We have a quorum so we will begin our meeting in public session. I welcome the Minister, Minister of State and their officials.
Finance Bill 2016: Committee Stage (Resumed)
I want to raise an issue prior to debating section 9. Later we will reach amendments that we discussed yesterday but were ruled out of order by the clerk to the Committee. I accept that the clerk's rulings are based on established practice. As the committee knows, there is a constitutional prohibition on the Opposition putting forward amendments that incur a cost on the people or the Exchequer. We also have Standing Orders in the Houses of the Oireachtas that interpret the constitutional provision. The people who decide whether an amendment is in order must look at the Standing Orders and established practice. Yesterday Deputy Donnelly and I mentioned that the proposals that come before this committee are not law. They are only proposals from Government and we are shaping them. The amendments have been treated as if they are a charge on the people or the Exchequer. It is my understanding, from talking to the clerk that the established practice, over a number of decades, is they look at the Government Bill as law. There is nothing in the Standing Orders and Constitution that says this should happen. I ask the committee to refer this matter to the committee on Dáil reform and to ask it to consider the application of established practices, which the clerk is bound to follow, in terms of dealing with financial motions that we table in the future.
I think we can agree with the proposal.
It is agreed, yes.
Agreed.
I thank the Chairman and members of the committee.
SECTION 9
Question proposed: "That section 9 stand part of the Bill."
Section 9 refers to the special assignee relief programme, SARP. We rehearsed this debate on Second Stage. I am unconvinced that the scheme works, is desirable or value for money. The Revenue Commissioners have told us that 302 people availed of SARP in 2014 and it cost the Exchequer €5.9 million. That is an important figure when we put it in the context of the strife and difficulties we are going through now. Let us remember that to avail of SARP one must first be a very high earner and one only gets relief on the portion of income above €150,000. The Garda have a starting pay of €23,000 and it is the same for teachers who are paid for supervision and all of the rest. Under SARP nearly €6 million was provided to 302 people. It means €20,000 in tax benefit was given to each person but that amounts to almost the annual salary of a Garda starting in the service.
Let us look at the number of jobs created by the scheme. In the Department's report of 2014 it states that of the 12 people who availed of the scheme only five jobs were created and six retained. It continued:
There is also a lack of measurable evidence that the scheme has resulted in an increase in Foreign Direct Investment or the rollout of new projects ... under the current scheme it is not mandatory to create jobs in order to qualify for SARP.
During the review, a number of stakeholders also expressed the view that the few who had availed of SARP to date had ‘fallen into’ the relief rather than it being a deciding factor in their decision to relocate.
As the Minister mentioned yesterday, we talked about dead weighting schemes and that is what has been referred to here. These key individuals would have come here anyway and they did not need this tax incentive to help them relocate here. At a time when there is a reduction in available fiscal space for us next year, and pressures in different areas, we should seriously question the continuation of the scheme. Let us remember that the scheme is supposed to be gone and I made this point yesterday. I do not know the last time the Government introduced a tax scheme with a deadline where it accepted the deadline, let it go and closed the scheme down at that point. The scheme was rolled over into 2016 and now it has been rolled over to 2020 yet there is no direct evidence, but increasing annual costs, that additional jobs have been created. Serious questions must be asked about why we give the relief to high earners in the first place.
SARP is only justifiable if there is demonstrable evidence that it has led to additional investment and employment. That is the key measure of whether SARP is a success but the jury is out. It is a controversial scheme in light of current developments. There must be an evidence-led demonstration that by bringing key decision-makers to Ireland, who are the top executives in many cases, will lead to investment decisions that are favourable to Ireland and, thus, have a favourable knock-on effect on employment. If that is the case then I will stand over the scheme, defend it and call for its extension.
I understand that the Minister's Cabinet colleague, the Minister for Transport, Tourism and Sport, wrote to him in September on behalf of the National Civil Aviation Development Forum. He raised a number of issues about SARP, particularly about aviation leasing. In his letter two issues were raised. First, a requirement that an employee works for the company in an overseas location for six months prior to availing of an assignment in Ireland. The criterion was 12 months up to the past couple of years but it was reduced to six months. Second, the Minister for Transport, Tourism and Sport has conveyed that the forum contends that the current limit of five years should be extended. These issues are not in the Bill. Does that mean that the Minister has considered the proposals but rejected them?
I have made the point that justification for the scheme should be based on additional investment and employment that is created in Ireland as a result of SARP.
I completely oppose SARP as it is a tax break for a small number of well-paid corporate executives and illustrates the Government's approach. The Government cannot give pay equality to gardaí, teachers and low-paid public sector workers but it can dole out tax breaks to some of the most well-paid people in this country. The scheme is completely odious and the fact that the Government seeks to extend it is illustrative of the nature of the budget.
First, foreign direct investment, as all colleagues will know, is very competitive. There are schemes similar to SARP in other jurisdictions that compete with us for foreign direct investment. The Netherlands is a case in point. It has a scheme along the lines of SARP but it is far more generous in its provisions.
I introduced SARP, in its present format, in 2012. I did so as a result of very strong lobbying by IDA Ireland that said there was a gap in the Irish offering to attract foreign direct investment and we needed to close the gap to retain our competitive position in attracting foreign direct investment. We reviewed the scheme in 2014. Deputy Doherty has given the key figures. The most recent report on the special assignee relief programme, which is SARP, in respect of the 2014 tax year shows that 302 employees availed of SARP. It also showed that 126 jobs were created and 708 jobs were retained as a result of the incentive. The cost to the Exchequer was €5.9 million, as Deputy Doherty has put on the record.
Second 9 provides for the announcement on budget day to extend the programme. As Deputies will be aware, I have decided to extend the incentive until the end of 2020. I announced the extension early in order to provide certainty for potential investors in Ireland following the UK's vote to leave the European Union.
The current SARP scheme, as enacted, does not finish until the end of next year so it is not ending now and we are not extending it now. It finishes at the end of 2017 and we are giving advance notice that we will extend it further.
One can do different sums on the cost of the jobs but if one takes the very high-earning people - every single employee earning a salary of €500,000 who avails of the relief under SARP - almost €139,000 will still be paid to the Exchequer in income tax and a further €37,000 in USC so it is not a complete relief. These high-earning people continue to pay significant amounts of tax and USC but, of course, they are less significant than what an Irish employee on an equivalent salary would pay. If PRSI is payable, it would yield a further €73,750 in employer and employee contributions. If one is looking at the cost per job, one needs to net it all out.
I do not see this as a major scheme but under the very strong advocacy of the IDA, I introduced it in 2012. With the threat from Brexit, I think it is important that we maintain our competitiveness in this respect. A total of €6 million and about 900 jobs in all are being claimed. One can argue about net cost and whether one goes gross or net but I think it is worth holding it for another couple of years. I am not extending it indefinitely. It can be reviewed in 2020.
I asked specifically about the letter from the Minister for Transport, Tourism and Sport, Deputy Ross, on behalf of the National Civil Aviation Development Forum.
I decided to come to the Dáil for an extension of the scheme, not to amend it. I am aware of the views expressed in that letter. Similar views were expressed to me directly by representatives of the aircraft leasing industry but I do not think the case was strong enough to make the alterations that were being requested. A lot of the time in these matters, it is a matter of judgment. It is hard to know whether the advantages that are being claimed will result or not. I have a note here as to why the scheme would not be open to new hires, which was the burden of the letter from the Minister for Transport, Tourism and Sport quoted by Deputy McGrath. It related to why someone must be employed in another country before moving to Ireland.
As part of the SARP review in 2014, the proposal to include new hires was considered but it was felt that to include new hires could cause job displacement in the Irish labour market. For example, if an Irish tax-resident individual and a foreign-based individual with similar skills both applied for the same job, it would be less costly for the employer to hire the foreign-based individual. This would place the Irish tax-resident individual at a considerable disadvantage so that is the principal reason I did not amend the scheme.
Deputies will appreciate that Ministers and Deputies, including Opposition spokespersons, are lobbied. To paraphrase W. B. Yeats, sometimes it is very hard to tell the dancer from the dance. When they are making claims about a huge economic advantage to the Republic of Ireland, one does not know whether they are simply advancing a personal case. It is always a line ball call but in considering this, I think it is worth proposing to the Deputy that we extend the scheme without amendment and the scheme concludes as currently enacted at the end of 2017. We are giving advance notice because there are many people looking again at Ireland - people considering whether they will transfer business from the UK to Ireland or many US investors considering whether they will change the plan they had to invest in the UK and invest in Ireland instead. We are positioning ourselves to make sure we are competitive. I agree that this is a small part of the IDA offers and there are many other considerations that are far more important.
Does Deputy Doherty have a question?
We can dice up the figures however we want. These 302 employees are getting €20,000 in tax relief that is available to them and not to any Irish citizen. That is the key point. There is a €20,000 reduction in tax on average and each of these people has to be earning in excess of €75,000. We know the rules of SARP. They are that 30% of a person's income between €75,000 and €500,000 is disregarded for income tax purposes. We do not have the individual details but some of these individuals could get a tax cut of €50,000 or €60,000 as a result of it.
We can take the Department at its word in respect of its report. I mentioned what it said, which was that people had fallen into the relief rather than it being a deciding factor in their decision to relocate. Let us think about this. Of course, a key person from a company in the US coming to a company in Ireland when the company decides it wants that person to come over will apply for SARP. Why would they not apply for it? However, the question is whether they would have come over anyway. The survey found that a number of people were going to come over anyway and then availed of SARP when they arrived here. It also makes it clear that there is no measurable evidence that the scheme has resulted in an increase in FDI or a roll-out of new projects.
The Minister has provided his own figures regarding how many jobs were created or retained and I accept that the figures are the stated figures. However, he and I know that this is not verified in any way, shape or form. If one looks at the forms that employers have to fill in relating to SARP, one can see that they have to provide the PPS details of the employee, the position within the company and all the other issues because it is not just about tax relief. These individuals are getting relief for flying to and from their country of residence, and tax relief on private tuition for their children. There is a box at the bottom of the form stating how many employees were created in the company as a result of this scheme, excluding the SARP employee, and how many were retained. There is no verification of those figures. If I was the company, I could put ten, 20 or 30 in the box. We do not know if that is the case because Revenue does not verify it. The company does not have to provide PPS numbers and company positions for them. I am sure the individuals are there. I am not suggesting that they are not there. The question is whether they are linked to this tax relief in the first place.
This is not a good time to be changing the offer, particularly when we want to attract multinational and financial investment. Hopefully, people, particularly those in London, are looking to relocate to this country as a result of Brexit but the question is whether this scheme is value for money. A scheme involving €6 million being spent on 302 individuals is not value for money.
On Second Stage, I said that there are a lot of tax breaks in the Finance Bill that benefit very few but involve large quantums of money. I would argue that €6 million is better spent in other areas given that there is no independent evidence to show that this scheme is actually creating jobs, investment and new projects. When it was first introduced in 2012, the Government said there was a gap about which the IDA lobbied heavily and that we needed to take these risks. We took the risk. An evaluation was done. It said that there is no evidence to suggest that it is actually working. It is a huge tax relief for these individuals. It is time not to extend the relief but to leave it the way it is. I would like to see the scheme gone but it will operate for another year. During that period, we should carry out a more detailed analysis and look under the bonnet to see if this has really created jobs. What the Minister is asking us to do in this Finance Bill is to extend the scheme to 2020, which it is not something I would or can support.
Question put:
The Committee divided: Tá, 5; Níl, 2.
Tá
- Burke, Peter.
- D'Arcy, Michael.
- McGrath, Michael.
- McGuinness, John.
- Noonan, Michael.
Níl
- Doherty, Pearse.
- Murphy, Paul.
Question declared carried.
Deputy Michael D'Arcy took the Chair.
SECTION 10
Question proposed: "That Section 10 stand part of the Bill."
This section relates to the extension of the foreign earnings deduction which is a tax break to a relatively small number of people. I am opposed to this section and would like to hear the Minister's explanation for it, why it is adding to the number of eligible countries on the list but also reducing the number of days. As far as I can the see the qualifying days have gone from 60 days, to 40 days to 30 days. It is another tax break for a small number of people with no particular rationale.
Section 832A of the Taxes Consolidation Act 1997 provides limited relied from income tax for individuals who travel in order to expand the export of Irish goods and services into non-traditional markets. This section of the Bill amends section 823A of the Act to provide for changes announced in the budget. The changes are that the section is extended such that it will continue to apply for the tax years 2018, 2019 and 2020. The list of qualifying countries is expanded to include the Republic of Colombia and the Islamic Republic of Pakistan from 2017 onwards, and that the minimum number of days required to be spent in the qualifying countries is reduced from 40 days to 30 days.
The kind of fear that is frequently expressed about Brexit is that it will reduce the capacity for Irish companies to export to the United Kingdom. The advice generally given is that the exporters should seek new markets and get into other markets to compensate for loss of market share in the UK, if it occurs. This scheme was originally introduced to give a tax benefit to the person, very often the sole representative of a company, who is trying to develop new markets, frequently in Third World countries. That is the reasoning behind it. The reason for extending it this year is - as in the previous section - that it is extant as is until the end of 2017 but we are giving advance notice to companies that it is our intention to extend it to the 2018, 2019 and 2020 tax years. There had been some representation from the parent Department, the Department of Jobs, Enterprise and Innovation, that it should be extended to the Republic of Colombia and the Islamic Republic of Pakistan. I am not too sure how fruitful these markets are for Ireland but it is another expansion to the list of countries that would be eligible. Colombia has strong export potential for Ireland in telecommunications, financial services and digital technology. Enterprise Ireland has a small number of clients whom it believes have the capacity to develop this market. Exports to Colombia have doubled between 2011 and 2015. Similarly, Pakistan has been identified by Enterprise Ireland as being a strong export target for education services. Irish exports to Pakistan grew by 26% in 2015 and have almost quadrupled since 2011, although this is calculated against a relatively low base. As I have said, I do not claim any expertise in this area. We get submissions in advance of budgets and Finance Bills from the Department of Jobs, Enterprise and Innovation, and frequently it is transmitting to us the advice of the agencies; this particular advice is coming from Enterprise Ireland in order to further develop alternative markets for Irish goods and services.
