the first 36 days of illness benefit and occupational injury benefit, as proposed in the section. The Minister gave an outline in the Dáil Chamber of the rationale for this proposal, namely, that in certain circumstances where a person is on sick leave and continues to be paid by his or her employer, the tax exemption means he or she is better off out of work. That may well be the case in certain instances, but the reality is that most employees are not paid by their employer when they are sick and that illness benefit may well be their only income during the course of their illness. When one contrasts this proposal with the special assignee relief programme, SARP, proposal, for example, whereby high earners coming to the country can save more than €50,000 per annum in income tax, it seems deeply unfair. I am interested to hear the Minister of State's justification for the proposal.
Illness benefit and occupational injury benefit are taxable by virtue of section 126 of the 1997 Act. However, the first 36 days, that is, the first six weeks of the payment in a tax year, are disregarded for tax purposes. Under certain employer and employee arrangements, an employee may remain on full salary while on sick leave. However, such an employee may at the same time also be in receipt of illness benefit or occupational injury benefit from the Department of Social Protection. In some instances, the receipt of full salary from the employer is conditional on the employee paying his or her illness benefit from the Department of Social Protection to the employer. Where an employee continues to be paid in full by his or her employer while on sick leave while at the same time being in receipt of illness benefit or occupational injury benefit, such an employee is generally better off while on sick leave than when working, even where he or she hands over the illness benefit to the employer.
This situation may reward the taking of illness leave and, in addition, has the capacity to increase expenditure on social welfare payments over and above what it should be. The section seeks to remove the tax exemption that applies to the first six weeks of illness benefit. The yield from this proposal is difficult to quantify, but a tentative estimate points to a figure in the order of €13 million in a full year. To clarify, if the social welfare payment is a person's only income, he or she will not be taxed on it. Unless the employee has transferred his or her tax credits to a spouse or civil partner or elected to offset them against another source of income, illness benefit will continue to be tax-free by virtue of the tax credits and will not be eligible for the universal social charge.
If one takes the case of a married couple, for example, where one spouse is in receipt of illness benefit, is the Minister of State saying that unless he or she has transferred his or her credits to the spouse, the first six weeks of illness benefit will remain exempt from tax?
Yes, if both parties are assessed separately.
In other words, the proposal is designed solely to remove an anomaly whereby a person who continues to be paid by his or her employer while on sick leave may end up financially better off.
That is fine. One that basis I am willing to accept the section.
I do not oppose the section, but I am interested in the rationale the Minister of State has provided. I accept that in cases in which an employer continues to pay full salary while an employee is on sick leave, the employee may receive a small increase in net pay. However, there are other social welfare benefits to which the same logic could be applied. Is the Government considering any such measures to bring these payments into line with what is proposed in this instance? I am concerned that we are starting on a slippery slope whereby other social welfare payments will be affected. Maternity benefit stands out as one to which the same logic could certainly be applied. Will the Minister of State give us an assurance that there is no intention to extend this provision to maternity benefit and other payments?
As I understand it, there is a certain uniqueness to this payment which was introduced in 1997 and is the only benefit with a 36 day exemption attached. While all social welfare payments are under review, this case was considered unique. The saving will amount to some €13 million a year, which is significant. However, I would not like the Deputy to think this is part of a general demolition of all of the benefit schemes available. There were particular circumstances in this case where the issue of an increase in net pay arose. That is why we brought forward the proposal. It is not to say we are going through every single benefit scheme with a view to knocking it out.
I welcome that. Perhaps the Minister of State will tell us, if he has this information before him, the rationale for originally including the 36 days in the Finance Bill? What is the counter-argument?
It was an agreement under partnership in 1997.
I presume it was done outside the Department of Finance and it is clawing it back now.
Question put and agreed to.
SECTION 8
Amendments Nos. 17, 18 and 19 are related and will be discussed together by agreement.
I move amendment No. 17:
In page 21, line 17, to delete "and systems" and substitute "or systems".
These amendments relate to section 8 of the Finance Bill which provides a new relief for key employees engaged in research and development activities. Amendment No. 17 relates to the definition of key employee. The Bill as initiated provides that for an individual to be a key employee, 75% of the duties of his or her employment must relate to the conception or creation of new knowledge, products, processes, methods and systems. The amendment clarifies that to qualify an individual need not be involved in each of the activities referred to, rather 75% or more of the duties of his or her employment may relate to one such activity only.
Amendment No. 18 is a technical amendment to clarify that for an employee to be a key employee, 75% or more of the cost of his or her emoluments must qualify as expenditure on research and development. The Bill as initiated states that 75% of the costs must qualify.
Amendment No. 19 relates to the manner in which the credit surrendered by the relevant employer is claimed by the key employee. The provision allows the employee to use the credit in the year following the year in which the company surrendered the credit. An amendment is needed to ensure that a key employee can claim the credit surrendered to him or her even if he or she is no longer a key employee in the year he or she is claiming the credit or even if the company is not eligible for the R&D tax credit in that year having moved on to do other things. This is provided the employee remains in the employ of the company surrendering the credit. The employer must have been a relevant employer in the year for which it surrendered the credit and the employee must have been a key employee in that year. This amendment allows for the fact that there is a time lapse between the company surrendering the credit and the employee using the surrendered credit.
Amendment agreed to.
I move amendment No. 18:
In page 21, line 19, to delete "75 per cent of" and substitute "75 per cent or more of".
Amendment agreed to.
I move amendment No. 19:
In page 21, after line 47, to insert the following:
"(c) Notwithstanding that, for the tax year for which a claim is made under this section, an employee is no longer a key employee of the company that surrendered an amount referred to in paragraph (a) but is an employee of that company, then he or she shall be entitled to have the income tax charged on emoluments from that company for that tax year reduced by the amount so referred to, or the balance of that amount, as appropriate.”.
Amendment agreed to.
Question proposed: "That section 8, as amended, stand part of the Bill."
I am opposing this section. Perhaps the Minister of State will explain the rationale of allowing a company to extend its research and development tax credit to a key employee. What is the benefit of this to the State? Is there a net cost to the State in regard to this measure?
Perhaps the Deputy could repeat his question.
I am asking the Minister of State to explain the background to the introduction of section 8 which allows a company to forego its tax credit in research and development and assign it to an employee in order that said employee can write down his or her tax liability to as low as 23% and if there is a cost to the State in that regard.
There is no cost because the company is already getting the credit. This provision redesigns how it is claimed. I recently visited a business in my constituency which outlined to me the way in which it was using the credit. It was being used in a general way in the business and was not specific to one person. The objective of this provision is to focus the advantage on the key individual who is the inventor, the person ahead of the posse who has created something different. My understanding is that previously this credit could have been used in a global way around a business and was not specific to an individual. As I understand it, the rationale behind this is to focus part of the credit on a key individual within the operation.
Is the Government of the view that this will enhance research and development in the State?
That is exactly the view. It was said to me recently that focusing on the individuals in the white coats who come up with ideas and inventions provides an incentive within a business. It ensures that the people doing the research and development are the ones who benefit.
This is a competitive area. People move around a great deal. People are important in terms of the viability of a business. In circumstances now whereby bigger businesses are spending huge sums of money on R&D, it is only right and proper that some of the credit can be focused on the people creating the ideas. That is the objective of this provision. There is no extra cost involved because as I understand it the credit is still there.
Are all credits available to companies being drawn down in full?
I cannot imagine that a company entitled to it would not draw it down.
Is it offset against operating profits?
I think the Deputy's implicit point is if a company does not have sufficient profits to offset it against it can now offset it in respect of an employee.
This can only be used by a company if making profits.
I would like to comment on one issue and ask a question on another. How is research and development defined for the purposes of this tax credit? It seems to me that it would be possible for people to define all sorts of things as research and development in order to avoid tax. What safeguards are in place to ensure that this is not just another way for the corporate sector which, in my opinion, already pays ridiculously low taxes, to pay even less tax? Unless there are clearly defined criteria in regard to what constitutes research and development, this could be used as a tax avoidance measure.
Just as in the case of the special assignee relief programme, SARP, which we will come to later, this is pretty nauseating given huge numbers of people, who one could just as easily argue deserve incentives, be they in the public or private sector, have had incentives robbed from them in the form of the universal social charge and have had all sorts of cuts, including cuts in income, imposed on them. Is there not an enormous double standard here? High-fliers or whizz kids, or however the Minister of State chooses to define them, will be given financial incentives to work harder, but vast numbers of others are having disincentives imposed on them, even though we require them to work just as hard. In fact, to use the Minister of State's famous slogan, he wants more for less.
It is the Government's - it wants more for less. Hundreds of thousands of public sector workers are being asked to work more for less. Where are the incentives for them? They have been taken from them in the form of the universal social charge and other levies. Why is there is no consistency in the application of the logic of incentives, as set out in the Bill? Why does one group deserve incentives, while others do not?
To which section is the Deputy referring?
I am referring to the tax breaks for research and development.
Yes. The same logic applies to the SARP which we will discuss later.
We will come to it. We have set out in the legislation, in so far as we can, who the employees are. They are not directors of the relevant employer or associated company, rather they are people who have no material interest in the relevant employer and spend 75% of their time on duties related to the creation of new knowledge products and processes. It is very much in line with what I understand to be the "Frascati definition" of the European Union of research and development. This definition has wide European acceptance of what constitutes research and development.
If we are to come back as a country, we have to attract high-end jobs in areas in which there are opportunities. Research and development is perceived to be one of these areas. One of the key offerings of IDA Ireland in attracting investment is in this area. What we are proposing is much more focused than the previous Government's policy on research and development which was more generic. This is focused on the people with ideas.
The Deputy has asked how we will know whether somebody is involved in research and development. I have been reliably informed by the Revenue Commissioners that they engage with scientific experts to examine projects claiming this credit to confirm that they are defined as research and development projects. This is the area in which we must invest. The Government will put significant capital funding into research and development in the next few years, as did the previous Administration, because there is an expectation that there will be a significant return for the country in seeking new markets and opportunities.
There will not be any additional cost. This is redesigning the credit to relate it to specific individuals, as against a business. While I do not want to say that in the past some of the credit was able to be written off against the CEO of a business - I am not sure if that actually happened - in this case the credit is specific to the individual person with the idea. That is very positive in an environment in which people can move from one business to the next because of the skills they offer. They can also move from one country to the next.
Is it specifically defined as scientific research and development? A big emphasis has been placed by the Government on financial services. Are we going to reward people for coming up with ingenious or dastardly financial instruments such as those that helped the economy and the global economy to crash? Could it be defined as research and development if someone comes up with new variations of hedge funds, derivatives and futures? That might be seen as a plus for the financial services sector but a minus for the rest of the economy.
While I am absolutely in favour of research and development, it should be applicable across the board. I do not agree with making a distinction in incentivising one group categorised as being involved in research and development and not incentivising teachers whose contribution to the future development of society is every bit as important as that of those engaged in research and development, nurses or street cleaners. All of the people concerned are equally as deserving of financial incentives if the Government believes that is what needs to be done to advance society and encourage people to be creative and come up with new ideas. Why should we single out one narrowly defined group rather than apply it across the board?
I would like the other two committee members to ask their questions on the section before the Minister of State replies.
This is an attractive sweetener on which I share some of the views of Deputy Richard Boyd Barrett. I am generally uncomfortable with the idea that some people under the PAYE system are given breaks and others are not. There needs to be a clear economic justification for creating such a system. I know that in this case the Minister of State is allowing companies to surrender a tax credit and assign it to a key employee. I have a few questions about this.
I presume the definition of "key employee" can include an existing employee. He or she does not have to be brought in from abroad.
The Bill expressly excludes the directors of a company. What about a situation where the person who set up the company is the innovator? This could be the person who championed the idea and much of whose time is taken up by the research and development aspect of the business. I fully understand that if a free-for-all was allowed, this provision would be wide open to abuse, but are there no circumstances in which the person who created the business and may be self-employed can be allowed to benefit from it, if he or she is genuinely driving research and development?
The definition of "key employee" states 75% of the person's duties have to be carried out in the conception or creation of new knowledge, products, processes, methods and systems. Does he or she have to satisfy each of these criteria? The word "or" is not used.
My amendment changes the word "and" to "or".
The Minister of State would need to insert the word "or" more than once. Amendment No.17 reads, "In page 21, line 17, to delete "and systems" and substitute "or systems"". Is it one or the other?
How is the person who creates a product defined? Could an argument be made that people in companies are creating products in assembling stuff? I understand the section in terms of the use of the word "conception", but the creation of something involves something very different. I can create a cup of tea by mixing a tea bag, hot water, milk and sugar.
Is there a market for that?
That is not included in the Bill, but we can create products and provide tax relief without there being markets for them. This may be a trivial point-----
-----but I would like the provision explained. The scope of the definition of creating a product could be much wider than what was intended. People not involved in research and development could be allowed to write down their tax bill for whatever reason. I am not sure why they would do that, but I seek clarification on this issue. Is a company allowed to roll over that tax credit indefinitely if it does not have sufficient profits to avail of it in that given year or is there a limit to the roll-over period?
On the roll-over, any unused amount may be carried forward and used to reduce the corporation tax of following accounting periods. However, where an excess remains, instead of carrying forward that excess, a company may claim to use it to reduce the corporation tax of the preceding accounting period. If any excess still remains it may still be carried forward and used to reduce the corporation tax of succeeding accounting periods. However, as an alternative, a company may claim to have the amount of that excess paid to it by the Revenue Commissioners in three instalments over a period of three months from the end of the accounting period in which the expenditure was incurred. They can roll it over.
Given that we are allowing the key employee to have a 23% minimum tax payment to the State, it could apply indefinitely for the term of his or her employment. If, as a director of a company, I was to assign a tax credit to Deputy Boyd Barrett of €0.5 million but yet his tax liability in that year was only €10,000, he could use that €0.5 million this year, next year and in following years as long as he remains within the company.
If he got a credit every year, he could theoretically, but I understand it is unlikely for a director to obtain a credit every year.
Where, hypothetically, as director or owner of a company, I were to award a key employee a tax credit that he or she was not able to draw down in that year, does section 4B allow that person to use it against his or her tax liability in any given year in the future indefinitely?
The same principle that applies for the business is also in place for the employee.
My last question relates to the 23% minimum tax rate. A key employee under this scheme can pay as little as 23% income tax. I am aware that USC is applicable as well.
That is what I said, I am aware USC and PRSI are applicable. In terms of income tax, they can reduce their income tax liability from 41% to 23%. How does that square with the effective rate of tax for high-income earners? What is the minimum effective rate of tax introduced by the previous Government?
For a high-income employee, it affects those who are earning at what level? It does not affect everyone. It affects the definition of high-income employee.
In the hypothetical situation, where somebody, who is the whiz kid in research and development and who is a high-income earner, working for Google, Microsoft or whoever in Gaoth Dobhair - that is a plug to remember to get them up to Gaoth Dobhair - is paying 23%, how would that square with the minimum effective rate of tax?
If a high-income earner was paying a top rate of tax of 30% and, suddenly, he or she goes back into the laboratory, in the white coat and has an effective tax rate of 23%, he or she - in that case, I suppose the person would be a CEO of a business and should be owning many businesses himself or herself - would be brought back up to 30%. In the hypothetical situation of Deputy Doherty's friend in Gaoth Dobhair who is one of these individuals who is back creating this idea, as I understand it, the person would be brought back up to 30%. It is not really designed for such persons.
May I respond to some of the questions?
I wanted a response to the question on the financial instruments in particular, but to all of my questions.
I will see if I can get all of these and, if not, we can come back to them.
I reiterate the point that this is an important issue for IDA Ireland, which has explicitly told us of the importance of putting this scheme in place and highlighting the importance of research and development.
I was asked whether this relates to the totality of the economy. As I understand it, it relates to science or technology. Of course, technology could be the adaptation of software or the creation of a new software scheme to do any of the matters to which Deputy Boyd Barrett referred in the IFSC.
I will be straight about this. It has long been the case that the research and development credit was recognised as a good measure but I think the view has emerged that it needs to be much more focused on those who create the ideas, who are the initiators and who then allow other businesses to go on and succeed, rather than for it to be used for the purposes of the CEO. I understand there have been examples on the patent royalty exemption scheme where that kind of abuse applied and the Government led by Deputy Michael McGrath's party took the view that we should change that. All we are doing here is providing for something that has been a legacy issue for quite some time.
This is up for review every year. If there are examples of some abuse of this measure or it is not being focused on what I described as those in white coats, then we can review it in every Finance Bill, as is already the case.
Revenue, as stated, engages with scientific experts to examine all of the profiles.
On the question of product development, it is if it seeks to resolve scientific or technological uncertainty. That is a fairly broad definition. That could apply equally around this place.
Although I think I have the answer, can it apply to, for example, financial whiz kids coming up with new financial instruments?
If the technology was advanced and this was a new piece of technology which in the ordinary way was patented as the new product of this company, I suppose it could then be used by a financial services company but that is not the intended consequence of this measure.
Deputy Boyd Barrett worries too much.
I think I have a legitimate worry in that we will all be aware that these obscure financial instruments which not many fully understand played a significant role in destabilising the entire global economy. Somebody sat down and thought, "This is a brilliant idea", and somebody else said, "Yes, this is a great idea. We can make a lot of money out of it". However, the macro effect of these great ideas was disastrous.
I would be quite concerned about a definition of research and development that provided an incentive to persons in an area which, notwithstanding our differences, almost everybody agrees must be more regulated and controlled. It is a reasonably serious concern to provide an incentive to come up with new and devilish ideas for making more complex or innovative ways of making money on the financial markets.
The Minister of State did not really answer the question. I think I know from where he is coming but as it happens I do not agree. I half-glibbly said it but the more I think about it, the more I think it is true. To my mind, a street cleaner who is creative in his or her job is contributing potentially as much, if not more, to job creation in this country by contributing to the tourist potential of the country as somebody who is in a white coat and has a degree coming up with whatever it might be - some technological development. I do not see why the Minister of State distinguishes between one and the other, especially as he cannot quantify what jobs may be created or he states there will not be any real cost-benefit analysis as to what jobs may be created as a result of this kind of incentive. Arguably, if we had more motivated street cleaners and the streets were cleaner as a result, that would yield as much in terms of tourism jobs as somebody who happens to be wearing a white coat and has a degree.
The discussion has gone on for long enough.
Question put and agreed to.
SECTION 9
I move amendment No. 20:
In page 23, line 38, after "second" to insert "or subsequent".
It is proposed to make an amendment to section 9 which deals with the increased rate of 30% in mortgage interest relief for first-time buyers who purchased during the period 2004-08. The amendment provides for the increased 30% rate to also apply if a qualifying individual traded up or moved to a second home during the period. It adds the words "or subsequent" to provide for the unlikely event that an individual who traded up or moved two or more times during the period will also qualify for the increased relief.
Amendment agreed to.
Amendment No. 21 not moved.
Question proposed: "That section 9, as amended, stand part of the Bill."
I have a technical question for the Minister of State on the additional mortgage interest relief for those who bought in the period 2004-08 buyers. Section 9(e) states it will apply “on a qualifying loan taken out on or after 1 January 2004 and on or before 31 December 2008”. Will the Minister of State explain what is meant by the words “taken out”? Does this mean that a loan sanctioned in December 2008 and not drawn down until January 2009 will qualify? Does this provision relate to the actual drawdown of the mortgage?
As I understand it, it refers to the drawdown.
It will apply, even if the first repayment was not made until January 2009, as long as the cash was drawn down from the bank.
Yes. The drawdown is the key requirement. To clarify, section 9 provides for the new 30% rate of relief on interest paid on qualifying loans taken out between 1 January 2004 and 31 December 2008 where such loans were used to purchase an individual's first or subsequent qualifying residence.
While the increase in mortgage interest relief to 30% will come as a reprieve to some who are struggling, it is not focused, as the Minister of State knows. People who have no problem in meeting their mortgage repayments will benefit from additional relief. It is a pity this is the direction we are taking. The measure should be more focused to help those who are struggling. I know it would be difficult to do this without looking at individual cases. However, the reality is that some persons who are comfortable and have very large incomes, who purchased their house during the period specified, will be eligible to benefit from the additional relief, even though this should not be the intention.
I have some questions that follow on from Deputy Michael McGrath's point on the qualifying loans taken out. The Minister of State referred to the drawdown. I will make a declaration of interest as this may refer to my own position. In large sections of rural Ireland people do not actually purchase houses, they build them. This is the trend and is what I did myself, although I did not physically build the house. It is the trend to hire different individuals to build the house, although this may not be the case in urban centres for various reasons.
It is in the case of an extension to a house, when there are stage payments.
The drawdown of the loan is very different. For example, if the Minister of State had purchased his house in 2004, he would have gone to the bank and drawn down the total amount at a given time. However, when many others and I build a house in rural Ireland, a mortgage is approved for a certain amount and people then bring in the diggers. That work is inspected and when it is in compliance with the standards laid down, a drawdown is approved. The next step is to have the builders complete the work to a further level. The work is again inspected and the second drawdown from the mortgage company happens. Not to be difficult, but which drawdown are we talking about?
The first. The builder would have to receive some money to start digging.
If I draw down my mortgage in October 2013, with the first tranche being €20,000, leaving a further €100,000-plus to be drawn down, because I will have drawn down the first €20,000 which might only represent 10% of the total cost of the house-----
The Deputy would qualify.
No, we are talking about the period 2004-08.
Even though most of the drawdown would actually have taken place in 2004.
When a person purchases a house in an urban or rural area, the transaction happens immediately. However, a person does not pay all of the money at once in having a house built because on average it takes nine months and may take over one year. Those persons who began to build a house in 2003 and did not complete the work until 2004 will be excluded.
It works the other way, too. Those who started afterwards, where the first drawdown occurred before the end of 2008, will also qualify. Even if the first drawdown was in October 2008 and it took four or five years to build the house, the person will still qualify.
I appreciate that. Forgetting my initial comments about the figure of 30%-----
A price would have been agreed.