Will the Minister explain why there is a further reduction in the number of days? When the measure was originally introduced it was 60 days, then it was 40 days and now it is proposed to go to 30 days. This is quite a difference. The more fundamental point is that I have not heard any evidence, or any basis upon which to develop the evidence, to say that this scheme works with regard to increasing exports or that it is not just a tax expenditure to a certain number of people who happen to work in these countries for a period of days, and that the scheme has no particular benefit to society.
The minimum number of days required to be spent abroad is being reduced from 40 days to 30 days per annum as many smaller companies may not be in a position to have employees away from the workplace for effectively eight weeks per year. Reducing the minimum number of days should mean that smaller companies are more easily able to avail of the scheme. That is my advice.
The Minister would have heard my reservations and opposition with regard to this scheme in the past. My reservations are around a number of proposals that the Minister has introduced. At the beginning it was a limited scheme that was targeted at the BRIC countries, and the argument was put forward that these were emerging markets and that we needed to encourage exports into these emerging markets. Then there were amendments and the decision to review the scheme. The countries included were Egypt, Algeria, Tanzania Senegal, Kenya, Nigeria, Ghana, Democratic Republic of Congo. Now we see another expansion of the scheme, and as Deputy Murphy has pointed out, the change to the restriction on the number of qualifying days. It would be unwise to consider the effect of Brexit when we discuss this scheme given that export goods from Ireland to the UK was 17.9% according to figures in the review that was done at the time. Obviously there are a lot of people who do not know what is coming down the line in terms of tariffs and so on and will have to look at other export markets and try to diversify.
I have some questions with regard to this section. The justification for the extension of the scheme is interesting, and Deputy Murphy has asked the Minister how this has come about. The review that was carried out actually calls for the scheme to be extended to all countries highlighted in the Government's integrated plan for trade, tourism and investment, which are all non-EU countries. Perhaps the Minister will indicate why he deems certain countries to be included. I am not arguing that the review's suggestion is what should happen; I am interested in the rationale behind that decision. The review suggested that expansion of the scheme would include countries such as Japan - which was our tenth largest trading export country at that point in time - Australia, Singapore, South Korea, Saudi Arabia, United Arab Emirates, Malaysia, Turkey, Indonesia, Mexico, Vietnam, Thailand and Chile. Why were those countries not included in the scheme and are we likely to see those countries being included next year?
Other proposals were put forward and we have seen a relaxation of the scheme. Qualifying days are down to 30 days, there were calls for it to be reduced to 20 days, there were calls for the travel time of employees to and from these countries to be included instead of just the days they were there. I am interested in the rationale for the decision. I am not advocating this but if this scheme is about supporting exports and companies to develop in markets - that are not as developed for exporters at this point in time - then why is this scheme not available to every country outside the European Union? Very established trading partners might be excluded such as the US which is probably the only country, bar Japan, that is in the top ten category with regard to exports from Ireland.
When the scheme was introduced in 2012 travel to Brazil, Russia, India, China and South Africa was included. The first extension of eligible countries was into 2013 and it included travel to Algeria, Democratic Republic of the Congo, Egypt, Ghana, Kenya, Nigeria, Senegal and Tanzania. These countries were included in order to further encourage the development of export markets by Irish-based enterprises, especially enterprises in the agricultural sector. The submissions in support of that extension were in the interest of food exporters by and large, and we gave that extension. In 2015 the list was further expanded to include travel to Japan, Singapore, South Korea, Saudi Arabia, United Arab Emirates, Qatar, Bahrain, Indonesia, Vietnam, Thailand, Chile, Oman, Kuwait, Mexico and Malaysia. This was in line with the Government's trade tourism and investment strategy as promulgated by the parent Department. The current Finance Bill proposes to add Colombia and Pakistan to the list of eligible countries and I have given the reasons for that particular expansion.
The scheme was introduced to diversify export markets and encourage employees to travel to non-traditional markets, including those presenting language barriers for Irish firms. Australia does not meet the requirements. In addition, exports to Australia are already doing well and were worth almost €1 billion in 2015. Recent growth in exports to Australia also indicates that no incentive is needed to encourage travel to this market.
Again, as Minister I decide, on the advice of the Department of Finance, whether to agree to make the extensions requested by the parent Department on behalf of its agencies. I do not have an insight into assessing anything beyond that.
My last question relates to the extension of the scheme for a three-year period to 2020. The scheme has morphed into something never intended when it was first introduced in the Finance Bill 2012. Basically, it now covers most of the globe or a large part of the globe whereas it was focused on the BRIC countries originally, in other words, Brazil, Russia, India and China.
Does the Minister believe the scheme requires an extension to 2020? Could the scope be narrower and then reviewed at a later stage? I am conscious of the question of Brexit and identifying new markets. Should there be a three-year extension for all these countries without an assessment? The fact that there is a limit of 30 days makes this a rather different proposal to what was put forward originally in 2012.
The original list of countries was driven by the consideration that those BRIC countries were growing strongly at the time. We are a small country. Effectively, we live by trade. We are more open to trade than most economies of our size. We are trying to provide an incentive to people to develop new markets. Initially, the consideration was that the countries listed in the first tranche in 2012 were growing rapidly and had the potential to purchase Irish goods and services. I have outlined for the committee the different considerations for the extensions over several periods. There are two countries to which we are proposing to extend the scheme now, namely, Colombia and Islamic Republic of Pakistan. Again, there is an increase in Irish trade with these countries. We believe that by extending the scheme to these countries we can develop alternative markets.
I have no wish to over-stress the Brexit issue, but the advice from anyone talking about Brexit or any economist talking about the disruption in exports, potentially, from Ireland to the United Kingdom is to diversify markets. Those who can should avail of the scheme. The reason I am not advocating that we make it a permanent part of the tax code is that extensions, such as the extension I am proposing now, allow Dáil Éireann to review the position, just as the committee is doing now and just as it has done in previous years when extensions were brought in.
The conclusions of the review included the opinion that while it could not be definitively stated that the existence of the foreign earnings introduction had led to an increase in exports to the qualifying countries, there was a consensus among stakeholders that the FED should be extended and enhanced to support SMEs trying to expand exports into emerging markets. The first part of this raises concerns for me. This was done in 2014. Those responsible for the review made the point that it takes time to establish markets in the countries in question and that the effects cannot be proven. We are now in 2016. We should be able to say definitively whether those pioneers, to use that term, those who originally availed of the FED, were actually successful in establishing market share in those countries and whether the scheme actually worked.
We may decide to extend the scheme for a further three years to 2020 and reduce its qualifying criteria. However, is the Department willing to look at the earlier entries into the scheme, in other words, the BRIC countries, to establish whether the conclusion still stands? Can we now state that the FED has led to an increase in exports to qualifying countries? Given that the scheme was introduced in 2012, four years ago, we should be able to carry out such a review with definitive verifiable evidence from the qualifying companies and individuals involved. They should be able to say whether it led to exports into those qualifying countries. I urge the Government to do that in order that we have the relevant information for the Finance Bill next year in case we are looking at these sections again.
A variety of factors are at play when markets develop for Irish exports. It is rather difficult to attribute anything to one particular scheme and to claim that because a particular scheme was in place, exports to Pakistan have quadrupled in the past three years. The scheme did not apply to Pakistan at that stage, but that line of argument is difficult to sustain.
The total cost of the scheme is approximately €1 million. It is not really possible to attribute quantums of trade to the tax expenditure of €1 million across so many countries. To a large extent I am relying on the advice of the agencies, in this case, Enterprise Ireland, as delivered to me from the parent Department. My view is that, on balance, it is worth taking this advice. The cost is low. As a general principle, it is important that a small trading nation like Ireland should be exporting goods and services to as many markets as are feasible.
Question put and declared carried.
Amendment No. 50 has been ruled out of order.
Amendment No. 50 not moved.
SECTION 11
Question proposed: "That section 11 stand part of the Bill."
My amendment was ruled out of order. I urge the Minister to consider it. I realise we cannot put forward amendments that may have a cost on the Exchequer or the people. I urge the Minister to consider my amendment. It does not abolish the scheme. Indeed, the scheme is being extended under section 11 for a further two years.
The scheme benefits a number of claimants. In 2014, a total of 2,291 people availed of the scheme. It is for long-term unemployed people who start their own business. They get relief for two years. The maximum relief is €40,000 each year. Therefore, the maximum relief an individual could get is €80,000.
The difficulty is that the number of individuals who are actually able to get anywhere close to relief at the high-end is extremely low. The figures show that the vast majority of them are claiming relief on a small scale. Approximately 75% of these entrepreneurs are getting relief at below €15,000. Basically, their profits do not reach €15,000 in the first two years.
I have argued that the relief should be curtailed to €20,000 per year but extended over a longer period. This would give more certainty for businesses. Business people who have availed of the relief have told me that the major challenge in any business is making any profit in year one and year two. The figures I have before me show that in the case 696 or one third of the 2,291 individuals who claimed in 2014 the profits on which the exemption had been claimed were between zero and €1,000.
We know that is the experience in that significant profits are not involved. An exemption on profits from €1,000 to €2,000 was claimed by 161 individuals and from €2,000 to €3,000 by 141. The figure for exemptions on profits above €15,000 starts to slide down from 30 to 12. While 49 people are able to gain relief on profits up to €40,000 per year, the majority are only getting relief on small amounts. As I said, one third have profits of less than €1,000.
My amendment would provide for the granting of relief up a figure of €20,000, which would not affect about 85% of claimants, and extend the granting of relief over three or four years, depending on the costs involved. For a business person, it would mean a little more certainty in setting up and it would not cost much more because of the small number of claimants at the top end. People with profits of up to €40,000 have probably fallen outside the category of those who need this relief. They would still get relief on their profits up to €20,000 over four years.
It is a good scheme which encourages people to set up their own businesses and rewards them for taking that risk. We know that the first few years in business are the most difficult. The evidence tells us that the scheme is of little benefit to the majority of individuals. Tweaking it could have a measurable impact on some entrepreneurs who have decided to use the start-your-own-business relief scheme.
Deputy Pearse Doherty's argument is that the start-your-own-business relief scheme should be amended to make it available over four years rather than two, that it should provide relief on taxable profits up to €20,000 rather than €40,000 per annum and that it should be extended to new businesses which commence before 31 December 2020, two years longer than that proposed in the Government's extension. Material on take-up of the scheme is only available for the first full year of the scheme, with 1,823 participants in 2014, who include participants who availed of the scheme in 2013. The scheme was available for just two months in 2013 when there were 139 participants. According to Revenue, the estimated cost of the scheme in 2014 was €5.2 million, or approximately €2,852 per individual on average. Recent analysis by Revenue suggests approximately 90% of applicants are earning profits under €20,000. However, it is important to note that we do not have sufficient information to make a judgment on how these businesses may fare in their second or subsequent years.
Extending the scheme, as suggested by the Deputy, could involve considerable costs, as it is unclear how the profits of businesses may evolve. For example, in extending the period during which relief may be claimed to four years as opposed to two, there is likely to be considerable additional costs for the Exchequer in 2019 and 2020 as a result of individuals who commence a trade in 2017 continuing to have exempt income in 2019 and 2020 which otherwise would be taxable. The scheme has already had a higher take-up rate than expected and a higher cost than forecast. It is unclear how fair it would be to continue to assist certain businesses in their third and fourth year, while providing no support for businesses which were not set up by long-term unemployed individuals. It is also unclear how the Deputy's amendment would affect businesses which are already claiming start-your-own business relief.
For these reasons and while I can understand the reasons behind the amendment, I am unwilling to accept it. I highlight the fact that the relief will be available until 2020 for individuals who start their business before the end of 2018. I suggest, therefore, that this issue might be considered again in the future. I see merits in the Deputy’s argument. If I thought it would benefit the scheme, I would accept the spirit of his amendment. However, I do not have enough hard data to know whether his argument is correct. The amendment is about a year premature and I would not rule it out indefinitely. I am prepared to come back to it next year when we will have more data to support the points he has made.
That is appreciated.
Question put and agreed to.
Section 12 agreed to.
SECTION 13
Amendments Nos. 51, 54, 55, 58, 59 and 62 are related and will be discussed together.
I move amendment No. 51:
In page 21, between lines 28 and 29, to insert the following:
“(a) in section 784—
(i) by inserting the following after subsection (2E):
“(2F) Notwithstanding any other provision of this Chapter, a retirement annuity contract shall not cease to be an annuity contract for the time being approved by the Revenue Commissioners where, notwithstanding anything contained in the contract as approved—
(a) the person with whom the contract is made—
(i) on or before 31 March 2017—
(I) commences payment of an annuity to the individual,
(II) pays a lump sum of a kind referred to in subsection (2)(b) to the individual, or
(III) transfers the value of the individual’s accrued rights under the contract in accordance with subsection (2A),
or
(ii) in priority to any payment or transfer referred to in subparagraph (i), makes available from the cash and other assets representing the value of the individual’s accrued rights under the contract, to such extent as may be necessary, an amount for the purposes of discharging a tax liability in relation to the individual under the provisions of Chapter 2C of this Part in respect of the contract,
(b) insofar as subparagraph (i) of paragraph (a) is concerned, the annuity contract is deemed to be a vested RAC in accordance with section 787O(6), and
(c) insofar as subparagraph (ii) of paragraph (a) is concerned, the annuity contract is a vested RAC within the meaning of section 787O(1).”,
and
(ii) by inserting the following after subsection (7):
“(8) Where an annuity contract is a vested RAC within the meaning of section 787O(1), the provisions of section 784A(4) shall apply to the cash and other assets representing the individual’s accrued rights under the contract at the time of death of the individual as if that cash and those other assets were assets of an approved retirement fund.”,”.