No, a price would not have been agreed. It takes a significant period to build a house in rural Ireland, probably one year, possibly longer, depending on how it is being financed, the availability of individuals and so on. During the period under discussion there was a lot of building activity; therefore, a person could have been waiting for three months for, say, a plasterer to become available. Everyone involved is an individual contractor. As such, it is necessary to price a contract taking into account the cost of plastering, plumbing and painting.
Effectively, the work is subcontracted out.
Exactly. It is not a situation where a person would have employed a contractor, rather he or she would have employed the blocklayer and so on. While I appreciate the Minister of State's point that the provision will have the same effect on the other side, the reason these dates have been chosen is this was when the market was at its peak; it was the most expensive time to either purchase or build a house. I, therefore, ask him to consider amending the section to allow for those persons who drew down their mortgages within the period. He can exclude me because there would be a conflict of interest. I presume many would be affected.
I reject the Deputy's claim that this provision lacks focus. It is very focused. It reflects an absolute commitment my party gave in the run-up to the last general election to focus specifically on the negative equity generation which bought at the worst possible time in terms of the housing market, namely, between 2004 and 2008. We recognised that people who are in negative equity, albeit making their mortgage repayments, have a right, through the taxation system and specifically through mortgage interest relief, to get something back. We were very focused in the commitment we gave in this regard before the election. We were told by others that it would not be done during the lifetime of this Government. We have delivered on that commitment and are very proud of it.
Second, the provision is also focused in the sense that it is during the first few years of repaying a mortgage that the interest build-up is the most significant. In seeking to assist that cohort of people who are stuck in negative equity and stung by the fact that interest payments are higher in the first several years, the provision is very focused. Third, it is focused in that it directly targets first-time buyers. We were clear in setting out our intentions in that regard in the context of our pre-election undertaking.
I understand the point the Deputy is making in regard to stage payments. However, our view is that it is first drawdown which triggers the relief. The Deputy asked whether I will consider an amendment that would broaden the definition. I am not in a position to do so. Regardless of the timeframe one chooses, there will always be difficulties in this regard. In fairness to the Minister, Deputy Noonan, he made it patently clear in introducing this provision in the budget that anybody with a drawdown date from 1 January 2004 until the end of December 2008 would be eligible for the relief. He has been very flexible in the approach he has taken. I will not give the Deputy false hope that the provision will be extended.
The Minister, Deputy Noonan, said he would like to give the provision as broad an application as possible within the rules. We all know that when one ascribes particular dates to measures such as this, all types of anomalies will be thrown up. Anybody who received mortgage sanction in the dying days or months of 2008 but was not in a position, for whatever reason, to draw down the loan until January 2009 should be considered eligible for this relief in the spirit of what the Minister is seeking to do. I reserve the right to bring forward an amendment on Report Stage to that effect.
To clarify, the Minister said, when introducing the Bill in the Dáil:
As with all time limited reliefs there will be people who just miss out, which is why I have been as flexible as possible with the legislation. However, I do not intend to extend the period any further as the measure would become less targeted and very costly.
He has been flexible in regard to the application on either side of the deadline. I do not want to give Deputies false hope regarding an extension. That would be dishonest.
Question put and agreed to.
Section 10 agreed to.
SECTION 11
Question proposed: "That section 11 stand part of the Bill."
This section relates to the fact that the Government has increased the fees for third level education. For parents affected by this increase, the only consolation was that they would at least be able to claim back a portion of the charge in tax. Does this section withdraw that facility?
If they have more than one child attending third level, parents will be able to claim for the second and subsequent children. As I understand it, this section refers to the increase that came about in the budget, which had to be reflected in the tax code.
The Minister for Education and Skills increased third level fees to €2,250. While the first €2,000 of that is ruled out for tax relief, there is no reason that the remaining €250 should not be eligible. For a person paying tax at the higher rate, this would amount to a small rebate of some €100.
My understanding is that registration fees were never eligible for tax relief. As education spokesman for the Fine Gael Party in the last Dáil, I made clear my personal view on the question of finding new means of funding higher education. I suspect my position is different from the Deputy's. The Government is in a situation where we must look at the broader picture in terms of funding higher education. As the registration charge has an impact across the tax code, any changes in terms of eligibility on one side has a knock-on effect on the other. Over the years all types of facilities were developed within the tax code in regard to fees, including tax covenants and the like. My view, which reflects the direction in which we are going, is that in the long term, some form of student contribution or loan system will be required to get us over the current difficulties and lessen the difficulties that exist for people.
As I understand it, because the budget increased the student contribution to €2,250, this provision is required in order to increase the disallowed amounts of €2,000 and €1,000 to €2,250 and €1,150, respectively, for 2012 and subsequent years. It is simply a knock-on effect from the decision made by the Minister for Education and Skills.
There has been a great deal of debate in terms of whether the student contribution charge amounts to tuition fees. We have been told it is a charge as opposed to fees, yet this section refers to relief for fees paid for third level education. In other words, the Bill recognises that the student contribution charge does in fact amount to fees.
It is my understanding that the registration charge was always excluded. This provision arises from last year's Finance Bill, where the charge was reclassified. What the Deputy states is correct, but the provision arises from the previous year's Finance Bill. There is a continuity there.
For clarity, registration charges were excluded for tax relief purposes. As such, a person with four children attending college, who is paying €8,000 in fees, could not have claimed relief in respect of those fees in previous years, whereas last year he or she could do so. Will the Minister of State confirm that this is the case?
One could not claim up until last year, whereas last year one could claim for second and subsequent children.
In other words, registration fees, or third level fees as they are described here, are still eligible for tax relief, but the first child is excluded.
Yes. The section simply reflects the increase in the charge. It is because of the increase in the charge that the eligibility was also increased in this Bill.
Question put and agreed to.
SECTION 12
I move amendment No. 22:
In page 24, line 11, to delete "10 consecutive days" and substitute "4 consecutive days".
This amendment relates to section 12 which introduces a new tax deduction for individuals who, as part of their duties, temporarily travel to the BRIC states. Having considered the comments of Government colleagues and Deputy Fleming on Second Stage, I am introducing an amendment to this scheme. The amendment reduces from ten to four the number of consecutive days which must be spent in any of the relevant states for a trip to qualify towards the overall minimum requirement to spend 60 days in the BRIC countries. The change will allow shorter business trips to qualify in recognition of the possibility that such trips may be undertaken as part of a broader trade mission which encompasses travel to states other than the BRIC countries.
I was in the House when Deputy Fleming raised this point on Second Stage, which is a fair one. I acknowledge the proposal from the Opposition, and the Minister is minded to make the changes as I have outlined.
Does Ireland have a double taxation agreement with all of the BRIC countries? Do we have a double taxation agreement with Brazil?
I know something about this because I also wear a hat on the double taxation front, so to speak. We have agreements with all of the countries except Brazil, and that is a priority issue for us. We are engaged in trying to bring about that double taxation agreement with Brazil. We will do everything in our power to get it over the line.
So this cannot be implemented in respect of Brazil.
A double taxation agreement between the states is not required.
We have commenced negotiations on this issue with Brazil, which is a priority country for us given the size, scale and economic activity of that country. We would hope to have this over the line at some point in the near future. Brazil is a significant market that we need to tap into.
Can the Minister of State speak to the section?
We must wait until the question on the section is put before we can do that. I would prefer to discuss this amendment and the Deputy's amendments, after which we can speak to the section.
I thought we had agreed the amendment.
I apologise. I was dealing with the section.
We will discuss the Deputy's amendments, and then we will discuss the section.
Amendment agreed to.
Amendments Nos. 23 and 24 are related and may be discussed together by agreement.
I move amendment No. 23:
In page 26, line 25, to delete "income, profits or gains."," and substitute the following:
"income, profits or gains.
(6) As part of the assessment for eligibility for the relief outlined in this section the authorised officer shall request evidence that the period of time for which the relief is claimed resulted in a clear and demonstrable increase in the volume of trade in the relevant state. The Minister shall set out by ministerial order the basis on which the authorised officer shall request and assess this evidence before making a determination on the claim for relief.",".
This amendment seeks to tie eligibility for this relief with an increase in trade in the country in which the employee is based. I presume the intention of this relief is to encourage people to engage in trade with the BRIC countries owing to the potential of those states. All reliefs must be focused and directed. I would have liked to have heard from the Minister of State what is an eligible company or person and what work they would have to have carried out within the four days and so on. There is a need for this relief to be linked to an increase in trade with the country in which the employee is based.
As amendments Nos. 23 and 24 are related and being taken together the Deputy should speak on amendment No. 24 as well.
We had a discussion earlier on tax exemptions in terms of how we measure if they are achieving what they set out to achieve. Amendment No. 24 provides that the Minister shall within one year of the passing of this legislation prepare and lay before the Dáil a report detailing the volume of relief sought and secured under this section and the increased volume of trade in the relevant states secured during the period in which the relief was claimed. The amendment provides for an assessment within one year of the passing of this legislation to see whether this provision is working. It may not be working and it may be that individuals are benefiting from this relief for purposes other than those for which it is intended.
I thank Deputy Doherty for tabling these amendments. The focus behind the provision of this relief is to assist in the development of new markets for Irish exports in the BRIC states. Deputy Doherty's amendment No. 23 proposes that where an employer is either unable to demonstrate an increase in the volume of trade with the relevant state or where there has been no increase in the volume of such trade, the relief should not be granted to employees who work abroad seeking to generate new business or market share. Outside of the practical difficulties which the proposed requirement would place on claimants, I am conscious that preparatory and substantive work in the relevant states will not always yield measurable results. I do not propose to accept the proposed amendments. I am of the view that it would be wholly unreasonable and impractical to impose such requirements on employees or employers.
Given that I do not propose to accept amendment No. 23, it would not be possible to provide the detail suggested in a report for Dáil Éireann as proposed in amendment No. 24. However, information regarding the volume of relief claimed under the section will be available through the usual channels.
Deputy Doherty also raises in amendment No. 24 the issue of how we will measure the impact of the relief, which is a fair point. I understand that the Central Statistics Office produces regular reports on Irish exports. These include information regarding the value of exports to individual countries and should indicate over time whether exports to the targeted markets are increasing. The number and value of claims for the relief will also be used to evaluate the scheme. The scheme is being introduced in a limited manner in order that it can be monitored. We have undertaken to look at this over three years.
The maximum deduction in any tax year for an individual is €35,000. Let us see how it goes. One of the shining examples of the Irish economy is the performance of our exporters in the first three quarters of last year, which were up 5.5%. Given that the world economy is as it is, the key to a return to growth in our economy is export-led growth. The Deputy and other colleagues will be aware that because we are exporting more than we are importing, we have a balance of payments surplus, which normally highlights that when the international economy turns and sentiment improves, we will be able to recover quicker. Many of our businesses are much more competitive than they used to be and are exporting well.
I understand that this proposal came from the Irish Exporters Association. It is important we listen to and engage with the association to determine if this can help. Some of the countries concerned are not the most hospitable places in the world to which to send people, including those with families. This measure will assist companies in sending some of their best people into these markets to try to increase market share, thereby increasing employment opportunities in the country. That is the objective behind this provision.
Measurement of whether exports are increasing does not tell us the full story. It does not tell us whether individuals or companies availing of this relief is resulting in increased exports. What is required is an assessment by a company or individual to show that there has been an increase in trade. Amendment No. 23 states "the authorised officer shall request evidence that the period of time for which the relief is claimed resulted in a clear and demonstrable increase in the volume of trade" and "The Minister shall set out by ministerial order the basis" of these requests. This does not preclude the relief being granted but attempts to focus and channel that relief to ensure it is individuals who are trying to grow the export market for the State.
The Minister of State should answer a number of questions in this regard. What is the implication for the State's tax take and what will be the net cost of this measure? How many individuals does the Government believe will avail of this relief? What are the safeguards to prevent, for example, a financial institution with a sister company in South Africa from sending someone there who would then be able to avail of this provision?
The Deputy asked a question on the cost. The Government's estimate is €1.5 million per year on the assumption that 100 people claim the full tax relief. On the question the Deputy asked on the assessment, the Government will know the numbers involved and the number of those who claimed. In addition, through the CSO the Government will know whether it has made any difference in respect of market share for those particular countries. It might take until next year, because such data probably are one year in arrears, to realise whether this measure has made any difference this year. As the individuals must claim back the reliefs, it will not be until next year that we will know. However, the Government's estimate is that it will cost €1.5 million.
The Deputy asked another question.
Yes, it was a hypothetical scenario.
Yes. What is to stop a financial institution with a sister company in South Africa from sending an employee there and for that employee then being able to write down his or her tax bill by €35,000?
I suspect I would take a pretty sanguine view of that, were such employees to manage to bring back some deposits with them. The Government is in the business of trying to attract money into the country and its banks. Export is export, regardless of whether it is a service, a good or whatever. As that is the qualification, goods and services qualify. If we can get an extra share of the market from those countries in banking or elsewhere, that must be to this country's benefit.
To be clear, an international bank that is based in Ireland and which, for example, has a company in South Africa-----
I apologise. The Deputy refers to an international business that is based here.
I mean a business that is based here, by which I mean one of the financial institutions that has a sister organisation in South Africa. Were such an institution to send an individual down there to carry out the normal functions of the bank, to put in place systems or whatever, would such an individual also be eligible for this relief?
My understanding is he or she cannot work for the subsidiary in that country. In other words, if a person is based here but that company also has a business related to that business in one of the countries concerned, he or she cannot work for that other business in South Africa but must work for the Irish business.
For whom must such a person work?
He or she must work for the Irish bank.
What does the Minister of State mean?
I apologise, he or she must work for the business domiciled in Ireland. Such people cannot work for a subsidiary when they go. Is the Deputy suggesting a scenario in which such people are part of an international bank in Ireland but are going to its sister bank?
Imagine, for example, that Bank of Ireland had operations in South Africa - I am unsure whether this is the case - and its chief executive officer sends one of his chiefs over to South Africa for a couple of weeks to put in place a system.
If one takes that example, I am reliably informed that Bank of Ireland would be most unlikely to be seeking to take deposits there because of the regulatory environments.
I am giving the Minister of State a hypothetical scenario. I simply wish to ascertain what restrictions exist in this regard and how focused is the measure in respect of developing trade.
The question is whether the benefit is for the business domiciled in this State. If one sends people out to any of these countries, one must ask what is the additional market share they bring back to the country. This is the test on which this measure must be based. However, I have precluded the option that such employees would work for a subsidiary. I simply do not know whether a bank would attempt to enter these markets.
Briefly, it is essential that Ireland increases its trade footprint in these countries. As the Irish Exporters Association has pointed out, not everything is rosy in the export garden either and Ireland is losing market share in many of these countries. While Fianna Fáil is prepared to support the Government on this issue, controls must be put in place because tax experts are watching these proceedings and await the enactment of this legislation, after which it will be their function to devise mechanisms for clients to reduce their tax liability. If there are any loopholes or if the aforementioned experts can find a way for their clients to benefit from this measure, they will so do. Consequently, members must put in place the requisite checks and balances. The critical test for me is whether it leads to increased trade and exports and more employment creation in Ireland. Similarly, in respect of the special assignee relief programme, SARP, proposal, to which I hope members get before the guillotine, one must have in place those controls. One must have a measurable link between the outcomes for which one hopes and the input one is injecting by way of this tax relief. I believe some of these sections are a little too loose. Fianna Fáil is prepared to give the Government the benefit of the doubt for the present as they are short-term measures but they must be measured effectively over that period.
I appreciate what the Deputy is saying. There is very little money about the place and in virtually all the proposals set out by the Minister for Finance and which members now are transposing into legislation, there is an element of attempting to provoke the economy and of trying to help business along. In all of these measures, this review will be put in place. I believe the Government has stated that a maximum of three years will apply in this regard. I refer to the scale of the tax preferment, namely, €35,000, which I understand to be worth approximately €14,000 in net terms to an individual. While this is significant, it is not on the tax lawyer or corporate side of organising a major scam. I hope these words do not come back to haunt me, as it is always dangerous to say such things.
The Minister of State has set a challenge for them.
If 100 people avail of this relief at the maximum rate, the full liability is €1.5 million. In the context of billions of euro, it is not huge. However, the Government will keep this issue under ongoing review.
As only three minutes remain, members will not reach the next section, which unfortunately pertains to the SARP. Consequently, I will ask a question on this issue. In respect of the individual who carries out the work in one of the so-called BRIC countries, the Minister of State should explain what work must be carried out. What kind of work is stipulated by this provision? Hypothetically, were someone to travel there on holidays, how is one to judge that they are carrying out work? While it might not be part of a major tax scam, it could be thrown in as part of spending a week over in South Africa, visiting the sights such as Robben Island and so on.
I was going to say that it was ten days but now, thanks to Deputy Sean Fleming, it is down to four, so it will be a short relief. It is crafted to follow out the instructions of the individual's employer. Presumably, if someone is paying one to go there, that person expects results.
Does it apply to a self-employed person or to the owner of a company?
That has been ruled out and it must be an employee.
Yes, I understand it must be an employee or a director. I have been informed it includes a director.
It includes a director in what? Can a director avail of this relief? I would be interested to learn the reason a director can avail of this relief. It could happen that someone had gone there, who may have a second house in a certain place, and a director could avail of this relief. I am concerned with regard to the scope of this provision. It is extremely frustrating that we do not have adequate time in which to tease out these matters.
I understand that quite senior people will be trying to win this share. These individuals may well be at director level. They will be trying to introduce themselves and their businesses. If one is trying to win a contract, one will want to deal with a person who is at the highest level within the relevant business. That is the objective here.
What safeguards are in place in respect of, for example, a director of a company who goes to South Africa for a period, who takes a holiday and who returns and claims tax relief?
This is also part of the restriction relating to high earners and the new rate of 30% we have introduced. If the provision we are discussing were used for tax avoidance purposes in order to write down an individual's liability, the latter would be increased again. This, of course, presumes that the person in question would, by definition, be a high-worth individual.
There are many directors who are not high-worth individuals. What is the position with regard to a director who does not come under the threshold, who takes a holiday in South Africa and who returns and gets his or her accountant to write down his tax bill? Is provision made in the section to prevent someone from doing that?
It is approximately 60 days in total in any event-----
-----so one holiday is not going to-----
I am sure the Deputy is aware of that quite benevolent and-----
I apologise but I must interrupt the Minister of State.
It would be a false claim and the person involved would be hit with penalties and interest in the same way as anyone else.
As it is now 5.30 p.m., the postponed division on amendment No. 10 must be taken. As there are fewer than ten members present, under Standing Orders we are obliged to wait eight minutes or until the full membership is present before proceeding to take the division.
Amendment put:
The divided: Tá, 7; Níl, 3.
Tá
- Dowds, Robert.
- Flanagan, Terence.
- Hayes, Brian.
- McNamara, Michael.
- Mitchell, Olivia.
- Timmins, Billy.
- Twomey, Liam.
Níl
- Boyd Barrett, Richard.
- Doherty, Pearse.
- Fleming, Sean.
Amendment declared carried.
As the question on section 2 is contingent on the result of the postponed division on amendment No. 10, in accordance with the order of the Dáil of 23 February 2012, the putting of the question was postponed until 5.30 p.m.
Section 2, as amended, agreed to.
As it is now 5.30 p.m., I am required to put the following question in accordance with the order of the Dáil of 23 February, "That the amendments set down by the Minister for Finance for sections 1 to 17 and not disposed of are hereby made to the Bill and in respect of each of the said sections undisposed of, that the section, or, as appropriate, the section as amended, is hereby agreed." Is that agreed?
I should say that we may be bringing forward an amendment on Report Stage relating to section 17. I should flag it before we go past section 17.
Question put:
The Committee divided: Tá, 7; Níl, 3.
Tá
- Dowds, Robert.
- Flanagan, Terence.
- Hayes, Brian.
- McNamara, Michael.
- Mitchell, Olivia.
- Timmins, Billy.
- Twomey, Liam.
Níl
- Boyd Barrett, Richard.
- Doherty, Pearse.
- Fleming, Sean.
Question declared carried.
Sitting suspended at 5.45 p.m. and resumed at 6.30 p.m.
Sections 18 to 25, inclusive agreed to.
The next amendment is in the name of Deputy Boyd Barrett who is absent. We will suspend briefly to allow the Deputy time to return to the meeting.
Sitting suspended at 6.35 p.m. and resumed at 6.40 p.m.
SECTION 26
I move amendment No. 74:
In page 79, between lines 20 and 21, to insert the following:
"(C) notwithstanding the provisions of subparagraphs (vii) and (viii) of subsection (1)(b), where a company pays an amount to another person to carry on research or development activities it shall be a requirement of that company to first attempt to obtain such research or development activities from persons resident in the State as far as is practicable,”.
I have moved the amendment on behalf of Deputy Boyd Barrett.
As announced in the Budget Statement by the Minister for Finance, we are introducing in the Finance Bill significant enhancements to the research and development tax credit scheme as we need to encourage the productive, high value added sectors of the economy to work our way out of the downturn. Until now, subcontracted research and development costs in respect of payments made to unconnected persons have been eligible for the tax credit to the extent that they do not exceed 10% of the expenditure incurred by the company in question on research and development activities. In the case of payments made to third level institutions in the European Economic Area for undertaking research and development, the limit was 5%. These limits had the effect of disproportionately affecting smaller companies which may have a greater need to outsource research and development work than larger multinationals with greater internal resources. The outsourcing limits for subcontracting research and development costs have been increased to the greater of 5% or 10%, as appropriate, up to €100,000. This will provide a targeted benefit to SMEs.
However, the proposed amendment which seeks to include a requirement that the company should first attempt to obtain research and development subcontractor partners who are resident in the State would bring the research and development tax credit scheme into conflict with EU state aid rules. It has been a deliberate policy to avoid EU state aid complications by maintaining the research and development tax credit scheme as a general measure which does not favour one form of domestic company over another or discriminate against companies or universities in other EU member states. The amendment attempts to ring-fence for the purpose of the scheme that the company would employ an Irish person first. I am informed that is in conflict with EU state aid rules because they should apply to all member state companies or individuals. For this reason I cannot accept the amendment.