Section 13, as initiated, amended certain provisions of Part 30 of, and Schedule 23B to, the Taxes Consolidation Act 1997 with the aim of closing off tax planning opportunities involving the use of personal retirement savings accounts, PRSAs. This tax planning involved the PRSA owner never taking benefits from the PRSA, which meant that various taxes were avoided and the assets of the PRSA passed tax-free to a surviving spouse or civil partner on the death of the owner after age 75 years. The amendments made in the Bill were designed to ensure all PRSAs vested no later than the owner’s 75th birthday were brought within the range of taxes that the tax planning was attempting to avoid. The range of amendments I am now proposing to section 13 reflect further consideration of the provision in the light of feedback and commentary received by my Department and Revenue since publication date. They are designed to ensure the closing off of this type of tax planning is fully effective by including retirement annuity contracts, RACs, within the provisions, as well as to clarify how certain aspects of the measure are to operate.
In summary, the following Committee Stage amendments are proposed: to provide that RACs which have not matured on, or by the time, an individual attains the age of 75 years will be treated as maturing, which will give rise to a benefit crystallisation event, BCE, in similar circumstances as PRSAs, as already provided for in the Bill as initiated; to clarify the transitional arrangements allowing individuals who are over 75 years at the date of passing of the Bill and who will face a deemed vesting of their PRSA or RAC on that date to access the assets in their PRSA or RAC by way of an annuity, a retirement lump sum or a transfer to an approved retirement fund and that such accessing will have to be completed by 31 March 2017; to make provision for any chargeable excess tax arising on a vested PRSA or RAC where the owner is over 75 years to be recovered by the administrator from the PRSA or RAC assets in priority to any other payment being made; to require an affected individual to provide a declaration in respect of the BCE for his or her administrator within 30 days of the deemed vesting of the PRSA or RAC, and, where a declaration is not made, to treat the entire value of the BCE as being chargeable to tax; to provide a review mechanism where it subsequently transpires that some, or all, of the value of the BCE should not have been charged to tax; and to provide for other minor technical amendments to ensure clarity of the provisions.
Amendment No. 51 amends section 784 of the TCA 1997, dealing with RACs, by inserting a new subsection 2F into section 784. This is primarily to provide transitional arrangements which mirror those provided for PRSAs in new section 787K(2D) of the Bill, as initiated. The new subsection 2F provides that an RAC which has been approved by Revenue will not lose that approved status where the insurance company with which the contract is made on or before 31 March 2017 pays an annuity or lump sum to the individual or transfers an amount to an ARF or, in priority to the making of such payments or transfers, uses the RAC assets to discharge any liability to chargeable excess tax arising as a result of the deemed vesting of the RAC. The facility to make a payment or transfer to the individual with whom the RAC is made after age 75 only applies where the RAC is deemed to have become a vested RAC on the date the Finance Act 2016 is passed, that is, in circumstances where the RAC owner is 75 years of age before that date. The use by the RAC administrator of the assets in the RAC to discharge a chargeable excess tax liability will apply in any circumstance where the RAC becomes vested on the date the RAC owner attains the age of 75 years, without having exercised his or her retirement entitlements under the contract by that time.
It also inserts a new subsection 8 into section 784. This new subsection provides that where an annuity contract is a vested RAC - that is, where an annuity does not become payable or a transfer to an ARF, etc., has not been made on or before the date on which the RAC owner attains the age of 75 years - the amount of cash and other assets in the RAC representing the owner's rights under the contract at the time the owner dies are to be treated as if they were assets of an ARF and the taxation provisions in section 784A(4) apply accordingly. This new subsection mirrors the death-related PRSA provisions in section 787G(6), as provided for in section 13 of the Bill as published.
Amendment No. 54 amends section 787K(2D) as initiated, which provides transitional arrangements for individuals who are over 75 at the date of the passing of the Bill and who will face a deemed vesting of their PRSA or PRSAs on that date. The amendments are for the purposes of clarifying the circumstances in which such individuals will be allowed to receive a payment of their PRSA assets in the form of an annuity, a retirement lump sum or a transfer of the assets to an ARF on or before 31 March 2017. They will not be permitted to take periodic withdrawals after 31 March 2017. As with vested RACs, this also permits the use by the PRSA administrator of the assets in the PRSA to discharge a chargeable excess tax liability in any circumstance where the PRSA becomes vested on the date the PRSA contributor attains the age of 75 years without having drawn down benefits.
Amendment No. 55 makes a number of amendments to Chapter 2C of Part 30 of the TCA 1997, which deals with the limit on tax relieved pension funds, that is, the standard fund threshold regime, by inserting a definition of "vested RAC" into section 787O(1), which is the interpretation section for Chapter 2C, in relation to annuity contracts or trust schemes which are included in the existing definition of "relevant pension arrangement" in section 787O(1) that are approved by the Revenue Commissioners under section 784. Under this amendment, a vested RAC is an RAC from which the owner has not taken retirement benefits on or before the date of his or her 75th birthday. This definition is similar to the new paragraph (c) of the definition of "vested PRSA" in section 790D(1), which was included in the Bill as initiated.
It also inserts a new subsection 6 into section 787O. Where an RAC owner attains the age of 75 before the date of passing of the Finance Act 2016, without having taken benefits, this new subsection provides that the RAC is deemed to become a vested RAC on the date of passing of that Act. This mirrors the PRSA provision included in the new subsection 1A of section 790D of the Bill, as initiated. It also inserts a new subsection 5A into section 787R. This is an important amendment which will ensure that a BCE arising as a result of the vesting of an RAC or PRSA at age 75 is brought into charge to tax. In general, where a BCE is due to occur in respect of a pension arrangement, the scheme administrator may seek a declaration under section 787R(4) from the owner regarding prior BCEs so that the administrator can determine if the BCE in question gives rise to chargeable excess tax. In the context of these anti-avoidance measures, the purpose of this subsection is to counteract situations where individuals refuse to provide a declaration, thus leaving the administrator unable to determine the amount of any BCE that is to be subject to chargeable excess tax, that is, arising from the vested PRSA or vested RAC where the owner is 75.
Under this new subsection, an individual whose RAC or PRSA vests in accordance with section 13 of this Bill is required to provide a declaration containing the details referred to in section 787R(4) to his or her administrator within 30 days from the date of the deemed vesting, regardless of whether or not the declaration is requested by the administrator. Where an individual fails to provide a declaration, the administrator can assume that the individual's standard fund threshold, which is currently €2 million, or personal fund threshold, if applicable, which would be higher than €2 million, has already been fully "used up", so that the entire value of the BCE, the vested RAC or vested PRSA, will be treated as a "chargeable excess" and taxed at the higher rate of tax, which is currently 40%.
Finally, it amends subsection 5 of section 787S which in general allows for the adjustment of chargeable excess tax which is incorrectly included in a return to Revenue by an administrator. This amendment is a necessary counterbalance to the amendment to section 787R and deals with the situation where a BCE is taxed in full under the new section 787R(5A)(c), that is, where a declaration has not been submitted by the RAC or PRSA owner in circumstances where, if a declaration had been provided, no chargeable excess or a lesser amount would have arisen. The amended subsection 5 allows Revenue, on a case being made to it, to make any necessary adjustments to ensure that the tax liability is correct. This is particularly important for individuals with relatively small PRSAs or RACs who may accidentally, through illness or the like, find themselves in this situation. It allows the situation to be redressed.
Amendment No. 58 makes a minor amendment to new subsection 1A of section 790D included in the Bill as initiated, to make absolutely clear the date the PRSA is deemed to become a "vested PRSA" where the PRSA contributor has attained the age of 75 before the date of passing of the Finance Act 2016. In other words, this means the date of passing of the Finance Act 2016 and not the date the PRSA contributor attains the age of 75 years.
Amendments Nos. 59 and 62 insert new subparagraphs (bc) and (dc) into paragraphs 2 and 3, respectively, of Schedule 23B to the TCA 1997. These mirror the provisions already included in the Bill as initiated for vested PRSAs and respectively ensures that the vesting of an RAC at age 75 is treated as a BCE and sets out how the amount crystallised by the BCE is to be determined.
I commend these amendments to the committee.
Is amendment No. 51 agreed to?
May we discuss the other amendments? Is it correct that a drawdown of 5% will be the imputed distribution on a vested PRSA?
Above €2 million it will be 6% regardless of age. Below €2 million it can be 4% or 5% depending on the age. Below 70 is 4% and above 70 is 5%.
The imputed distribution is the same as an ARF. The legislation will deem a PRSA vested on the 75th birthday of the owner of the PRSA. The ARF has an imputed distribution of 4% at the age of 61 and 5% at the age of 71, but if the legislation forces it to be vested at 75, the 4% will not be applicable.
The primary purpose of the amendments being introduced is to reduce the potential for tax planning to avoid a tax which is legitimately owed. The primary purpose of the provision going forward is to stop this tax planning in its tracks and to make sure it would be financially irrational for an individual to allow a situation to arise where he or she does not vest his or her PRSA or RAC on or before his or her 75th birthday. If he or she does this in the future, he or she will not be able to access the benefits but will be taxed on them nonetheless. For individuals who may be contemplating this form of planning in the future, they have been forewarned in the legislation that the consequences will be severe. We assume that, rationally, they will avoid doing so. In the case of an individual who has got him or herself into the situation already and is not in a position to unwind the arrangement, in my view, it would clearly not be proportionate to impose potentially significant and, in the case of vested PRSAs, ongoing tax charges under the imputed distribution regime while at the same time not allowing the person to access their funds. An attitude of "They have made their bed so they should lie in it" seems to me to be unreasonable. These individuals may face chargeable excess tax. They will face notional distribution tax if they make their PRSA a net to the ARF. They will face the ARF regime on assets passed on death so they are not escaping. The purpose is to avoid tax avoidance through tax planning.
I appreciate that and I welcome the substance of the amendment and the amendment to the amendment. The issue I want to deal with is twofold so I will separate it out. One is on the vesting of the PRSA and the date at which it happens. I then want to discuss the transfer of the assets on death and how that will apply. I will focus on the first part of it first. If one has an ARF, there is an imputed distribution at the age of 61 of 4% and 5% at the age of 71 yet in the PRSA the imputed distribution will only kick in at the age of 75. What is the rationale for that?
That is because legally a person does not have to vest under the contract until the age of 75.
A person does not have to vest but the whole point with an imputed distribution is that regardless of whether he or she draws down the money from the pension fund, there has to be a calculation made that a certain proportion of it is drawn down and the person has to pay tax on that. It goes to the spirit of pension tax relief, whether we agree with it or not. It is deemed as deferred taxation and at some point the State has to receive that taxation back. I am trying to figure out why, for an ARF, we have an age of 61 for 4% and 71 for 5% and then 6% if the pension pot is above €2 million but we now have a different age of 75 for a PRSA. Why could that not be earlier? This is an issue of tax planning because the longer the imputed distribution does not take place, the more beneficial it is to the individual.
The imputed distribution regime only kicks in when benefits have been drawn down. The avoidance scheme was that they were not drawing the benefits at all so the imputed tax did not kick in.
The situation with the imputed tax is that if one draws down the benefits, one will have to pay the tax. The legislation provides that if a person does not draw down the benefits because he or she has other income from other sources and does not need to draw down the benefit and the intention is to pass it on to the family either tax free or as a sum more generous than transferring cash from one account to another, regardless of whether the person wants to draw it down, the person has to calculate for tax purposes that he or she is drawing down a proportion of it and pay taxes on it. Therefore, that person is being forced to draw it down. That is what he or she will do. The person will not leave it in and just pay the taxes. It makes no sense to do that because there would then be double tax on it. There are two different ages where this kicks in. Some of this is very technical so perhaps we could deal with it with the Minister's officials before Report Stage and get a paper on it. Does it have to be 75 years of age? Has a decision been made that it is a fair enough age for this calculation to kick in and for the PRSA to be deemed vested?
Under the contract and under the scheme, 75 is the age at which benefits have to be drawn down. That is the latest stage. That is where the figure of 75 comes from. It might be a good idea to have a technical briefing of colleagues before Report Stage because it is very complex and I can ensure we can make the arrangements for interested colleagues to get briefed on the technicalities of this.
The second part is on the transfer of the PRSA to a family member after death. Prior to this, one was able to transfer it tax free. Now it will be deemed to have the same standing as an approved retirement fund, ARF. My question is on the tax treatment of the passing of ARFs to family members. Somebody with a PRSA of €2 million, that is a pension pot of €2 million, has built up tax credits or reliefs as a result of that which means for every €1 million, 40% was contributed by the State through tax reliefs. That person can pass that to his or her child completely tax free if the child is under the age of 21. If the child is over the age of 21, they pay a tax of 30% which would still be less than capital acquisition taxes. While it is a marked improvement in what we have had up to now, this will still lead to serious tax planning by individuals who can afford to have a PRSA.
If the recipient is under 21, it is subject to capital acquisitions tax at normal rates. If they are over 21, there is a ring-fenced rate of 30%.
Why is there a difference between transferring a PRSA to a person under 21 and one over 21? That could create an anomaly given that under existing law, the first €280,000 would be exempt from CAT, whereas if one is 21 years of age, one has to pay.
If a PRSA was transferred of €300,000 from a father to a daughter, the first €280,000 would be exempt and the other €20,000 would be taxable at 33%, which is a small amount of tax, whereas if one ended up holding one's 21st birthday the week before, one would be subject to 30% tax. Why is there a difference in treatment between a 21 year old and somebody who is below 21, given that under capital acquisitions tax there is no such distinction made in terms of the age of children?
I do not know what the origin of it was when the scheme was legislated for and put in place but I assume the distinction is between dependency and independence. The age of maturity was deemed to be 21 and a different set of rules applied below that.
I will leave it at that.
First, I welcome the transitional measures the Minister is proposing in the amendments. Taking it to the end of March next year is welcome and necessary.
It is fair to say this is quite technical. We will have to go over some of the remarks the Minister put on the record there by way of explanation of some of the amendments but it is true to say that there is a different treatment in relation to vested PRSAs of those over the age of 75 proposed than those that apply to an ARF. I am not sure, having listened to that exchange, what the logic is.
Given that the Minister is proposing to introduce a benefit, a so-called "crystallisation event", at age 75, why is it necessary to prohibit the withdrawal of assets from a vested PRSA but to allow a withdrawal to pay the imputed distribution from it? What is the rationale behind that?