I withdraw the amendment and reserve the right to table it again on Report Stage.
Amendment, by leave, withdrawn.
I move amendment No. 75:
In page 83, lines 32 to 35, to delete all words from and including "in" in line 32 down to and including "be." in line 35 and substitute the following:
"in an amount equal to 4 times so much of the specified amount as is not so authorised.".
This is a technical drafting amendment to clarify that where an amount of research and development tax credit is incorrectly claimed by a company, the amount that is due will be taxed at four times the value of the amount not due. The section, as currently drafted, allows for the whole amount claimed by a company to be taxed at four times the value of the claim rather than just the amount not due. The amendment rectifies the issue.
Amendment agreed to.
Section 26, as amended, agreed to
SECTION 27
Amendments Nos. 76 to 79, inclusive, are related and may be discussed together, by agreement.
I move amendment No. 76:
In page 85, subsection (1), lines 23 and 24, to delete paragraph (a) and substitute the following:
"(a) by substituting the following for paragraph (a):
"(a) subject to paragraph (b), where the chargeable event falls on or after 1 January 2001, at the rate of-
(i) 25 per cent where the policyholder is a company, and
(ii) 33 per cent in the case of any other policyholder,",
and".
These amendments give legislative effect to the changes announced in budget 2012 to increase the rates of tax applying to life assurance policies and investment funds by three percentage points with effect from 1 January 2012. A similar increase has been applied to deposit interest retention tax under section 35. The amendments to section 27 are being made to address anomalies that have arisen as a result of the difference between the tax rate of 25% on investment income for companies and the rates of exit tax on the investment funds and life assurance products which are 30%, and 33% from 1 January 2012. The anomalies include the administrative difficulty of having to refund exit tax in certain cases, the anomaly of similar income being taxed at different rates if one type is subject to an exit tax, and the current disincentive to investing in certain products, not least the fact that tax rates encourage investment in foreign life policies over domestic life policies. The amendments provide that companies with income from such products are liable to tax on that income at the rate of 25%. This rate already applies in the case of companies receiving deposit interest.
Will the Minister or State clarify that all that we are doing here is increasing the tax rate from 27% to 30% for all these products, including DIRT tax?
Yes. The Deputy will be aware of the outline commitment made by the Minister in respect of capital gains tax to all the other taxes which have a headline rate of 30%. All we are doing is addressing that issue in terms of the headline rate.
Amendment agreed to.
I move amendment No. 77:
In page 85, lines 41 to 44, and in page 86, lines 1 to 6, to delete subsection (4) and substitute the following:
"(4) The Principal Act is amended in Chapter 1A of Part 27—
(a) in section 739D by substituting the following for subsection (5A):
"(5A) The amount referred to in subsection (2)(dd) is the amount determined—
(a) where the unit holder is a company, by the formula—
A x G x __100____
100 – (G x 25)
and
(b) in any other case, by the formula—
A x G x __100____
100 – (G x 33)
where in relation to the formula in paragraphs (a) and (b)—
A is the appropriate tax payable on the transfer by a unit holder of entitlement to a unit in accordance with subsection (2)(d), and
G is the amount of the gain on that transfer of that unit divided by the value of that unit.",
(b) in section 739E(1) by substituting the following for paragraph (a ):
"(a) subject to paragraph (ba), where the amount of the gain is provided by section 739D(2)(a), at the rate of—
(i) 25 per cent where the unit holder is a company, and
(ii) 30 per cent in any other case,",
(c) in section 739E(1) by substituting the following for paragraph (b):
"(b) subject to paragraph (ba), where the chargeable event happens on or after 1 January 2001 and the amount of the gain is provided by paragraph (b), (c), (d), (dd) or (ddd) of section 739D(2), at the rate of—
(i) 25 per cent where the unit holder is a company, and
(ii) 33 per cent in any other case,",
(d) in section 739E(1)(ba) by substituting “(S + 33) per cent” for “(S + 30) per cent”,
(e) in section 739G(2)(c) by substituting “section 739E(1)(a)(i)” for “section 739E(1)(a)”, and
(f) in section 739G(2) by substituting the following for paragraph (e):
"(e) where the unit holder is a company, the payment is not a relevant payment and appropriate tax has been deducted from the payment, the amount received by the unit holder shall, subject to paragraph (g), be treated for the purposes of the Tax Acts as the net amount of an annual payment chargeable to tax under Case IV of Schedule D from the gross amount of which income tax has been deducted at the rate specified in section 739E(1)(b)(i),”.”.
Amendment agreed to.
I move amendment No. 78:
In page 86, subsection (5), between lines 17 and 18, to insert the following:
"(f) in section 74E(1) by deleting paragraph (a),”.
Amendment agreed to.
I move amendment No. 79:
In page 86, subsection (6)(f), line 43, to delete “Paragraphs (f) and (g)” and substitute “Paragraphs (f) to (g)”.
Amendment agreed to.
Section 27, as amended, agreed to.
Sections 28 to 36, inclusive, agreed to.
SECTION 37
I move amendment No. 80:
In page 99, subsection (1), line 37, to delete paragraph (g) and substitute the following:
"(g) in Part 5 of Schedule 2 by the deletion of paragraph 27.”.
This amendment relates to section 37 which deals with encashment tax. It is a technical drafting amendment. The words "of Schedule 2" were omitted in the Bill as published. I commend the amendment to the committee.
Amendment agreed to.
Section 37, as amended, agreed to.
Sections 38 to 42, inclusive, agreed to
SECTION 43
Amendments Nos. 81 and 82 are related and may be discussed together, by agreement.
I move amendment No. 81:
In page 103, to delete lines 18 and 19 and substitute the following:
" ‘Directive' has the same meaning as in section 540A;
‘emissions allowance' means-
(a) an allowance within the meaning of Article 3 of the Directive,
(b) an emission reduction unit or ERU, within the meaning of Article 3 of the Directive, or
(c) a certified emission reduction or CER, within the meaning of Article 3 of the Directive;”.”.
Section 43 provides a deduction for expenditure incurred on the purchase of EU emissions allowances that may be used in offsetting a company's emission level under the EU emissions trading scheme. The purpose of the amendment is to ensure that a tax deduction is already available for expenditure incurred in the purchase of emission reduction credits issued under the Kyoto Protocol. These credits, known as certified emission reductions, CERs, and emission reduction units, ERUs, are generated by emission saving projects undertaken in third countries, subject to a verification process under the Kyoto Protocol. These credits are traded in the carbon market and can be exchanged for EU allowances for the purposes of meeting a company's compliance obligations under the EU scheme.
As these credits can be purchased and used by Irish companies to cover part of their emissions in the same way as EU emission allowances are used, it is appropriate to allow a deduction for expenditure incurred for this purpose. The amendment will also provide that the sale of any purchased credits will be treated as a trading receipt of the trade similar to the sale of purchased EU allowances. The profits for such sales will attract tax at the standard corporation tax rate of 12.5%.
Amendment agreed to.
I move amendment No. 82:
In page 104, line 6, after "by", to insert the following:
"Directive 2004/101/EC of the European Parliament and of the Council of 27 October 2004,"
Amendment agreed to.
Section 43, as amended, agreed to.
Sections 44 and 45 agreed to.
SECTION 46
I move amendment No. 83:
In page 107, subsection (2)(b), line 49, after “loss” to insert the following:
"or other amount available for surrender under section 411(2) of the Principal Act".
This amendment inserts into section 46(2)(b) of the Bill a necessary reference to section 411(2) of the Principal Act and relates to the determination of the amount of relief available for an accounting period beginning prior to 1 January 2012 and ending after that date.
Amendment agreed to.
Question proposed: "That section 46, as amended, stand part of the Bill."
Section 46 deals with group relief and the transfer of losses by one company to another. What is the rationale behind our allowing a profitable company to offset its tax liability against the losses of a sister company?
A company in common ownership may have a number of entities but is nonetheless one group. A company might be divided in equal or unequal parts in a number of countries but it is still one entity. This provision acknowledges this and allows for transfer of losses to occur.
Common ownership is guided by different percentages. As such, common ownership could be a director who owns 75% of each company.
There is no limit in terms of the portion of profits that can be transferred to a loss making company.
As I understand it, the losses are transferred.
The losses are transferred to the profitable company which can then write down its tax liability in terms of corporation tax.
We are treating these companies as a single company for taxation purposes, yet companies are split for other purposes such as redundancies and so on.
That would differ depending on the protection applicable in each member state.
Can the Minister of State explain that to me?
The Deputy is speaking about a social welfare system, which is not applicable in a group of EU member states. Group relief for companies is a basic feature of modern tax systems. It recognises that groups of companies generally comprise a single economic entity and provides a system of relief for trading losses and related matters within the group. Simply put, the relief may be surrendered to another company of the group, subject to strict criteria being met. Group relief is important to Ireland's competitiveness and attractiveness as a location for foreign companies.
Group relief is already in place and is used on an extensive basis. I am surprised this was not already incorporated in legislation. Perhaps the Minister of State or his officials will advise if there are any restrictions in a situation where a profitable company acquires a company with significant accumulated losses carried forward. A recent article in the media - I think it related to Greencore - reported that a company with extensive losses was allowed to extend those losses to a profitable company, resulting in greatly reducing its tax liability. Are there restrictions on this type of practice?
Yes. I am informed that a company cannot simply buy in the losses. This provision is strictly enforced. A company which buys another company which has substantial losses cannot offset those losses against the tax liability of the new company. That is the position as I understand it.
I will review the article which raised the issue of one company acquiring another company, the losses of which were being offset against the profits of the acquiring company.
I suppose the question that arises is when did the losses occur? If the losses occur after common ownership that is a separate matter to the losses having been there historically and a company buying into that.
In regard to group relief, it has been stated that this is standard practice.
It applies in other EU countries.
Yes but it does not apply in all EU countries. Am I correct that it does not apply in a number of EU countries?
I am informed it is general practice in other EU countries. We do not know the precise number of countries in which it does not apply.
As I understand it, it does not apply in three or four EU countries.
It applies in the majority of EU countries.
It applies then to different degrees depending on how ownership of the company is defined in terms of share and so on.
Am I correct that this group relief allows for losses to be transferred to profitable companies that are not resident in the state? For example, in the case of a company in Portugal which is making a loss, a sister company or director who owns 75% of that company can-----
As I understand, transfer can only take place within the state.
It cannot be done outside of the state. The group relief applies where a transfer takes place within a state.
Page 106 states that relevant territory means a relevant member state.
For the purposes of clarity, I will read the note into the record. It might explain the provision better than I can.
In recognition of the fact that groups of companies generally comprise a single economic entity, the legislation provides for a system of relief for trading losses and related matters under which the losses of one member of a group, the surrendering company, may be offset against the profits of another member of the group, the claimant company. Trading losses and other amounts of which relief may be given for corporation tax may be surrendered by a company which is a member of a group of companies. Relief given to another company in the same group is termed group relief.
Originally, to be in a group all of the companies had to be Irish resident. However, this was held to be discriminatory under EU law in a landmark UK case. To meet the requirements of that case, the Finance Act 1999 extended group relief for trading losses to situations where the parent was EU-EEA resident. It has been highlighted by the international insurance industry and the EU-EEA that restriction is a negative factor when non-EU-EEA companies and multinational groups are exploring the possibility of setting up Irish re-insurance operations. The issue has been also raised less formally by other industries.
In addition, a recent UK High Court case has found that the non-discrimination article in treaties permits a group relief claim where two resident UK companies are subsidiaries of a company resident in a treaty country. This means the current Irish rules are open to challenge. In anticipation of that ruling, the UK changed its law on this point in 2000. In light of the industry representations and the recent UK case law, the new provision being introduced in section 46 allows into the group subsidiaries of companies resident in tax treaty countries or listed on a recognised stock exchange. This means that losses can now be transferred between two Irish-resident companies, where those companies are part of the 75% group involving companies resident in a jurisdiction with which Ireland has a treaty or quoted on a recognised stock exchange.
They can be transferred only between the Irish-based companies that are resident in Ireland.
Until now, that was possible only if the parent company was a member of the European Union but this measure will extend this facility to all. I am aware of the court case in Britain on this issue but other member states have not followed this path thus far.
The bigger the range of ownership, the bigger the range of investment that is open. Being purely strategic about it, as we anticipate the possibility of a challenge, consequently would it not be more sensible to change the legislation given the importance of investment to this country as a small open trading economy? That is the argument.
This amendment, which extends group relief for companies across the globe where tax treaties exist-----
The only restriction is it must be resident in a jurisdiction with which Ireland has a treaty or is quoted on a recognised stock exchange.
Yes, companies from any country across the globe that has a double taxation treaty with this State can now avail of group tax relief for the Irish subsidiary companies. What is the net cost of such a measure?
My understanding is the claiming countries must be in Ireland and must be subject to corporation profit tax as well. The Deputy has asked for the net cost.
Sorry, the Minister of State referred to the claiming company, which is one of the profitable companies.
However, the mother company can be in Russia, South Africa or wherever.
Yes, assuming the treaty restriction is met.
On the Deputy's question regarding cost, it is not possible to estimate the cost of this extension but it is not expected to be significant. This is because most multinational groups already will have structured their organisations so that their Irish companies fit within the current definition of groups. However, some groups with non-EU or non-EEA parents, particularly in the insurance industry, may not have been able to so do due to regulatory reasons and their Irish operations will now be able to avail of group relief. The removal of the EU and EEA restriction in respect of group relief should make Ireland a more attractive location for non-EU and non-EEA companies and multinational groups that are exploring the possibilities of setting up here.
What is allowed in this regard is to transfer from a non-profitable company to a profitable company to write down the profitable company's liability. However, the non-profitable company has the ability to carry forward its losses anyway. Consequently, I take grave issue with this extension. Am I correct in stating that group relief in its entirety is costing the State approximately half a billion euro?
It cost €390 million in 2009.
This provision is widening it so that it-----
I do not have a more accurate number to hand for that. I am informed it is a timing issue because the losses can be carried forward.
I understand that but I am concerned because these losses can be carried forward and this measure proposes to extend the existing group relief beyond the scope of the European Union. While the latter was required under the British legal case, the global position proposed here was not. The amendment to the Finance Bill in previous years was as a result of the aforementioned judgment. However, this extension is not based on any judgment although one might think there may be a judgment or a case that may give rise to an unfavourable judgment. I have concerns about this section.
Question put and agreed to.
Sections 47 to 50, inclusive, agreed to.
SECTION 51
I move amendment No. 84:
In page 109, subsection (1), lines 41 and 42, to delete all words from and including "Schedule" in line 41 down to and including "paragraph 9DB:" in line 42 and substitute the following:
"Schedule 24—
(a) in paragraph 4(5)(a) by substituting “paragraphs 9D, 9DB and 9DC” for “paragraphs 9D and 9DB”,
(b) in paragraph 4(5)(b) by deleting “and” where it last occurs in subclause (iv), by inserting “and” after “that paragraph),” in subclause (v) and by inserting the following after subclause (v):
"(vi) the amount of income of a company treated for the purposes of paragraph 9DC as referable to an amount of relevant leasing income (within the meaning of that paragraph),",
and
(c) by inserting the following after paragraph 9DB:”.
This amendment makes purely technical amendments to paragraph 4(5) of Schedule 24 of the Taxes Consolidation Act 1997, which is referred to in section 51 of the Bill. The amendment is to insert the necessary reference to section 51 of the Bill, which was omitted from the original draft, into paragraph 4(5). I commend this amendment to the sub-committee.
Amendment agreed to.
Section 51, as amended, agreed to.
Sections 52 and 53 agreed to.
Amendment No. 85 has been ruled out of order.
Amendment No. 85 not moved.
Sections 54 to 56, inclusive, agreed to.
NEW SECTIONS
I move amendment No. 86:
In page 112, before section 57, to insert the following new section:
57.—(1) The Principal Act is amended—
(a) in section 584(3) by substituting “(10)” for “(9)”,
(b) in section 584 by inserting the following after subsection (9):
"(10) (a) In this subsection, ‘investment undertaking’ and ‘unit’ have the same meanings respectively as in section 739B.
(b) Subsection (3) shall not apply where the new holding comprises units in an investment undertaking, being a company.”,
(c) in section 585(1) by inserting the following definitions before the definition of “security”:
" ‘investment undertaking' and ‘unit' have the same meanings respectively as in section 739B;",
(d) in section 585 by inserting the following after subsection (1):
"(1A) For the purposes of this section, a conversion of securities shall not include a conversion of securities into units in an investment undertaking, being a company.",
(e) in section 586(3) by inserting the following after paragraph (c):
"(d) This section shall not apply where the company issuing the shares or debentures is an investment undertaking within the meaning of section 739B.”,
and
(f) in section 587(4) by inserting the following after paragraph (c):
"(d) This section shall not apply where the company issuing the shares or debentures is an investment undertaking within the meaning of section 739B.”.
(2) This section applies to any shares or debentures issued by a company on or after 22 February 2012.".
This amendment is designed to counteract a scheme which attempts to avoid capital gains tax on the disposal of valuable shares in a company by means of an exchange of shares in the company for units in a collective investment undertaking and the subsequent disposal of those units to an offshore company. The proposed amendment will counter such attempts by providing that where a shareholder of a company exchanges his or her shares for units in a collective investment undertaking, whether in the context of a reorganisation of the company's own share capital or in the context of a company restructuring or amalgamation involving two or more companies, such a transaction will not qualify for capital gains tax relief under the relevant provisions of the Taxes Consolidation Act.
I have included this provision in the Bill on the advice of the Revenue Commissioners. Revenue recently has become aware of attempts to circumvent a charge to capital gains tax on the disposal of shares held in an asset rich company through a scheme, which involves the following steps. The first step is the setting up of a Part 13 company, being a company authorised by the Central Bank under Part 13 of the Companies Act 1990, which operates as a collective investment undertaking. The second step is the swapping of the shares in the asset rich company for shares in the Part 13 company and the subsequent disposal of the shares of the Part 13 company. Agents acting for shareholders using this scheme argue there is no capital gains tax liability on the disposal of shares in the Part 13 company by reason of the special computational rules applying to the taxation of collective investment undertakings. I should emphasise that the Revenue Commissioners do not accept the validity of such arguments. The arrangements clearly are being designed to avoid tax and Revenue will contest vigorously any such arrangements using all the available means at its disposal. Nevertheless, it is desirable and prudent to close off any possible loophole that may exist under existing legislation or that may be exploited through the use of this type of scheme in view of the potential tax loss to the Exchequer. This is what the provision in the Bill aims to do and, therefore, I recommend the amendment to the sub-committee.
Amendment agreed to.
Amendments Nos. 87 and 88 are related and will be discussed together.
I move amendment No. 87:
In page 112, before section 57, to insert the following new section:
57.—Section 598 of the Principal Act is amended by substituting the following for subsection (2):
"(2) (a) Subject to this section, where an individual who has attained the age of 55 years but has not attained the age of 66 years disposes of the whole or part of his or her qualifying assets, then—
(i) if the amount or value of the consideration for the disposal does not exceed €750,000, relief shall be given in respect of the full amount of capital gains tax chargeable on any gain accruing on the disposal;
(ii) if the amount or value of the consideration for the disposal exceeds €750,000, the amount of capital gains tax chargeable on the gain accruing on the disposal shall not exceed 50 per cent of the difference between the amount of that consideration and €750,000.
(b) Subject to this section, where an individual who has attained the age of 66 years disposes of the whole or part of his or her qualifying assets on or before 31 December 2013, then—
(i) if the amount or value of the consideration for the disposal does not exceed €750,000, relief shall be given in respect of the full amount of capital gains tax chargeable on any gain accruing on the disposal;
(ii) if the amount or value of the consideration for the disposal exceeds €750,000, the amount of capital gains tax chargeable on the gain accruing on the disposal shall not exceed 50 per cent of the difference between the amount of that consideration and €750,000.
(c) Subject to this section, where an individual who has attained the age of 66 years disposes of the whole or part of his or her qualifying assets on or after 1 January 2014, then—
(i) if the amount or value of the consideration for the disposal does not exceed €500,000, relief shall be given in respect of the full amount of capital gains tax chargeable on any gain accruing on the disposal;
(ii) if the amount or value of the consideration for the disposal exceeds €500,000, the amount of capital gains tax chargeable on the gain accruing on the disposal shall not exceed 50 per cent of the difference between the amount of that consideration and €500,000.
(d) For the purposes of paragraphs (a), (b) and (c), the amount of capital gains tax chargeable in respect of the gain shall be the amount of tax which would not have been chargeable but for that gain.”.”.
Amendment No. 87 relates to section 57. The purpose of that section was to give effect to the proposal in the Budget Statement to reduce the retirement relief in section 598 of the Taxes Consolidation Act 1997. That section grants relief from capital gains tax on disposals made by individuals aged 55 or over in respect of the disposal of business or agricultural assets.
Full relief from capital gains tax is given where the consideration is less than €750,000.
This amendment replaces the original section 57 because a drafting error contained therein had the unintended effect that individuals currently aged 66 or who will attain that age on or before 31 December 2013 would not qualify for retirement relief. The new section 57 is similar to the original with the exception that subsection (2)(b), which is being inserted into section 598 of the principal Act, ensures that individuals currently aged 66 or over or who will attain the age of 66 on or before 31 December 2013 will be able to avail of the current relief of €750,000. The new section 57(2)(a) ensures that the relief currently available will continue to apply in respect of the disposal of qualifying assets by individuals who are aged 55 or over but who have not attained the age of 66. Section 57(2)(c) gives effect to the proposal in the Budget Statement to reduce the relief from €750,000 to €500,000 for disposals of business or agricultural assets by individuals aged 66 or over. This provision applies to disposals made on or after 1 January 2014.