The purpose of the scheme, as designed, was that distributions would take place by the age of 75. Tax planning arrangements to defer that to a later age are not in accordance with the purpose of the scheme, as designed. It allows for tax planning and the avoidance of tax, and this is to deal with that issue.
Amendment agreed to.
Amendments No. 52 and 53 of Deputy Pearse Doherty are out of order.
Amendments Nos. 52 and 53 not moved.
I move amendment No. 54:
In page 22, to delete lines 8 to 15 and substitute the following:
"(a) the PRSA administrator—
(i) on or before 31 March 2017—
(I) commences payment of an annuity to the PRSA contributor,
(II) pays a lump sum to the PRSA contributor, in accordance with section 787G(3)(a),
(III) makes assets of the PRSA available to the PRSA contributor, or
(IV) transfers assets of the PRSA to an approved retirement fund in accordance with section 787H(1),
or
(ii) in priority to any payment, making of assets available or transfer referred to in subparagraph (i), makes available from the PRSA assets, to such extent as may be necessary, an amount for the purposes of discharging a tax liability in relation to the PRSA contributor under the provisions of Chapter 2C of this Part in respect of the PRSA,
(b) insofar as subparagraph (i) of paragraph (a) is concerned, the PRSA is deemed to be a vested PRSA in accordance with section 790D(1A), and
(c) insofar as subparagraph (ii) of paragraph (a) is concerned, the PRSA is a vested PRSA within the meaning of paragraph (c) of the definition of 'vested PRSA' in section 790D(1).",".
Amendment agreed to.
I move amendment No. 55:
In page 22, between lines 15 and 16, to insert the following:
"(c) in section 787O—
(i) in subsection (1)—
(I) in the definition of "uncrystallised pension rights", by substituting "on that date;" for "on that date.", and
(II) by inserting the following definition:
" 'vested RAC' means a relevant pension arrangement of a kind referred to in paragraph (b) of the definition of that term in this subsection in respect of which-
(a) payment of the annuity to the individual entitled to the annuity under the contract has not commenced, or
(b) a transfer has not been made under section 784(2A),
on or before the date on which the individual attains the age of 75 years.",
and
(ii) by inserting the following after subsection (5):
"(6) Where an individual of a kind referred to in the definition of 'vested RAC' attains the age of 75 years prior to the date of passing of the Finance Act 2016, the relevant pension arrangement is deemed to become a vested RAC on the date of passing of that Act.",
(d) in section 787R—
(i) in subsection (5), by substituting the following for paragraph (b):
"(b) where the benefit crystallisation event is an event of a kind described at subparagraph (b), (ba) or (c) of paragraph 2 of Schedule 23B, refuse to transfer an amount to the individual, or to any of the funds referred to in the said subparagraph (b), refuse to make assets of the PRSA referred to in the said subparagraph (ba) available to the PRSA contributor or, as the case may be, refuse to make a payment or transfer referred to in the said subparagraph (c),",
(ii) by inserting the following after subsection (5):
"(5A)(a) In this subsection—
'relevant administrator' means—
(i) in the case of a vested PRSA of a kind referred to in paragraph (c) of the definition of ‘vested PRSA’ in section 790D(1), the administrator of that vested PRSA, and
(ii) in the case of a vested RAC within the meaning of section 787O(1), the person with whom the individual (referred to in the definition of 'vested RAC' in that section) made the annuity contract;
'relevant person' means—
(i) in the case of a vested PRSA of a kind referred to in paragraph (c) of the definition of 'vested PRSA' in section 790D(1), a PRSA contributor of a kind referred to in that paragraph, and
(ii) in the case of a vested RAC within the meaning of section 787O(1), an individual of a kind referred to in the definition of 'vested RAC' in that section;
'date of the benefit crystallisation event’ means, as the case may be, the date the relevant person attains the age of 75 years or, where the relevant person attains that age prior to the date of passing of the Finance Act 2016, the date of passing of that Act.
(b) Notwithstanding subsection (4), where a benefit crystallisation event of a kind referred to in subparagraph (bb) or (bc), as the case may be, of paragraph 2 of Schedule 23B occurs in relation to a relevant person, the relevant person shall, within the period of 30 days from the date of the benefit crystallisation event, provide a declaration containing the details referred to in subsection (4) to the relevant administrator.
(c) Where a relevant person fails to comply with paragraph (b), section 787Q shall apply to the benefit crystallisation event referred to in that paragraph as if the condition referred to in subsection (2)(b) of that section is met.",
and
(iii) in subsection (6), by substituting "subsections (4), (5) and (5A)" for "subsections (4) and (5)",
(e) in section 787S, by substituting the following for subsection (5):
"(5) Where any item—
(a) has been incorrectly included in a return as a chargeable excess, or
(b) has been included in a return as a chargeable excess in accordance with the application of paragraph (c) of subsection (5A) of section 787R in circumstances where, if a declaration referred to in paragraph (b) of that subsection had been provided to the relevant administrator (within the meaning of that subsection), no chargeable excess or a lesser chargeable excess would have arisen in respect of the benefit crystallisation event concerned,
then, on a case being made, an officer of the Revenue Commissioners may make such assessments, adjustments or set-offs as may in his or her judgement be required for securing that the resulting liabilities to tax, including interest on unpaid tax, whether of the administrator of a relevant pension arrangement or the individual or, where the provisions of section 787R(2A) apply, whether of the subsequent administrator, fund administrator, relevant member or non-member, as the case may be, are, so far as possible, the same as they would have been if the item had not been so included.",".
Amendment agreed to.
Amendments Nos. 56 and 57 of Deputy Pearse Doherty are out of order.
Amendments Nos. 56 and 57 not moved.
I move amendment No. 58:
In page 23, line 4, to delete "on that date" and substitute "on the date of passing of that Act".
Amendment agreed to.
I move amendment No. 59:
In page 23, to delete line 9 and substitute the following:
"of 'vested PRSA' in section 790D(1), (bc) the relevant pension arrangement becomes a vested RAC within the meaning of section 787O(1),",".
Amendment agreed to.
Amendments No. 60 and 61, in Deputy Pearse Doherty's name, are out of order.
Amendments Nos. 60 and 61 not moved.
I move amendment No. 62:
In page 23, to delete line 17 and substitute the following:
"Finance Act 2016, on the date of passing of that Act,
(dc) where the benefit crystallisation event is an event of a kind referred to in paragraph 2(bc), the aggregate of so much of the cash sums and the market value of such of the other assets representing the individual's rights under the relevant pension arrangement at the date the individual attains the age of 75 years or, where the individual attained the age of 75 years prior to the date of passing of the Finance Act 2016, on the date of passing of that Act,".".
Amendment agreed to.
Section 13, as amended, agreed to.
NEW SECTIONS
Amendment No. 63 in the name of Deputy Michael McGrath is out of order.
Amendment No. 63 not moved.
I move amendment No. 64:
In page 23, between lines 18 and 19, to insert the following:
"14. The Minister shall, within 3 months of the passing of this Act, prepare and lay before Dáil Éireann a report on the possibility of extending the TaxSaver Commuter Ticket Scheme to include parking costs associated with public transport.".
This amendment relates to the taxsaver commuter ticket scheme, which is quite a successful tax incentive scheme to encourage commuters to use public transport and which gives a benefit to them as a result. Currently, individuals can obtain tax relief for buying tickets for the use of certain modes of public transport.
In practice, individuals can also buy annual parking tickets by train and bus stations. They drive to the train or bus station and park their car, and can pay an annual charge in respect of that service. The cost of such parking is not included currently in the taxsaver commuter ticket scheme. What I am seeking here is a report to look at the possibility of extending the scheme to including parking costs associated with public transport strictly on the basis that the parking service is directly linked to the individual availing of the public transport service. In our view, it would potentially incentivise park and ride and the use of public transport.
This is an idea brought forward to me by one of our colleagues, Deputy James Lawless, in Kildare North, which is very much a commuter constituency. He strongly believes that this would be of benefit.
Section 118(5A) of the Taxes Consolidation Act 1997 exempts employees and directors from benefit-in-kind taxation where an expense has been incurred by an employer on the provision.
The Minister is giving a response to amendment No. 63. We are on to amendment No. 64.
Actually, I do not think I am. I think we are taking a run at it.
That could happen in a minute. Amendment No. 63 was ruled out of order.
The exemption also includes passes for travel on commuter ferry services which operate within the State in respect of journeys which begin and end in the State. The exemption does not extend to car parking charges which are purchased as part of a combined travel pass which includes car parking charges, nor does it include ad hoc parking charges, such as daily charges.
While I could agree to prepare a report as the Deputy suggests, I am not at all convinced of the merits of the underlying proposal. If I am correct in assuming that the Deputy wants individuals who have a travel pass, that is the taxsaver travel pass, to get a further tax relief for car parking, then this would be an additional benefit for someone already getting a significant tax relief on his or her commuting costs. In addition, it would be very difficult for the Revenue Commissioners to administer such a scheme; the existing travel pass or taxsaver scheme is transparent in that the providers are listed in the legislation and the cost of the pass at the start of the year is known. On the other hand, parking facilities are provided by a multitude of different providers, from multi-storey to waste ground, and at various rates.
I would be concerned also that to extend the scheme in the manner proposed by the Deputy would perhaps have the unintended effect of increasing the distance driven by commuters before they switch to public transport. Also, incentivising use of the car would appear contrary to the intention behind the travel pass legislation which was introduced in budget 1999 as a traffic-related measure. In his budget speech at the time, the then Minister, Mr. McCreevy, stated that the scheme was being introduced "to address the growing traffic problem in urban areas". Finally, I would note there could also be difficulties in terms of minimising any opportunity for its misuse. For example, if an annual parking fee was paid, how would the Revenue Commissioners know who was using it?
For all these reasons, I would be reluctant to contemplate an extension on the lines proposed by the Deputy and I am not disposed to accept this amendment. However, I would point out that people should be aware that the travel pass taxsaver scheme and the cycle-to-work scheme are not mutually exclusive. While this option would not be suitable for all, it may be of practical value to some commuters. The departmental advice is leave the car at home, buy a bike and-----
Cycle to the station.
-----cycle to the station, and one will get the double tax benefits.
I appreciate the Minister's response. As I said, it is a good scheme. It is successful. The reality for many is that they have to drive to the nearest station. I will take the note the Minister read into the record and discuss it with Deputy Lawless. I will withdraw the amendment on that basis.
Amendment, by leave, withdrawn.
Amendment No. 65 not moved.
Deputy Michael D'Arcy took the Chair.
Amendments Nos. 66 and 67 may be discussed together.
I move amendment No. 66:
In page 23, between lines 20 and 21, to insert the following:
"14. The Minister shall, within one month of the passing of this Act, prepare and lay before Dáil Éireann a report on options for the abolition of the Local Property Tax.".
Amendment No. 66 supports our position that the local property tax, LPT, should be abolished. We believe it is not an appropriate tax. Many who are in mortgage distress are being forced to pay it, and there are other ways to fill the gap in revenue that would accrue. One of the alternatives that would go a portion of the way would be to reintroduce the second house tax. Given the Government's position on LPT, I do not expect the Minister to accept the amendment.
Amendment No. 67 calls on the Government, within one month of the passing of the Act, to lay before Dáil Éireann a report on the likely changes to the amount of LPT payable by households based on the most recent house price data and forecast for the net valuation period. In July 2015, the Thornhill report called for a freeze on the valuation date and said any legislative change to defer the valuation date should be accompanied by the legislative changes necessary to reform the system as I have outlined. While we got a freeze, we did not get the reform which Mr. Thornhill suggested. Mr Thornhill was no politician facing an election. Of his 83-page report, the only recommendation implemented was the recommendation to freeze the deferral date that was intended. Even that was taken completely out of context. It was supposed to allow for reform. The report set out that LPT needed reform. However, there is no mention in the programme for Government to touch the issue.
The freezing of the LPT was a cynical election move. It cannot be deferred forever, and I want to figure out where the Government intends to go with it. Our position is to abolish LPT. The valuation date was May 2013. According to the Central Statistics Office, CSO, at this point house prices were at 59.6% of the base which was calculated in 2005. It is now almost 30 points above that, which means average house prices are almost 50% higher than they were when they were valued for LPT. When the freeze ends and revaluation kicks in, many people are in for a terrible shock. This is very clear. My position is not for reform but abolition. The tax has become a bizarre tax. It is called a local tax, but it is no more local than any other tax. The only local element is that wealthier counties can afford to reduce it with no impact on services while poorer counties cannot afford to reduce it. What is the Government going to do about it? It is a poorly designed tax. If the Government decides it will freeze it forever and the valuation date will always be May 2013, people will not face an increase. If a revaluation takes place in two years' time based on current property prices, which have increased by 50%, people across the board will have to pay a higher LPT. A report is required on the options for the likely changes in the amount of LPT in order that we can be informed of the movement and, if the valuation date were set, for example, next year, what it would mean for individuals and local authorities.
I will speak first to amendment No. 66 which seeks a report on options for the abolition of LPT. LPT is designed to provide a more sustainable system of funding for local government and place the provision of local services on a sounder financial footing. It has led to greater transparency and accountability at a local level and it is certain that the stronger democratic relationship and clearer lines of accountability created can only have a beneficial impact on service provision from the perspective of the service user. LPT is also a significant base broadening measure. The level of income expected to be generated by LPT in 2017 is approximately €460 million. Deputies will be aware that, under the terms of the Stability and Growth Pact, Ireland may not introduce discretionary revenue reductions unless they are matched by other revenue increases or expenditure reductions. This means the Government must consider carefully any tax changes as any reductions will have to be offset elsewhere by tax increases. A report by the Think-tank for Action on Social Change, TASC, published on 4 November, includes the statement:
An annual property tax is a tax on capital/wealth and as such contributes to social equity. The new Irish property tax has generous thresholds but is also a very stable tax. It is hard to avoid and so is a sound source of revenue for the State.