Amendment No. 88 relates to section 58, which amends section 599 of the Taxes Consolidation Act 1997. The latter grants unrestricted relief to individuals aged 55 or over who dispose of business or agricultural assets to their children and certain other individuals. The amendment replaces the original section 58 because of a drafting error contained therein which had an unintended effect, namely, that individuals currently aged 66 or who will attain that age on or before 31 December 2013 would not qualify for retirement relief. The new section 58 is similar to the original with the exception that paragraph (b)(ii), which is being inserted into section 599(1) of the principal Act, ensures that individuals who are aged 66 or who will attain that age on or before 31 December 2013 will be able to avail of the current unrestricted relief. Paragraph (b)(i) ensures that the relief currently available will continue to apply in respect of disposals by individuals who are aged 55 or over but who have not attained the age of 66. Paragraph (b)(iii) gives effect to the proposal in the Budget Statement to limit the relief to €3 million in the case of individuals who are aged 66 or over. This provision applies to disposals made on or after 1 January 2014 by such individuals.
I commend the amendments to the select sub-committee.
I understand what is being done in these amendments. However, will the Minister of State outline the rationale which applies in respect of both of them? Why is a cut-off point being introduced in the context of the relief for those who are aged 66 or over? Is this designed to encourage farmers to retire early?
Yes, it is an encouragement.
Has the reduction in the threshold been discussed with the organisations which represent farmers? Will they support it?
As I understand it, the proposal in this regard was put forward by the Department of Agriculture, Food and the Marine. It is one of a number of measures, announced on budget day, which are designed to assist in the transfer of land and to encourage younger farmers to take ownership of land. I do not know whether the matter was raised by the farming organisations but it was certainly one of a package of measures proposed by the Department of Agriculture, Food and the Marine. I do not know whether those measures were welcomed by the farming organisations.
So the reduction is simply focused on-----
Younger farmers taking ownership of the land.
Is it the case that a farmer could sell his land to a developer in order that the latter might develop it within the parameters relating to such development? Am I correct in stating that the provision is not restricted to farmers selling their land to other farmers?
I understand that specific reference is made to children.
Only the new section 58 deals with family. As I understand it, however, the new section 57 relates to children and others.
We are getting rid of section 57.
Yes but it is being replaced with a new section 57, which allows for land to be sold to others.
The new section 58 refers to land but the new section 57 does not. I suppose it could be interpreted as referring to land but what it actually refers to is the disposal of business or agricultural assets.
Which would be land. I take the Minister of State's point with regard to encouraging young farmers. However, I would not like individuals who are turning 55 or who will turn 56 in 2014-----
The Deputy raises an important point. If the reference in the new section 57 is to disposals of business or agricultural assets, we must determine whether it is sufficiently broad to include land. If land is part of a business holding, then it is possible to argue that it is contemplated within the terms of the provision. Perhaps we might reconsider the position in respect of this provision to see whether it might be tightened up.
We all accept that the objective of the exercise is a useful one. However, I accept the Deputy's point and we will re-examine the provision.
Will the Minister of State endeavour to prepare a note for the members of the select sub-committee in respect of this matter?
Is Deputy Pearse Doherty satisfied with that?
Yes. On a point of order, will the Vice Chairman indicate what it is intended to do in the context of proceeding with business? I was under the impression - obviously a mistaken one - that we would deal only with the sections-----
That is the minimum number of sections with which we must deal.
So we are already dealing with tomorrow morning's business.
I apologise but I do not have my notes on the later sections with me.
Acceptance of amendment No. 87 involves the deletion of section 57 in order that the new section 57 might stand part of the Bill.
Amendment agreed to.
Section 57 deleted.
NEW SECTION
I move amendment No. 88:
In page 113, before section 58, to insert the following new section:
58.—Section 599(1) of the Principal Act is amended by substituting the following for paragraph (b):
"(b) Subject to this section—
(i) where an individual who has attained the age of 55 years but has not attained the age of 66 years disposes of the whole or part of his or her qualifying assets to his or her child, relief shall be given in respect of the capital gains tax chargeable on any gain accruing on the disposal;
(ii) where an individual who has attained the age of 66 years disposes of the whole or part of his or her qualifying assets to his or her child on or before 31 December 2013, relief shall be given in respect of the capital gains tax chargeable on any gain accruing on the disposal;
(iii) where an individual who has attained the age of 66 years disposes of the whole or part of his or her qualifying assets to his or her child on or after 1 January 2014 and the market value of the qualifying assets is greater than €3,000,000, relief shall be given in respect of the capital gains tax chargeable on any gain accruing on the disposal as if the consideration for the disposal had been €3,000,000.".".
Acceptance of amendment No. 88 involves the deletion of section 58 in order that the new section 58 might stand part of the Bill.
Amendment agreed to.
Section 58 deleted.
Sections 59 to 61, inclusive, agreed to.
NEW SECTION
I move amendment No. 89:
In page 114, before section 62, to insert the following new section:
62.—The Principal Act is amended by inserting the following section after section 604:
"604A. --(1) In this section--
‘EEA Agreement' means the Agreement on the European Economic Area signed at Oporto on 2 May 1992, as adjusted by the Protocol signed in Brussels on 17 March 1993;
‘EEA State' means a state which is a contracting party to the EEA Agreement.
(2) This section applies to land or buildings situated in any EEA State (including the State)--
(a) which--
(i) were acquired for a consideration equal to their market value in the period commencing on 7 December 2011 and ending on 31 December 2013, or
(ii) were acquired in the period referred to in subparagraph (i) from a relative (within the meaning of section 10) and the consideration was not less than 75 per cent of their market value at the date they were acquired, and
(b) which continue in the ownership of the person who acquired that land or those buildings for a period of at least 7 years from the date they were acquired.
(3) On a disposal of land or buildings to which this section applies, such portion of the gain shall not be a chargeable gain as represents the same proportion of the gain as 7 years bears to the period of ownership of such land or buildings.
(4) Relief under subsection (3) shall not apply--
(a) to land or buildings to which this section applies unless any income or profits or gains derived from the land or buildings concerned in the period of 7 years from the date they were acquired by the person who acquired them is income or profits or gains to which the Income Tax Acts or the Corporation Tax Acts apply, or
(b) where arrangements (within the meaning of section 546A) have been put in place and it can be shown that relief (apart from the relief given under subsection (3)) would be less if the arrangements had not been put in place.”.”.
This amendment relates to section 62.
That section gave effect to the proposal in the Budget Statement to give relief from capital gains tax for properties purchased between 7 December 2011 and 31 December 2013 where the property is held for more than seven years. Where such property is held for more than seven years, the gains attributed to the seven-year period will not attract capital gains tax.
This amendment substitutes a new section for the existing section 62. A number of changes are introduced in the new section. A technical drafting error in the original section is corrected to ensure properties situated in this country qualify for the relief. The new section also provides that the relief will only apply where the property was acquired for at least 75% of its market value at the date of acquirement if it is acquired from a relative, as defined in section 10 of the Taxes Consolidation Act 1997. A relative for this purpose is a brother, sister, uncle, aunt, nephew, niece, ancestor or lineal descendant.
A further condition for the relief is included in the new section. This condition is that for the incentive scheme to apply, any income, profit or gains from the property must be subject to Irish tax. An anti-avoidance provision is included in order that the relief will not apply if arrangements have been put in place and it can be shown that the relief provided for by the section would be less if the arrangement had not been put in place. I commend the amendment to the committee.
I am deeply worried about this section. From my reading, the intention is to fuel a property bubble again, as we are giving reliefs on land and building purchases if people hold on to them for seven years. I am deeply concerned that we are following the mistakes of previous Administrations and we will come to regret this. There has been a big learning curve over the last number of years for everyone to see and we should not incentivise the purchase of property as we have done in the past. Although this is of a more limited nature, it would still have an effect, especially if coupled with other measures.
We have seen figures today indicating that property prices have decreased by the largest degree in quite a while. I could be wrong but I believe the last thing we should do is try to initiate policies to drive property prices again. We are starting at a zero base now but with every tax relief or expenditure item in the past ten years, there was always a clear argument, although it may not have had the desired effect. On the introduction of such measures one may have seen such logic but considering the cumulative effect, the process was definitely not helpful but was very destructive to the State.
There is a serious question over this amendment, which affects the entire section. Will the Minister of State explain the rationale for the Government initiating such a measure and how does it respond to the argument that these measures could fuel another property bubble?
I have heard what the Deputy is saying and I will be blunt. His comments would have some validity in circumstances where there are normal levels of transactions. Both the Deputy and I know this is not the case now, as the market is utterly dysfunctional. I was interested to see recently that the same number of transactions occurred in 2011 as in 1971, despite the fact that in population and development terms, the years were on different planets. In some parts of the country, the cost of building a house, which we spoke of earlier, is more expensive than the purchase price, which shows that the market is deeply dysfunctional.
The objective of the Government's approach in the last budget was to encourage transactions and this is one such small measure. This could not be presented as any kind of short-term speculative gain as holdings must be in place for seven years. This formed part of a suite of different options, and there are also proposals such as stamp duty reductions on the commercial side to bring it more in line with the UK experience. That is useful. I know we will discuss the matter later but I know of people around this town who fielded many calls the day after the budget because there is a significant pent-up demand, with people waiting to make a transaction if the critical confidence is achieved. Our actions on stamp duty were important, as were the measures dealing with mortgage interest relief, as encouraging people to get into the market this year was important.
This is a slow, cumulative, confidence-building exercise and transactions are a part of that. If this encourages people to make a purchase, it would be good, as the State would have a greater take on the taxation side. I hope we all have an interest in bringing about a more functional property market. Our pensions, asset values and the future of the country are predicated on coming back in this area, although not to the extraordinary heights that existed in the past. Even those of us who purchased in recent years and who find ourselves in negative equity have an interest in encouraging transactions. This measure is nothing more than part of a suite of options set out by the Minister in the budget which I hope will encourage limited transactions in order that we can get our revenue going again.
We do not want to return to the unsustainable property bubble - it will not happen - and the degree to which the revenues of this State were dependent on that bubble. Nevertheless, we have a responsibility to the wider society, including the construction industry, to encourage more transactions. In so far as this measure is a tentative measure in that direction, I hope we succeed.
I hear what the Minister of State is saying. I listened to the Minister for Finance when he introduced this measure, which allows relief for purchases between that budget day and 31 December 2013. His comments seemed to encourage people to get into the market. If people had followed his advice they would have been stung as property prices have fallen at their most severe rate in January and again in February.
The major concern is that this is not a revenue-raising measure as we are forgoing capital gains tax, and stamp duty has been reduced in previous Bills. This is more of a design to stop the property market from continuing to drop to the levels at which it is headed.
Is that not a good thing?
I am not sure. There is one cohort, the people in negative equity, who would be affected but only if they wanted to sell their house. It does not matter for people in mortgage distress if they are in negative equity as the point is that incomes have dropped rather than the value of the property. What about people trying to get on the property ladder and the people who want to purchase now? House prices have been at an unsustainable level, and the price was driven up because of availability of easy credit from banks, which came about from Government decisions. I lean towards the argument of letting the property market find its own level and starting from there. There should be a gradual increase.