As regards abolition of LPT, it is well established that the taxation of property through an annual recurring tax is less economically distortionary than the imposition of tax on income or capital. This is supported by economic literature and OECD analysis which underscores how an annual tax on land and buildings has a relatively small adverse impact on economic performance. Both international and domestic research indicate that property taxes are more growth friendly than taxes on labour.
The Government is determined to do everything in its power to protect and support the creation of jobs. The introduction of a property tax is part of a broader approach to the taxation of property. The aim is to replace some of the revenue from transaction-based taxes, which have proven to be an unstable source of Government revenue, with an annual recurring property tax, which international experience has shown to be a stable source of funding. With LPT we have a stable source of funding which is fair and progressive, with the owners of the most valuable properties paying most. The tax is equitable, has reference to ability to pay, conforms to international norms and significantly broadens the domestic tax base. We have seen how previous over-reliance on revenue from transaction-based taxes, such as stamp duty, capital gains tax and capital acquisitions tax, led to a significant fall in tax revenue when the number and value of transactions decreased sharply from 2007 onwards as a result of the economic and banking crisis, creating enormous problems for Ireland’s fiscal position. In the circumstances, I do not propose to accept amendment No. 66.
Regarding amendment No. 67, I have taken on board the concerns expressed by home owners during the past two years regarding the potential impact of increasing property prices on their LPT liabilities, particularly in urban areas. The Finance (Local Property Tax) (Amendment) Act 2015 provided for the postponement of the next LPT revaluation date from November 2016 to November 2019. Projected impacts on LPT liabilities due to increasing property prices have been examined as part of the review of the operation of LPT which I initiated and which was completed in mid-2015. The review was carried out by Dr. Don Thornhill, who chaired the interdepartmental group on the design of a local property tax in 2012, and it focused especially on the issue of property price developments. Dr. Thornhill’s report on the review of LPT was published on budget day last year on my Department’s website. The postponement of the revaluation date for LPT means home owners have not been faced with significant increases in their LPT for 2017 as a result of increased property values, and it gives sufficient time for the other recommendations in Dr. Thornhill’s report to be considered in full.
The cost associated with the deferral of the revaluation date for LPT is estimated to be approximately €125 million in a year. The Thornhill review of the local property tax estimated an increase in LPT collection to €560 million in 2015 if residential properties were revalued at May 2015 property prices. This compared with the €435 million estimated LPT collection in 2015 if May 2013 property valuations were maintained.
If factors such as property prices and the rate of exemptions and deferrals were to remain the same until 2019, the estimated cost, as I said, would be €125 million per annum, not taking into account any changes in property prices since the review. The amendment sought would be a significant undertaking and would only be appropriate in the context of the wider work on LPT.
A previous exercise which examined the impact of property price developments for LPT liability for the period May 2013 to May 2015 as part of the Thornhill review took approximately six months to complete and required significant resources. The results from that report are likely to be still valid in terms of the distribution of the changes in LPT liability, though the level of the changes would be higher, reflecting more recent increases in property prices. The review found that revaluation as of May 2015 would have been associated with significant increases in tax liabilities for some taxpayers; higher value properties as of May 2013 experiencing the largest increase in tax liability; and a wide degree of regional variation in changes in liability, with the largest increases mainly occurring in the Dublin area. Forecasting of future property prices would be fraught with difficulty and would likely be highly inaccurate even at an aggregate level. Forecasts at a more detailed level which estimated different price paths on the basis of location and property characteristics would be even more unreliable. It would be misleading to base estimates of changes in household LPT liability on such forecasts. In light of these considerations, I am not inclined to accept the amendment.
On questions raised by Deputy Doherty as he proposed the amendment, there are obviously two variables. There is the value of the property subject to LPT, but also the rate at which the LPT is charged. I am sure that whatever Minister is involved in reassessing the position in advance of a new revaluation date of 2019 will take both variables into account in order that dramatic increases in property taxes for individuals would be avoided.
The Minister gave no indication of the recommendations of the 83-page report by Dr. Thornhill on needed reforms in 13 areas or when they would be carried out. All we have at this point in time is a date in November 2019 when the revaluation of the LPT liability will take place. All of us in this room know what that means. It means that nearly every household in the State will see an increase in their local property tax. It is likely that most households will go up at least one step. In some areas, as the Minister mentioned, where house prices have been accelerating at a faster rate, particularly in certain parts of Dublin, we could even see a two-step increase, which could be significant. In my view, there is a need to inform people and to conduct debate as to what is going to happen. The Government talks about how this is progressive taxation and all the rest, yet the whole point of the local property tax is that it is meant to be linked to one's asset. If it is not linked to one's asset, then it is not a local property tax. Unfortunately, the way that this family home tax has been structured means that people are actually paying on their liability. People in negative equity still have to pay this.
I encourage the Minister to carry out the report and to issue a comprehensive statement on where the Department stands on the reforms that Dr. Thornhill has recommended in order that we can have a fuller discussion. There are other issues that need to be addressed. Unfortunately, my amendment No. 68 has been ruled out of order. That is related to issues of muscovite MICA. It is a plight in particular areas in Donegal in which buildings are crumbling. There has been excellent investigative journalism carried out by RTÉ that looked at this issue in great detail. There is a need for the Government to address this issue. I note that the Minister for Housing, Planning, Community and Local Government has made comments on this in the past. We need some action and the Minister for Finance has a role in that.
I have one last point I wish to make about the local property tax. We were told at the time that there would be exemptions. As we know now, there are no exemptions from the local property tax, not even for those on the lowest incomes. There are people in the courts at this point in time, where the banks are trying to take their homes from them. They are still subject to this liability, as are those in negative equity and so on. What we do have is a deferral. People have to be on very low incomes to be able to avail of the deferral. How can we justify the fact that the State is charging them an interest rate of 4%, at a time when one would not even get a 1% interest rate on savings one has in the bank and when the country is able to borrow at less than 1%? The local property tax is still accruing on the people who are on the lowest incomes in society and who are therefore able to prove to the State that they do not have the resources to pay it. On top of that, a 4% interest rate applies. When this was decided, interest rates were very different from what they are now. In my view, it is completely unjustifiable. Despite my reservations about an opposition to the overall local property tax, the idea that we continue to apply a 4% interest rate for people who cannot afford their local property tax is wrong. It is profiteering off the back of people who already cannot afford to pay in the first place. I encourage the Minister to change the interest rate charge for deferred payments to an appropriate rate.
As well as accepting Dr. Thornhill's proposal that the revaluation date would be deferred to 2018 or 2019, I accepted and enacted other proposals and amendments as well. For example, proposals regarding the treatment of property with pyrite defects and properties adapted for persons with disabilities were enacted in the Finance Act 2015. I know there are other problems in the quality of building materials, particularly in counties in the north west of Ireland. The Department with responsibility for building standards is the Department of Housing, Planning, Community and Local Government. I understand that an expert panel on concrete blocks was established by that Department in April 2016 to investigate the problems that have emerged in the concrete block work of certain dwellings in Donegal and Mayo. The terms of reference of the panel have been published. In general, the terms of reference were designed to establish the facts behind the problems that have emerged in Donegal and Mayo and to outline technical options for addressing the problems identified in order to assist affected homeowners. When it was set up in April, the terms of reference required it to report within six months and to advise on solutions. That report should come to hand pretty quickly. We can then consider all of the issues that are wrung from it. I agree with the Deputy that, on the basis of the evidence at this stage, there is a problem and a genuine cause for concern. I await the advice of the technical report to see what way that can be remediated or what the parent Department proposes by way of remediation.
The 4% rate is half of the standard rate of 8% that applies to late payment of LPT. It is not related to current interest rates, but it was 50% off the penalty rate that applied to late payments of LPT. As I say, the revaluation date is to take place from 2019.
The Government of the day would have to make a decision about it in advance. The programme for Government has committed to a general review of measures to boost local government leadership and accountability. That is agreed in the programme for a partnership Government. It provides for the preparation of a report by mid-2017 and it would be very difficult to develop such a report without taking into account how property tax is operating in local authorities and reflecting on some of the other recommendations made by Dr. Thornhill. Deputy Doherty will get his report anyway arising from that commitment in the programme for Government, although it will not be related solely to property tax. Without having seen any draft terms of reference, property tax would be within the remit of the consideration.
I take the point and we can leave the amendments aside for a moment. There is the figure of 4% and the late payment is 8%, so it is usually a once-off when a person has not paid on time or decided not to pay and so on. The problem with the 4% figure is that it continues. It could apply to a person with a very low income, such as a pensioner, but with an expensive house in Dublin. The person could be asset rich and cash poor and have deferred the tax liability. The 4% rate would be applied every year and if the property is sold, the quantum would be paid. It could also be paid if the person gains employment or comes into additional income. That is very different from the late payment rate, as it continues to build and becomes quite substantial. A 4% figure applied to €500 might not be much at €20 but if that is extended to ten years it is €200. However, it is not just for one year and if an individual cannot pay for the second year, there is another €200 over the period and so forth. There can be quite a big liability arising for individuals who simply do not have the ability to pay. A late payment occurs with individuals who have not been permitted by the Department to defer the payment. The people I refer to meet criteria and it is acknowledged that they cannot pay. They are the poorest in society. This penalty is excessive and there is no rationale for it.
The only question should be whether the State is losing money as a result of the deferral and it would not if it were reduced to 1%. The State would benefit more as a result of these low income individuals deferring their payment. That is not justifiable under any grounds. I ask the Minister to consider that point.
The 4% figure arises from a scheme that was included for the benefit of home owners who did not have the cash flow to pay property tax. They could defer it. A typical example might be that the main wage earner in a house is deceased and somebody has a large and valuable house without a very significant income stream. This allows people to defer the property tax and it accumulates as a charge on the property. The intention would be that this would be settled when the person who got the deferral either decided to settle or, alternatively, on the sale of the property by one's heirs. In comparison with the value of such properties, the 4% figure is a small enough imposition.
Amendment put and declared lost.
Amendments Nos. 67 and 68 not moved.
I move amendment No. 69:
In page 23, between lines 20 and 21, to insert the following:
“14. The Minister shall, within six months from the passing of this Act, prepare and lay before Dáil Éireann a report on options available to restrict banks from carrying forward losses against taxable profits of the banks, which could result in many institutions paying no tax for the foreseeable future.".
This is about preparing a report on the options available to restrict banks from carrying forward losses against taxable profits of banks that is resulting in many institutions paying no tax for the foreseeable future, or at least having a significant reduction in their tax. I have debated this with the Minister every year since he introduced the amendment allowing the banks that incurred massive losses during the financial crash to carry forward those losses against taxable profits. When this was introduced, the banks were on the floor and the Government stepped in to assist them, as it had done in previous years. The banks are no longer on the floor. There may be borrowers in significant distress as a result of the banks' attitude towards them but we can consider that AIB has annual profits of €1.9 billion, while Bank of Ireland has a profit of €1.2 billion and is paying dividends again. This rule allows the banks to deal with their losses during the financial crisis to reduce their tax liability to the State.
We all know banks must pay their fair share. This should not only be the money pumped in by the State for them; it should be in excess of the euro for euro amount because we had to borrow that money at a significant interest rate. There were opportunity costs as a result. The banks must pay the fair share of tax on the profits that they accrue. Allowing banks to carry forward losses in the way that is currently applicable is completely and utterly unjust. I am not permitted to ask the Minister to end the scheme but I ask him to bring forward a report. Let the Department examine this and put the issue in black and white before Oireachtas Members. Let us view the report and come back to this at a later stage when the details and analysis have been done by the Department. At least we could have a discussion based on a report carried out by the Department.
Under the National Asset Management Agency Act 2009, a new section – section 396C – was inserted into the Taxes Consolidation Act 1997. The provision limited the amount of prior-year losses that a NAMA participating institution could offset against trading profits to 50% of trading profit for each accounting period. It should be noted that it did not disallow any tax losses from being utilised but instead lengthened the period over which they could be used. In 2013, I decided it was appropriate to remove the restriction on relief for losses in participating institutions, with effect from accounting periods beginning on or after 1 January 2014. This was done against the backdrop of the introduction of the new capital rules under the EU Capital Requirements Directive, CRD Four. The removal of the restriction has protected the carrying value of deferred tax assets at the banks in which the State has a significant stake, thus improving capital ratios under the new Basel III rules and consequently increasing the value of the State’s investment.
The removal of section 396C enabled the banks to absorb their losses over a shorter timeframe than would be the case with a 50% limit in place. Whereas corporation tax will not be payable on the banks' trading profits until their losses are fully absorbed, the net effect of the measure in terms of tax receipts is largely one of timing. This will be offset by an improvement in the valuation of the State’s equity stakes in the banks, as well as its debt investments, while the risk to the State as backstop provider of capital is also reduced.
In conjunction with the removal of section 396C, in 2013 the Government also decided that the banking sector should make an annual contribution of approximately €150 million to the Exchequer for the period from 2014 to 2016.
As part of budget 2016, I announced proposals to extend this levy to 2021 subject to a review taking place of the methodology used to calculate the levy. The new methodology has been included in this year's Finance Bill. Between 2017 and 2021, the levy is expected to raise €750 million, which reflects the significant role played by the banking sector in the economic crisis. Although significant trading losses carried forward are reported on the corporation tax returns submitted by covered banks, the timing of when these losses will be utilised will be determined by future profitability. The banks typically manage losses on a group basis in accordance with the group relief provisions provided for in the Taxes Consolidation Act 1997. While revenue for the banks may be protected by these losses in the short term, this position may change for later years as the relevant banks return to profitability. Therefore, I do not accept the proposed amendments.
The amendment is very clear. It asks the Minister to lay before the House a report on the options to restrict banks carrying forward losses against their taxable profits. These banks caused massive pain in this country. They are now profitable and should pay tax on those profits like anybody else. For the Minister to introduce measures in previous Acts which allowed them to carry over losses for a huge amount of time means they will be reducing their corporation tax liability to the State for a significant period. It is a ten year period over which they are allowed to do this. Bank of Ireland is paying dividends to shareholders. These banks are profitable again and they need to make their proper contribution to the State as any other business is asked to do. I have gone through this before with the Minister and I have referenced what the late Brian Lenihan said about section 396C when he was dealing with this at the time. I am sure we will revisit it on Report Stage. The amendment was to ensure that banks becoming profitable would pay their proper corporation tax at an appropriate point in time. This is another major dig out for the banking sector. If the Minister is so convinced that this is the proper thing to do, he should produce a report, lay it before the House and convince us in black and white that this has no impact and is just a timing issue and all of the rest.
Deputy-----
I am speaking but the Chair has continually interrupted me.
The Deputy has put the point and I want to let the Minister respond.
I am moving an amendment.
Yes, the Deputy is.
I am moving an amendment and the rules are that there is no time limit imposed on members of the committee.
I am aware of that but the Deputy is repeating himself over and over again. Please, do not continue to repeat yourself.
Please stop interrupting me, Chair, when I am in the mid-flow of a sentence in relation to-----
If the Deputy does not mind, I am chairing the meeting. The Deputy has continued to repeat himself over and over. The Deputy has asked the question.
Check the record. When is the last time I referenced what the late Brian Lenihan said when he introduced section 396? How many times have I repeated that?
The Deputy has asked the question.
No, I have not.
Have you not asked a question?
I have not. I am making a comment.
I am asking the Minister to respond.
This is unbelievable. The Acting Chairman has done this continually when I am mid-flow in a sentence.
The Deputy has continually repeated himself. The Minister to respond please and then we will take Deputy Paul Murphy.
I have very little to add to my initial speaking note which I read into the record. The motivation for the change in 2013 arose from CRD 4 and the new capital rules for banks under Basel III. Up to then, it was possible to continue to use potential losses in a bank in calculating the off-setting arrangements against tax liability as part of tier 1 capital. When the change took place, it was in ease of the taxpayer that I removed the 50%. If we had not done it this way, we would have had to put extra capital into the banks at that time. The extra capital would have had to be taken from either borrowing or Exchequer funds.
It is not that the banks will pay less over time. Everyone knows that recovering the Irish banks is a long term rather than a short-term game. They will pay the same amount of tax over time but there is an advantage in doing what we did in 2013 in terms of making provision for the capital required for the banks under the Basel III arrangements. That was one of the key factors at the time. I also took on board the arguments being put forward now by Deputy Doherty and others. These arguments were put forward at the time as well. I took them on board so that the banks would make a contribution to remediate the crisis they were significantly responsible for causing. Rather subjecting them to the normal corporation tax regime, we introduced a levy system of €150 million a year from the banking sector. I announced on budget day that we were extending in the Finance Bill the €150 million per annum levy to 2021. That guarantees a tax take of an additional €750 million. I also said the calculation of this would have to be changed because it adversely affected foreign banks. We need better targeting in that regard. It was related to the amount of DIRT paid by banks as well. We know what has happened with the lower percentages on DIRT and the amount of DIRT paid. There is a change in the methodology, but the net result is the same; the banks will pay €750 million in levies over the five-year period 2017 to 2021.
It is scandalous. If members of the public were aware of what was happening here, which is a double bailout for the banks at the expense of taxpayers, they would be appalled. We bailed out the banks but they continue to have a tax benefit as a result. The Government is opposed to even having a report about how this could be curtailed. The annual financial report of AIB for 2014 stated that it would take in excess of 20 years for the deferred tax asset of €3.24 billion to be utilised. Bank of Ireland had something in excess of €1 billion. Obviously, Bank of Ireland is in private hands and is not paying corporation tax as a result of the taxpayers' bailout. The public loses out again. Presumably in the event of the privatisation of AIB, a private company will be able to take advantage of the deferred tax assets to avoid paying corporation tax. It is scandalous.
I make the point that in fairness Deputy Doherty was not repeating himself and has the right to make his points and to speak at whatever length he wishes.
That is a matter for the Chair.
The only point to make to Deputy Paul Murphy is that losses in business can be offset against tax liability. It is not a separate rule for the banks.
It should be because we bailed them out.
Ordinary workers do not have that right.
I know it is great rhetoric and great political positioning to scapegoat the banking sector, but if the country did not have functioning banking sector providing the credit lines private citizens and businesses need, it would continue to be bankrupt. Part of the bailout programme and part of what we have done for the past six years has had to be to restore a proper banking sector. If one applies more penal tax rules to banks than are applied to other businesses in the State, it will not achieve that. There is no loss of tax here. It is just a different arrangement of the period over which historic losses can be offset against tax liabilities.
The reason for it was not particularly to benefit the banks but to benefit the Exchequer and taxpayers in order that we would not have to pony up again by providing additional capital to replace the potential for the banks to offset historical losses against future tax liabilities.
This is an example of there being one law for the rich - in this case, big business - and another for ordinary workers. An ordinary person cannot claim that because he or she had large debts in one year that cost him or her a fortune, the amount of tax paid the following year should be reduced.
Businesses can do that.
That is exactly the point I am making. It is not acceptable that there is one law for workers and another for business. It is even less acceptable that it applies to bailed out banks, for policies over which we do not exercise any control. The Minister might have an argument if he exercised some control over their lending and investment policies and their treatment of distressed mortgage holders. With members of the public, we have pleaded with him to do this in recent years, given that we bailed out and nationalised the banks. It is an utter scandal that, having bailed them out and nursed them back to profitability, at the very moment they are starting to make money, we give them back to the private sector which benefits from carried forward losses and will have virtually no or, in any case, a greatly reduced tax liability.
I raised this issue at a meeting of the Committee on Budgetary Oversight and I am grateful to the Revenue Commissioners for the figures they supplied on it. The Minister is correct that every country in the world has a regime in place for dealing with business losses. The issue is that institutions that return to strong profitability are being allowed, as a consequence of built-up losses in the system, to opt out of making a contribution to taxation. This is wrong, particularly in the case of Ireland, given that we have such a large built-up need for capital investment, as we discussed yesterday and earlier today.
Some years ago, the Minister for Finance at the time, the late Brian Lenihan, and one of his predecessors in that office and a former Taoiseach, Mr. Brian Cowen, agreed with me that the same circumstances which applied to high income earners at the time were a scandal. As a result, they agreed to introduce a regime of minimum effective tax rates, similar to those in operation in many other countries. Under this model, if a person has built up losses, he or she must contribute to taxation once profits exceed a significant level. We have this formula in place for income tax and I am pleased that the Minister has maintained the model because it was the subject of much debate in the period after the crash. This approach has served the country well.
We all want financial institutions to be viable and provide credit. I fully concur with the Minister on that point. However, in the context of a housing crisis in which construction companies and development firms have built up large losses, it is a mistake to allow the banks to effectively make no contribution when they return to significant profitability. This does not address the country's needs. While everyone recognises that losses are a particular feature of business and addressed in taxation systems, one cannot have circumstances in which banks begin to earn €200 million, €300 million or €500 million per annum without making a contribution because there are accumulated losses in the system.
While it is not easy to address this issue, the various requests made by members should at least be examined. We should learn more about the issue and work out a strategy for addressing it. I am aware that the Minister does not favour hypothecating taxes, but some of these contributions should be directed into capital investment in third level education, an underfunded sector that has much catching up to do. That would be an investment in the future economic sustainability of the country. The details could be worked out. The Minister should not simply reject our proposals.
I worked in business for a long time. One can conduct comparative studies of different tax regimes, but the Minister's two immediate predecessors correctly saw fit to accept the principle we have outlined in respect of people with very high incomes who had available to them a large number of tax shelters. A report in the Dáil showed that many of those on incomes in excess of €1 million per annum effectively paid no tax. We finessed the tax code by introducing the concept of a minimum effective income tax rate and the Minister maintained this model. As I stated previously, including during the debate on Apple, we should introduce a minimum effective tax rate for companies. This issue was discussed in the debate on Apple and the tax treatment of some multinational companies. We need to ensure individuals with strong incomes are contributors to the taxation system. Equally, in the corporate sector, notwithstanding that it is technically more difficult to achieve, we should ensure profitable corporations with significant current profits are not able to avoid making a contribution to the economy through corporation tax.
Deputy John McGuinness resumed the Chair.
I am glad that the Chairman has rejoined us. That is not a reflection on Deputy Michael D'Arcy.
I have simply requested a report on many of the facts surrounding this issue and fully appreciate that it is an issue of timing. What is happening is that banks are being treated like any other business and allowed to carry forward losses indefinitely. What the late Brian Lenihan had the foresight to do in the National Asset Management Agency Act 2009 was to provide that it would not be appropriate for financial institutions participating in NAMA to be treated like any other business. As a result of section 396C of the Taxes Consolidation Act, he made it clear that a portion of the participating institutions' income should be taxed in any given year. He achieved this by inserting in the legislation a provision that only 50% of losses could be carried forward in any given year. That was the purpose of the provision.
The Minister argued that in previous years he changed this provision. The former Minister's objective was clear. I was about to refer to a statement he made when I was interrupted by the Acting Chairman. Mr. Lenihan stated the NAMA legislation limited the amount of trading income of a participating institution and all other participating institutions in the same group against which losses carried forward could be offset in any accounting period to 50%. The objective, he continued, was to leave a portion of income in the tax net which would otherwise have been relieved by the use of losses carried forward. Unused losses could, he added, be carried forward indefinitely by companies until they were fully utilised and this remained the position both for institutions involved in the NAMA process and companies generally.
That was the intention. The Minister stated to us earlier today as well as in previous years that he got rid of section 396C because of the issue of capital and the risk that the State might have to recapitalise the banks because losses would not be accounted for in the way in which they are accounted for in terms of tier 1. However, there is a question as to whether that argument remains the case today. Time has moved on. Banks have become more profitable. I have given the Minister the figures that show the banks' capital has been restored. The intention behind section 396C was the right one. There may be merits in what he did a number of years ago in the Finance Bill, but there is a question as to whether that is still the case. I am asking for a report. Is the decision the Government took at that time still valid today? Is the issue, which the Minister has repeated today, of a fall below the capital requirements of the banks, still valid? If not, then it is an issue of timing, but the State needs additional revenue now. Let us say that an assessment by the Minister's Department stated that reverting to what was originally in the tax code would not impact the capital position of the banks. It obviously would not impact the profitability of the banks because, one way or another, they will be able to carry forward these losses, either now or into the future. However, it will not impact on their profitability. The question is therefore whether we could revert to the position that existed under Brian Lenihan Jnr. and see the banks paying taxes now, next year and the year after that on the billions of euro in profits they are collectively making. We will get those taxes at some time in the future because the losses will run out, but we need them now to deal with some of the crises we have in our society. That is the argument I am making. I am not saying that we should do that here and now because I cannot put forward that proposal, but at a bare minimum we should consider this issue, a report should be done - I cannot imagine that it would be hugely complex as much of the data are available - and it should be published. This will continue to come up time and again, and we need to have an informed debate on it with all the facts. That could easily be done by the Minister's Department, and I cannot see a reason for his resistance to it. If he is as sound in his arguments as he has expressed them today, a report of that nature could close this debate down, so I encourage him to accept the amendment I put forward seeking such a report to be commissioned by his Department.
I have made the main point but I add to it the wider question of the various deductions and allowances that a bank or any other corporate entity is allowed to avail of to write down its taxable income. It is a scandal that is waiting to be uncovered when we dig into the detail. We need a forensic analysis of every single one of these headings under which a bank or any other corporate entity is able to write down its tax liability. Looking at the figures before me for 2011, I see there was €39 billion in deductions and allowances under various headings that year. The figure is pretty consistent - in fact, it is rising. I do not know the more recent figures. Every single one of the headings needs to be forensically investigated so that we can see whether we are being robbed. We have a good bit of evidence and we know that these corporate entities employ the best tax lawyers and the big accountancy firms to find ways to reduce their tax liabilities under various headings. Trying to keep up with them is a very difficult job. We will discuss a number of the means later - the section 110s, the means by which Apple managed to avoid taxes and so on. These losses carried forward constitute one of those very significant headings. It is an absolute scandal. Any forensic analysis of these headings under which taxable profits are written down would reveal that the Exchequer and the public are losing out a hell of a lot. The very least the Minister could do is carry out a review of this, consider it closely and let us all see what is happening under this heading, how much potential revenue is being lost and what the case for and against it is. These headings constitute one of the primary mechanisms through which the people of this country are being ripped off enormous amounts of tax revenue.
Deputy Boyd Barrett's initial contribution put personal taxation and corporate tax in the same space. Personal taxation is a tax on income, and corporation tax is a tax on profits, so they are not comparable. It cannot be said that if one's personal income were reduced because one made a bad decision or bought a defective car, one should be able to write that off against one's income. We are talking about business taxes. In addition, the Deputy asserted that businesses can offset loans against tax liability. They cannot. They can offset losses, but not loans, against tax liability, so that is simply not correct. The general position is-----
They are doing it under section 110.
Under existing loss relief provisions in the taxes Acts, any unrelieved trading losses of a company for an accounting period may be carried forward for offset against trading income of the same trade and future accounting periods. Losses incurred in the carrying on of a trade are a normal fact of business life. The provision of relief for such losses is a standard feature of our tax code and that of all other OECD countries. It would be difficult to justify the taxation of business profits without also taking into account business losses. The carry forward of unrelieved trading losses is a usual feature in other tax jurisdictions, and that is the way corporation tax applies to business and how losses are treated.
In respect of the banks, the late Brian Lenihan Jnr. introduced the NAMA legislation at a very sensitive time. He brought in this provision. It was a decision which made the passage of the Bill more acceptable, but he never had any expectation that there would be a tax on bank profits at that point because there was no expectation that a bank would be profitable even if it were allowed to offset 50% of it losses against future profitability. It was not envisaged that the recovery would be rapid enough to put bank into profitability on the other 50%. That was not the issue. It changed in 2013 because circumstances had changed, in particular with the treatment under CRD IV of core tier 1 capital for banks provisioning. The capacity to write off historic losses against future profits was included in the calculation of capital requirements, but under Basel IV a termination date was put on this, and beyond a certain point it was signalled that this would not be acceptable. That is why I made the change. However, like the late Brian Lenihan Jnr., I envisaged that it would be generally unfair if the banks that had been such a causal factor in the recession that was visited on us were to pay no tax at all. Therefore, to substitute for the possibility of their only offsetting 50%, I introduced the levy, at €150 million a year, and in this budget we have announced the renewal of that to 2020. Overall, therefore, about €1 billion will have been collected from the banks from 2011 to 2021 or whenever it is.