I can see the benefits to the State and NAMA - the big beneficiary of a halt in property price falls - but there is no positive impact directly from this measure as we are forgoing tax. I am reluctant to support a measure such as this. I listened to the Taoiseach last week in the Dáil when he said this Government wants to invest in humans, not in property or bricks and mortar. This measure is about investing in bricks and mortar and allowing people to forgo income tax if they buy property. It is not designed to be fair but to serve as a means of fuelling activity in the property market. As I indicated, while it could have benefits, I tend towards the view that its negative effects will be greater.
Deputy Doherty may remember that in September 2006 the then Tánaiste and former Minister, Mr. Michael McDowell, commenced a debate on stamp duty which continued until the general election of 2007. The discussion resulted in a substantial reduction in the number of transactions in the housing market because people logically asked whether it would be preferable to wait for the new regime to be introduced following the election before purchasing a property. Certainty is important in any economic cycle but particularly important in the current cycle. One could argue that what we are trying to do in the section is give certainty to people who want to dip their toes in the water by purchasing a property during the window of opportunity provided. I cannot tell Deputy Doherty hand on heart that this measure will stimulate a specific number of transactions. However, in the round and combined with the other measures set out in the budget, I believe it will make a difference.
Deputy Doherty noted, on the basis of figures released today on the property market, that anyone who has purchased property since the budget will have lost out. The idea that someone would buy property last December with the intention of flipping it by February 2012 is not realistic given the current utterly dysfunctional housing market. We all have a responsibility to identify what can be done to encourage transactions where none is occurring. Will this measure work? While I cannot give a definitive answer, its purpose is to build confidence in a property market that has been flattened.
I concur with Deputy Doherty that we must reach the bottom of the market, not only because the National Asset Management Agency holds assets on our behalf and we need yields to increase but also because ordinary consumers must have a palpable sense that the bottom has been reached. This must be discernible and clear to everyone if a recovery is to take place. Fundamentally, a pick-up in the property market is inextricably linked to a return to normal levels of economic growth. I am not a prophet announcing this measure will tomorrow ignite some special device in the property market. However, combined with the other measures we are introducing, it will send out a signal of confidence. We will see what develops.
I will make a few points on this issue, about which I also spoke earlier. Given that capital gains tax does not apply to the sale of a principal private residence, this measure is effectively a tax break for investors, one which is designed to get investors into the market. If sufficient numbers of investors avail of this incentive, it could have the effect of making housing more expensive for first-time buyers and owner occupiers. We should be clear that the purpose of this provision is to encourage investors into the market. I believe the objective is to establish a floor for property prices. Depending on one's perspective, one could argue that is a good or bad outcome but one cannot argue that it is of any benefit to a first-time buyer deciding whether to buy a home given that capital gains tax does not, in any case, apply to principal private residences.
A reading of the text suggests the provision applies to land as well as buildings. Land should be excluded from the measure. Notwithstanding the arguments about incentivising the purchase of commercial or residential buildings, we all know what took place when people started speculating through land purchases. We should not encourage a return to such practices. Land should be excluded from the measure, except in the case of land that is incidental to the enjoyment of a property, for example, private gardens. The Minister should be able to find the wording required to accommodate that.
I assume, based on the reference to "a person", that the measure applies only to private citizens and does not apply to corporate entities or companies investing in property.
The measure will also apply to companies.
Does that include companies whose core business is development and property related?
Yes. A transaction is a transaction, whether it is undertaken by an investor, first-time buyer or someone else.
If it is the Government's core objective to get more first-time buyers into the market and encourage people to buy a family home, this measure will not have any effect.
I did not say that was the objective of the measure. The objective is to encourage transactions because we will all be winners if that occurs. In circumstances in which we are getting nothing from nothing, one could argue that a smaller percentage of something is a significantly better outcome. The purpose of the old relief schemes was, in many cases, to reduce the income tax people paid. The new relief only applies if there is a real gain from investing in the property. If there is no increase in value, there is no gain. This means that those who avail of the measure are taking a punt. If people avail of it, the State will benefit from the transaction tax and stamp duty arising from the purchase in circumstances in which it does not receive anything at present.
As I pointed out to Deputy Doherty, no one is suggesting that we will return to circumstances in which one third of tax revenue will be property related. However, we all gain when VAT and stamp duty flow into the coffers, especially given that nothing is flowing into the Exchequer from these sources at present. That is the focus and objective of the measure.
Unfortunately, when VAT, stamp duty and so on were flowing into the Exchequer, 107,000 families did not gain much. They are now in a serious pickle as a result of Government policies which were also grounded in the argument that a bit of something is better than nothing. The Minister of State indicated the measure will provide confidence. The only group who will gain confidence are property investors. He also indicated investors will take a punt. All investors take risks but this proposal limits their exposure by providing that if they make a gain, the State will forgo capital gains tax through a relief.
As I stated, I can understand from where the Government is coming because getting investors into the market will push up property prices across the board. Such a scenario would be beneficial for the banks and the National Asset Management Agency. The problem, however, is that it would not benefit first-time buyers.
If we agree that we need property prices to stabilise and then begin to recover at a normal pace, this measure will not achieve that outcome. While it is a confidence measure for investors, its sunset clause has the potential to skew the property market again because on 1 January 2014 the relief will be removed, as will be the incentive to buy. This is not a policy which seeks to stabilise property prices. This is a carrot to fuel investment in investment properties which could have a negative effect on other property prices and on the property market. There is also the issue of the Government forgoing tax. It is next to impossible to quantify that because we do not know how many people will make an investment. The relief is open ended and, for example, billions of euro could be invested between now and the end of 2013. Large corporations could snap up property because prices are at an all-time low. We do not know if that will happen because this is hypothetical but the tax will be forgone. Stamp duty is only 1%. I have major concerns about this section.
It would be wrong to classify this as the sole measure introduced in the budget relating to property and is not designed to help first-time buyers. We have introduced other measures relating to mortgage interest to help them and they were set out by the Minister in his Budget Statement. If we can get to the bottom of the bottom, as I described it earlier, we will all be beneficiaries as we then move back to a confident property market.
On the question of land, the building includes the land it is built on. It would be extremely difficult to include the land the building is on. A company or an individual who is trading in land and buildings will not qualify for this relief. They will be subject to income or corporation tax. The value of the property market is falling but I understand that the value of agricultural land has increased in the past two years - quite substantially in some parts of the country. That is unusual. That demonstrates there is interest in agricultural land because the industry is doing well but the property market continues to slide. It is another example of the utterly dysfunctional market.
Nobody suggests this is a silver bullet, which will allow the property market to get off its knees tomorrow. However, in the context of lack of transactions in the market, we all have a responsibility to see if we can encourage more transactions. The Deputy is correct that the window will close at the end of 2013, which is a minimal window for people to make an investment in property. We need professional investors in property. It is a legitimate business.
I agree with the Minister of State that we need investment in property and, more important, we need the capital gains revenues that come with that. Previous Administrations introduced section 23 property relief. It was argued, for example, that this would help the construction industry in County Leitrim where it had hit rock bottom. Nobody was building at the time and the relief was intended to help young people remain in a county with little employment and prevent them from emigrating. However, the Exchequer is still forgoing the tax on the houses that were built and which are lying empty and derelict. When the Government opens the door to a relief such as this, it does not know what will come through. Those are my concerns.
The Deputy's point regarding previous tax reliefs is well made. If one looks back on the economic history of the State in the past two decades, colossal mistakes were made in respect of how that section 23 relief was applied in different parts of the country. In most cases, people purchased houses under this scheme to reduce their income tax liability. I do not blame them for that and later we will debate what to do about these legacy tax reliefs. Equally, many people who had no public service pension determined that they would invest in property for pension purposes. Many people my own age who do not work in the public sector and who do not have private pension cover decided to put their money into property because they thought the second property would be their pension. Many of the legacy reliefs revolved around income tax rather than investment in property. It was regarded as a tax efficient way to utilise funds to purchase the relief. We have to learn from those mistakes and manage them.
I dispute that. Developers developed because the developments were subject to section 23.
No one disagrees with that but enormous mistakes were made as a result. This measure cannot be seen in the same light because the property market is on its knees and prices have collapsed by more than 40%. That cannot be compared with the market then, which I acknowledge was inflated during these years as a result of the tax relief. It did huge damage to the country.
I ask the Deputy to consider this measure in the round. If it encourages transactions and a sense that we have reached the bottom of the market, I do not know how he can oppose that.
Amendment agreed to.
Section 62 deleted.
NEW SECTION
I move amendment No. 90:
In page 114, before section 63, to insert the following new section:
63.—(1) The Principal Act is amended by inserting the following section after section 79B:
"79C. -(1) In this section-
‘approved accounting standards' means standards which are in accordance with generally accepted accounting principles in the State or in accordance with International Financial Reporting Standards (as promulgated by the International Accounting Standards Board);
‘net foreign exchange gain' means the excess of foreign exchange gains over foreign exchange losses arising on the disposal of currency in a relevant bank deposit by a relevant holding company, but does not include such gains and losses which are chargeable to corporation tax under Case 1 of Schedule D;
‘net foreign exchange loss' means the excess of foreign exchange losses over foreign exchange gains arising on the disposal of currency in a relevant bank deposit by a relevant holding company, but does not include such gains and losses which are chargeable to corporation tax under Case 1 of Schedule D;
‘profit and loss account' has the same meaning as in section 81C;
‘relevant bank deposit' means a sum standing to the credit of a relevant holding company in a bank and which is not Irish currency; ‘relevant holding company' means a company-
(a) with at least one wholly-owned subsidiary and that subsidiary derives the greater part of its income from trading activities, or
(b) which acquires or sets up, within one year of a net foreign exchange gain being credited to its accounts, a wholly-owned subsidiary which derives the greater part of its income from trading activities.
(2) Currency in a relevant bank deposit shall not be an asset to which section 532 applies.
(3) An amount determined by the formula—
A × 6
5
where A is the net foreign exchange gain which is credited in the profit and loss account of a relevant holding company, as reduced by so much of any loss under section 383 as is attributable to a net foreign exchange loss and which has not been deducted from any other amount of income, shall be income chargeable under Case IV of Schedule D.
(4) This section shall not apply unless the accounts are drawn up in accordance with approved accounting standards.
(5) An allowable loss under section 546 which is unused at the date this section comes into effect and which has arisen, or would have arisen, on the disposal of currency in a relevant bank deposit of a relevant holding company may be treated as an unused loss, at the same date, under section 383.
(6) An allowable loss under section 546 to which subsection (5) applies may qualify for relief under section 383 or 546, but may not qualify for relief under both those provisions.".
(2) This section applies as respects accounting periods ending on or after 1 January 2012.".
The amendment inserts a new section, which provides that a disposal of non-euro currency by a holding company will not require a capital gains calculation for a currency gain or loss where that company has at least one trading subsidiary. Instead, the accounting calculation of such a gain or loss will be charged to corporation tax under case IV of Schedule D. The chargeable amount is increased in six fifths. This has the effect of equalising the tax charged with the rate of capital gains tax. The chargeable amount also takes account of losses that are attributable to net foreign exchange losses to the extent that they have not been deducted from any other amount of income. The amendment will facilitate the development of this country's holding company regime. I commend the amendment to the committee.
Amendment agreed to.
Section 63 agreed to.