It is based on the DIRT paid, so it is related to the deposit base of the banks. Deputy Burton talked about a minimum tax regime for the banks. That is, in effect, what the levy is designed to do, to ensure that the banks pay a minimum amount of tax and that it is related to the deposit base. However, it is not a de minimis provision like the 30% that must be paid in the personal tax code because personal taxes are paid on income whereas corporation tax is paid on profit. There is an assessment of the potential profit when the levy is being imposed. That is the current position.
On the issue of a report, I believe the dialogue across the House has put all relevant information on the record. I do not believe there is other relevant information that would be assessed in a report. My officials had conversations with the Revenue Commissioners when we were deciding on the new base on which the levy system should be grounded. The Revenue Commissioners have a large amount of information and if they have further information on this issue, I will communicate it to members on Report Stage.
I will withdraw the amendment and continue the discussion on Report Stage. The relevant information that is missing is that if this were to revert back to what the late former Minister, Brian Lenihan, had introduced in the National Asset Management Agency Act 2009 the impact it would have on the capital position of the banks is not here and that would inform the debate as to whether this could be introduced without an effect on the banking sector.
We probably have that information internally. I will get the Deputy a note on it.
I would appreciate that.
Amendment, by leave, withdrawn.
I move amendment No. 70:
In page 23, between lines 20 and 21, to insert the following:
"14. The Minister for Finance is to order a study to be carried out on the operation of Relevant Contracts Tax, particularly in relation to rise in self-employment in the construction industry, and is to report to the Dáil within six months of the enactment of this Bill on the findings of the study.".
This relates to the concern about bogus self-employment, particularly in the construction sector, and the need to take action to curtail what construction workers and I believe to be wholesale abuse of the category of self-employment in the sector by big building contractors. We have raised this issue with the Minister a number of times and I have correspondence from the Minister and the Revenue Commissioners stating that they are doing their best, the criteria are good, they are trying to enforce them and so forth. However, I do not accept that we are serious about dealing with abuses taking place in this sector. I note that in the controversial and prominent case of J.J. Rhatigan & Co., the contractor who was building a school in Kishoge in Clondalkin, there was a long dispute in which building workers claimed that they were victims of this abuse of the category of self-employment. They were vindicated when they took a case in that regard, even though at the time of the dispute there were denials that there was a problem.
There has also been an interesting variation in the figures given by the Department in response to questions as to how many people are categorised as self-employed in the construction area. At one point I received a reply stating that there were approximately 30,000 and then we were told it was over 60,000. In fact, there is also a figure that puts it as high as 70,000. To have that level of self-employment among the 130,000 people working in construction immediately tells one that it is being abused. I do not believe for a minute that more than half of all those working in construction are self-employed entrepreneurs. It makes no sense in terms of how construction operates. Signs of it are seen in cases such as the Kishoge dispute. The workers at the centre of it believed themselves to be employed by the main contractor. Then they were not paid for weeks, after which one of them was paid and was told that he was a sub-contractor and the boss of all the rest. They were unaware of this. This is what is happening, and it is on a widespread basis. Frankly, everybody knows this is happening, but there is no serious effort to deal with it.
Many of the people who are categorised as self-employed simply do not fit any of the criteria that should apply to the self-employed, such as having offices and the like. They do not have any of this stuff. Clearly, they are people who have been taken on by the contractor but he does not wish to pay the various contributions, sick pay and so forth which he would have to pay if the person was categorised as directly employed on PAYE. As a result, there is evidence to suggest that the taxpayer is losing a huge amount of tax revenue due to people being wrongly categorised. Unfortunately, I do not have the figures with me now but I have quoted them to the Minister in the past. There have been parliamentary questions on this issue and the replies show a minus figure in some years under the RCT tax heading. In some years the State pays out more in refunds under this heading than it receives, in a situation where 60,000 people are categorised as self-employed. The State ends up with a minus figure. Even when the figure is a plus, it is a very small amount of money compared to the number of people employed. If those 60,000 people, or even half of them, were categorised correctly as PAYE workers there would be tens of millions, possibly hundreds of millions, of euro in additional tax revenue for the State. There is wholesale abuse.
There is a further piece of evidence of how this is continuing. The latest Purchasing Managers' Index shows that jobs growth in the construction sector is now at its weakest in 18 months, but we know that construction is growing at present. The index points out that it is because outsourcing is accelerating, so there is job displacement. As the construction sector begins to take off again our old friends, the developers, are up to the same old tricks again. They are displacing properly paid jobs with these outsourced jobs to supposedly self-employed people who are not, in fact, self-employed people. They are bricklayers, labourers and so forth who are being falsely categorised as self-employed. This is Italian mafia style stuff taking place in the construction sector and there must be a serious move to deal with it. It is very unfair to the workers, obviously, and it is also costing a huge amount of money for the taxpayer. The Minister for Finance should be far more concerned about the urgent need to deal with this. We are asking that a serious study be carried out in this area to get to the bottom of what is, regardless of how one looks at it, a very controversial and disputed matter.
It is important to emphasise that the relevant contracts tax, known as the RCT system, does not determine the employment status of an individual engaged in the construction industry. The design and development of the relevant contracts tax system was an anti-tax evasion measure to counteract tax evasion in the construction, forestry and meat processing sectors. Principal contractors are required to deduct tax from the payments made to sub-contractors and pay it to the Revenue Commissioners. As it is recognised that it would be undesirable to deduct tax from compliant sub-contractors, provision is made for these compliant sub-contractors to receive payments without deduction of tax.
The electronic relevant contracts tax, or eRCT, system was introduced with effect from 1 January 2012 and has reduced substantially the opportunities for fraud, mainly from bogus documentation, that attached to the previous paper-based RCT system.
It is important to emphasise that the system does not determine the employment status of any individual engaged in the construction industry. Where the parties have entered into a contract for employment, that is, there is a principal and subcontractor relationship, the eRCT system operates to determine the tax obligations on all parties. In contrast, where the parties have entered into a contract of employment, that is, there is an employer-employee relationship, PAYE operates on all payments made.
The Revenue Commissioners have undertaken to examine any case brought to their attention of "bogus self-employment". In 2015, a sector-specific compliance programme was initiated for the construction industry, which included a focus on the mis-classification of employees by employers. Interventions by Revenue into the construction industry in 2015, which have included audits, resulted in additional yield for the exchequer of €51 million.
The code of practice for determining the employment or self-employment status of individuals was created to assist both parties to an engagement, including an engagement in the construction sector, in determining whether a contract of engagement is, by its nature, either a contract of service, that is, an employer and employee arrangement, or a contract for service, that is, not an employer and employee arrangement. The code of practice is not a Revenue code, but was compiled with the assistance of a variety of Government and representative organisations.
Since RCT does not determine the employment status of an individual, I do not propose to accept the amendment. Revenue is inviting members of the public, including elected representatives and members of trade unions, to draw to its attention any example of bogus self-employment and is committed to dealing with same. While the Deputy has been strong in his general arguments, he has been short on specifics. If he knows of specific cases, he should ring Revenue, which is committed to rooting out the practice.
The revitalised construction industry is moving away from the tradition of main contractors employing hundreds of workers towards a subcontractor model in which a developer with a small staff of administrators is bringing in people to pour foundations and lay blocks, electricians, carpenters and so on. The different sectors of the building trade are organised on a subcontract basis to a greater degree than previously. This is not to say that what they are doing is illegitimate or not Revenue compliant. It is just a different model.
There is another factor. The Deputy will see it if residential house building in Dublin gets reactivated to the same degree as commercial building. Construction is largely becoming a manufacturing industry.
A what industry?
It is becoming a manufacturing industry rather than a construction industry. A great deal of what goes into modern buildings is manufactured off site in factory-type environments and is brought on site to be put together. One sees this in what is happening on the commercial side in Dublin. It is not quite like assembling Lego, but there are construction companies that are supplied to a large extent by manufacturing companies. I do not mean manufacturing construction materials. Rather, they are manufacturing whole sections that can be put together. This can be seen all over the city. I am told that this model has moved on to housing as well.
Of course there is an issue with tax avoidance and evasion in many industries. Revenue's activity is not just confined to construction. There are similar problems in the pharma, IT, airline and other industries where subcontractors are employees under another name and there is tax evasion. The way to root it out is by anyone with accurate information providing it to Revenue, which is committed to ensuring that everyone is tax compliant. It is not turning a blind eye.
Is Deputy Boyd Barrett pressing his amendment?
Yes. I am glad to hear the Minister acknowledge that there is some problem. By the way, I have raised specifics. I cannot spend my days and weeks wandering around building sites conducting spot checks, so I am dependent on calls from construction workers. I have raised specific cases in the Dáil when I have been tipped off by construction workers about particular sites. For example, I raised a case in the Dáil eight or nine months ago and there was a raid three or four weeks ago. That was the delay between my naming a specific firm and site and a raid on that site. From the report that I received from construction workers, Revenue found that a large number of people had been mis-categorised when it finally bothered to raid the site. That was just one raid, and the problem is that there are not enough raids to identify a problem that is rampant. Anyone working in construction will say so. It is a cliché to say that the dogs on the street know, but there is wholesale abuse of the category of self-employment. It is being dictated by contractors because they have the whip hand. People approach contractors looking for jobs and believe that they have got them, only to discover that they are instead being categorised in this way and that, if they kick up a fuss, they will be out the door. This is how it works. Everyone knows it.
Consider the number of people who are supposedly self-employed. It goes without saying that general labourers - bricklayers or particular trades people, for example - will comprise a larger portion of the workforce than managers or bosses, be the latter main contractors or subcontractors. One would expect that the portion of people who are self-employed would comprise approximately one quarter of the construction workforce. It is not a quarter, though. Rather, it is approximately a half. This suggests that major abuse is happening. Any reasonable person looking at the situation would agree that that is what is happening.
A serious investigation is required. I am not the only one raising this problem, as the Minister well knows. ICTU has carried out reports on it and trade unions with significant numbers of members working in construction agree that it is happening.
I will go slightly off point, but the Minister has raised another matter. It is true that there is a great deal of Lego-type construction. It is not doing much for the quality of construction in Dublin, aesthetic or otherwise. It is the cheapest way to bang stuff together and is too widespread. Some of that is precisely because developers do not want to have to deal with troublesome workers like bricklayers, carpenters, stonemasons or so on, who do quality work and build quality buildings, because they demand things like the right to pay tax. They cannot have that, so get rid of them and have as much of the Lego-type stuff that they can bang together as quickly as possible. Its quality is poor.
This is something we have already learned to our cost with some of the construction practices in recent times. More to the point, it is something people who have to live in certain places have learned to their cost. I suspect we will find much more of it in the future. Apart from anything else, skilled tradespeople and experienced construction workers are also the best police for the purposes of quality control, which has been significantly hit over recent years.
It is patently obvious that there is enough evidence in the form of allegations, and from groups kicking up about it and saying there is a problem, to justify a serious investigation. I can commit to bring to the attention of the Minister, Revenue and the public any tip-offs I get, as I and others have done in the past. If a serious allegation of widespread abuse of the tax system or of employment rights is made, however, it is up to the State to look into it and to find out if there is a systemic problem, which I absolutely believe to be the case.
I disagree with the Deputy in one respect. There is a lot of very high-quality, well-designed and well-built construction taking place in Dublin and it is much better than it was during the Celtic tiger. The construction methods the Deputy deplores are the methods in use in every major city in the world, whether the temperatures are above or below freezing point. One does not mix concrete when the temperature drops below freezing point or one will end up with a load of cracks, as anybody who ever put down a concrete path will know.
There is not much difference between the Deputy's general thesis, except for his style of expression, and the approach of the Revenue Commissioners. An alleged loss of employer PRSI to the Exchequer because of an employer's behaviour in the construction sector is acknowledged by Revenue as a high risk from a tax compliance point of view. I am informed that Revenue is monitoring the sector for abuses of tax, and the duty system forms part of its ongoing compliance programme, to which it commits significant resources. In view of the welcome growth in activity in the sector, Revenue has an extensive dedicated focus on construction to target the various tax compliance risks associated with the sector. As I pointed out, one of its initiatives collected tax due of €51 million and the Revenue Commissioners will continue their work in this area. It is not difficult for people to be compliant in a business where they go to work every morning and clock into the same building, but the building industry is transitory and people move from site to site, from contract to contract and from city to city. Compliance is more difficult but Revenue is dedicated to compliance and it has made a lot of progress. I do not believe it is as bad as the Deputy makes out but I am also sure there is some tax evasion. As construction activity continues and it gets more difficult to get key workers, the potential for exploiting construction workers will become more limited. When everybody was looking for a job, it was easy to do deals with people and such deals might not have been fully tax compliant. The Revenue Commissioners are doing their job and will act on any information provided to them.
It is not a simple issue and it has been going on for years. Certain individuals will feel they will benefit from designation as self-employed, even though it will be bogus self-employment. They would not look at the impact of having no sick leave or the protection given by PRSI, and some employers would be of the same view. The Government has acknowledged that there is an issue. The Minister has acknowledged it and, when the Minister, Deputy Joan Burton initiated a consultation process in January this year. When discussing a similar amendment put forward by Deputy Boyd Barrett, we were told to wait for the consultation process, which was ongoing.
Four options were outlined in chapter 8 of the report and ICTU put forward sensible proposals that the onus should be on the contractor and individual to prove their contracts were contracts for services. One of the proposals was that everybody would be treated as a PAYE worker until they could prove otherwise. Another proposal was that contractors should be levied a sum equivalent to the PRSI liability, to be repayable only on satisfactory approval of employment status by Revenue. At the moment it is up to Revenue. The industry is transient and people are working on one site today while they may be working on another site as a contractor on another day. It is very hard to pin all of this down, and putting the onus on Revenue to investigate means we will be chasing our tails a lot of the time. It would require intensive input from Revenue personnel, but the PRSI loss from every bogus self-employed worker is €2,886 and it has to be asked if chasing that type of money is worth the effort. It is also about workers' rights and we need to rebalance the situation.
It would be wrong to suggest that every self-employed person working on a construction site is bogus, as they are not. There is no doubt, however, that this is the way the system works in Ireland. Friends of mine thinking of coming back from London and Glasgow will not do so at the minute because prices are not right. When they do come back, however, they know they will be deemed self-employed because that is the only way they will get the price from the contractor. They will sacrifice their security and sick leave for the extra cash in their pockets in the short term. I am not talking about my friends but generally. We need to tip the scales in order that they are not forced into those positions.
Deputy Doherty spoke about the consultation I initiated with the Minister. There is a great deal of bogus self-employment in Ireland and it is not helpful to the long-term sustainable growth of the Irish economy not to review our systems with a view to limiting this. It is pervasive in other areas, too. Has the Minister received any report on the outcome of Revenue's examination? Many people in Revenue have been very anxious about this. There is a great difference between self-employed businesspeople, who set up firms and employ other people, and people who are forced into being treated as self-employed in the construction industry. The difficulties down the line for many individuals are quite significant. Construction is, by and large, a young man's game and it is very difficult to convince 25 year olds and 30 year olds that by only paying the 4%, they are not looking after their own best long-term interests. They do not believe they will fall off scaffolding or end up injured in some way, leading to life-long difficulties. They also do not believe that, even if the industry picks up again, it may go into a decline at some later stage.
At such a stage and particularly if their partner or spouse is working, they will not qualify for any kind of unemployment assistance support. It has really big consequences for many individuals who then become quite impoverished. If they also have children and other family dependants, the whole family can become impoverished. While it is an industry issue, it is also a really big social issue. It also concerns the sustainability of our social services. We know that it is spreading like wildfire across different types of businesses where the gig economy exists and you pick out a self-employment part of a job and identify people as contractors. Again, quite a lot of this is happening in IT. The work of people in IT is often much more sustainable and long term than that of people in construction. It is one thing when people are in their 20s but when they get into their 30s and have no framework for longer term sustainable employment, it has huge implications for their place in society and is very difficult for them. It is an economic and social welfare issue but it is also a societal issue in Ireland. Could the Minister give us an update on where the study is?
Revenue and the Department of Social Protection are collaborating in carrying out examinations at sites. In respect of school building, which was a specific concern for the past number of years and where the State was paying top dollar on the contracts, the former Minister for Education and Skills, Ruairí Quinn, actually got the Department of Education and Skills to hire what were in effect private investigators to check out the sites to see what was happening. Trade unions and ICTU are very familiar with the outcomes. If Revenue and the Department of Social Protection go on site, they check people out and find that they are registered. I do not know what is happening. Do they have two sets of books - one for when they are working in the normal economy and another that is under the table or off the regular books? It is a very big problem here.
We are also seeing a return to an increase in immigration. The Minister spoke earlier about a potential shortage of skilled building workers. If people from countries like Poland come in and are outside our system, it is a mug's game for us if they are not fully registered for tax and insurance. They are competing against good firms who are paying people properly. This is what happened to the Minister's predecessors at the height of the Celtic tiger. If we go down that road again, it will be a mug's game for Irish society. People will come, be bogusly self-employed and not contribute to social welfare. The people who are paying PAYE will have to pick up the tab. Ultimately, the people paying their contributions will have to pick up the tab.
Nobody is saying there is an easy solution. It is a very tricky area to legislate for but this is a critical area in terms of looking for reforms in the Irish system. If people want to set up their own businesses, that is the best thing in the world and we have developed lots of supports for them. However, if they have no choice, are at the lower end and are really stuck in a seriously unprotected area, that is all our loss and a particular loss to the individuals involved. I ask the Minister and his officials to give some thought as to how we could work together to address what is an awful problem.
As someone who has operated the new RCT system as an accountant, I would point out that there is a significant amount of genuine self-employment. Revenue has never been in possession of as much data as it has now. If one takes into consideration the changes that have happened since 2016 in terms of a principal actually registering a contract through the eRCT system, one will see that the site location, the value of the contract and various details of the employee in question have to go in. Revenue has all that data whereby it can furnish aspect queries or Revenue audits directly to that firm or principal contractor. That is going on. I have seen detailed audits. A company or a principal must account for everyone on their books in terms of whether they are self-employed or in the PAYE system. Obviously, it is a significant blow to them if they are found to have self-employed individuals who should be employees. The code of practice is very clear on that.
I would point out that there is a lot of rigour in terms of someone getting a 0% payment from the eRCT system because, obviously, Revenue determines what deduction should be given to a contractor. One has to jump huge hurdles to get a 0% rate involving having a clean history with Revenue and a built-up period of tax compliance and this is only correct. While there are issues, many of them are due to fraud and are being clamped down on by Revenue. Revenue has the data to go after a lot of these cases. I have seen audits where Revenue went after cases and made genuine employers show clearly that people were genuinely self-employed compared to their PAYE employees, which is right and proper. It is important to know that there is serious compliance in this area.
Does Deputy Boyd Barrett wish to add anything?
I have made most of my points. There is enough opinion even in this committee, never mind the various people who have raised it beyond this committee such as ICTU, unions and construction workers, to merit the review we are asking for, regardless of people's opinions. The Minister said that construction is reporting growth in all areas and has grown consistently for the past three years. However, as I pointed out to him, job growth is stagnating. The PMI report I mentioned previously states that while the rate at which companies outsource work to subcontractors grew the fastest in three months, they are displacing direct employment. As construction picks up again, the move back towards subcontracting that was a major feature of the last construction boom is returning and with it, almost inevitably, an increase in bogus self-employment - replacing directly employed people with stuff that is outsourced, which opens up to all of the bogus self-employment. It is in that outsourcing that we see all the bogus self-employment. I accept that there are legitimately self-employed people in construction. I know that is the case but when the proportion of people who are categorised as self-employed is as high as it is and is increasing significantly while job growth is stagnating, that suggests that the abuse of the category of self-employment is increasing.
Does the Minister wish to respond?
I thought it was a very interesting discussion. All I can do is reaffirm that Revenue is paying particular attention to any instances of bogus self-employment it comes across and that it regards the construction industry as being one of the high-risk areas. Revenue has taken action and as I have already pointed out, one piece of work yielded €51 million in additional taxes.
Deputy Burke has given a professional accountant's point of view of how the system has been tightened up with the new electronic system since its introduction in 2016. This is very effective. Whenever a sector is coming out of a recession, it takes a while before it fully legitimises itself. If construction workers are unemployed and then get intermittent work, the tendency is to continue signing on and take the week's work and sign on the following week. It is not until people have a sense of security about having a continuing job that they make the arrangements that bring them fully back in. We have already discussed a scheme for self-employed people whereby the first €40,000 in income for a two-year period would be exempt of tax and Deputy Doherty made the interesting proposal that we split the €80,000 involved into four units of €20,000 rather than two of €40,000. We have built an incentive into the tax code for someone coming off the live register to be self-employed rather than be an employee. In reply to Deputy Doherty's amendment I said the cost of that scheme had exceeded the forecast and that the take-up was stronger than anticipated. I believe some of that is reflected in people being incentivised to style themselves as self-employed and providing services to the construction industry. Many do so legitimately.
There are certain categories of work where services in particular are being provided to different users where people need to be self-employed. It is increasingly true of the information technology, IT, industry. If one brings someone in to reconfigure the software in an office, that person might work for three or six months and move on to the next job. People in the IT industry are increasingly self-employed. This applies across all professions with engineering or architectural consultants, quantity surveyors and so on, connected to the building industry. There is an increasing incidence of self-employment too in areas associated with new technology.
I do not disagree with most of the points made and Revenue has to be vigilant and I am sure it will be aware of the discussion here today because there are Revenue officials present and listening to the committee's contributions. We can take it forward by replying to the former Tánaiste's question about the consultation undertaken jointly by her and me starting in January of this year, and Deputy Doherty raised this as well. The consultation was on the use of intermediary type employment structures and self-employment arrangements and their impact on tax and pay related social insurance, PRSI. That was the mission statement when it was set up. We received 23 submissions, one of which was from the Irish Congress of Trade Unions, ICTU, which were all relevant to the issue. They were passed on to a working group comprising officials of the Departments of Social Protection and Finance. They were also passed on to the Revenue Commissioners. I understand the working group has examined the submissions and is finalising its report which we expect will be published shortly. If I may be bold enough to make a suggestion to the committee, when the report is published, it could use the data compiled in that after the consultation process as the basis for advancing the project because we all agree there are problems and potential problems. That will give us the up-to-date position and the committee could take it forward under the Chairman's guidance.
I will consider what the Minister has said and reserve the right to bring the amendment back on Report Stage.
Amendment, by leave, withdrawn.
SECTION 14
Question proposed "That section 14 stand part of the Bill".
We oppose several sections of this Bill that amount to incentives for landlords. We are not happy with the thrust of the Government's policy on increasing the availability of affordable rental property under whatever guise, publicly or privately provided. Tax incentives for landlords and developers are not the right approach. It has not succeeded, and rather than continue to forgo taxes in this area, we should be using available funds for direct provision. It is one or the other. If the Minister gives tax breaks or subsidies to private landlords, there is less money available to the State to provide the affordable housing we need.
That is not true.
I know the Minister thinks it is not true but I think it is.
It is possible to grow the economy and everybody gains.
That is possible but the problem is we are not growing the economy. We have leprechaun growth. There is a student in Trinity College Dublin who is researching a PhD on corporate tax. He gave a presentation at the weekend which was quite stunning even for someone who has been as critical of the corporate tax regime as I have. I was pretty amazed. He showed a graph that stripped out growth based on intellectual property assets. There was no growth in the Irish economy. It was barely above zero.
He will not get his PhD on that basis.
We will see. Much as the Minister can get the laughter and he is a very witty character, there is no doubt about it. The problem is that Ireland is the laughing stock of the international scene because we record growth rates which bear absolutely no relation to the real economy or the lived reality of human beings in Ireland. I would not say they would be sharing the joke. In fact they are not sharing it. It is certainly not delivering in the area of affordable rental accommodation and there is nothing to laugh at there. If the Minister is suggesting that it is, that is laughable. That is the thrust of our opposition to several sections, we think this is a misguided use of available revenues to continue to give them to developers and landlords rather than put what resources we have into the direct construction and provision of local authority housing and affordable schemes of various kinds.
We are having our annual discussion on the living city initiative, our old friend from Finance Bills past. When it was first proposed, it was to be a pilot scheme for Georgian Dublin. Then for a couple of years Brussels was sizing it up, changes were proposed and we had a much wider scheme, including residential and commercial elements. Now it is for any building although previously it was for buildings built before 1915, and it is for any size of building. There are strict criteria to designate areas in cities.
I think it is fair to say the Department of Finance has been very generous in its interpretation of these criteria, for example, in a chunk of Limerick city near O'Connell Street. The person who was paid by the Department to draw up the designated areas recommended the following for Limerick:
While Limerick City Council has sustained its case for designation of a Special Regeneration Area, the inclusion of more affluent streets, including much of O’Connell Street itself, and Pery Square, is questionable, as is the inclusion of areas of significant redevelopment in the area north of Sarsfield Street and west of Patrick Street, and also the redevelopment of Cruise’s Street. It is recommended that the City Council should identify sub-areas within the overall proposed boundary which adhere more closely to the Department’s criteria; the smaller northern sub-area (Nicholas Street / Mary Street) should be accepted.
However, the entire area was included on the advice of the Department's officials. The most affluent areas were included for redevelopment, even though they clearly fell outside the criteria for the scheme at the time.
As the Minister knows, I have always been cautious about this scheme. The only difference I can see between it and Fianna Fáil's old section 23 scheme which we discussed at length and which was criticised by most people is that this scheme has been capped on the insistence of the European Union because of state aid rules. With that exception, the provision of 100% relief over a ten-year period is the same as that in the old section 23 plan. As Deputy Richard Boyd Barrett said, we are now allowing landlords to avail of the scheme also. There has been little interest under it in some cities. Despite the redesignation of the areas recommended by the independent person - he said certain areas should not be designated - there has been absolutely no interest in the scheme in the Minister's city of Limerick. I understand where he is going in this regard in so far as we are in the middle of a housing and homelessness crisis. I am sure that is the argument that will be made. There may be a tax angle in incentivising new builds, landlords and all the rest. Landlords have a legitimate business in providing accommodation in the State for renters. Landlords, homeowners and local authorities have their respective roles in providing social housing.
I have serious reservations about the scheme because it has morphed into something that was never intended. It was supposed to be a targeted small-scale initiative, but it is growing and morphing into something it was never intended to be. I do not think any of the analysis of the scheme up until now has justified its existence. I would like to hear the Minister's opinion on why it is still not working in cities such as Limerick. Why have no applications been received? As I said previously, the argument that seems to be made when a pilot scheme is introduced is that it is worth taking a risk and trying it and that if it does not work out, it does not work out. Rather than letting the scheme wither, the Minister has decided to pump more steroids into it by providing that it can apply to any building of any size and to landlords. Now the idea of living over the shop does not apply anymore. It is no longer a living city initiative but a property initiative and a tax incentive for property development initiatives, similar to section 23.
I disagree with the Deputy. First, the scheme is not being extended to apply to any building. It is still confined to buildings built before 1915. They have to be within the designated areas set out when the scheme was initiated. There is no new designation of areas into which buildings would fall. There has been a disappointing uptake because the conditions attached to the scheme, particularly with regard to square footage, were too restrictive. A typical Georgian building in Limerick, typically three or four storeys over a basement, almost by definition falls outside the square footage requirement for the purposes of eligibility. The cost of refurbishing a prestige Georgian building is greater than that of a new-build on a greenfield site. When people looked at the numbers, they found that they did not work. The advantage of the living city initiative is that it passed muster with the European Union from a state aid perspective after two years of difficult negotiations in Brussels. It is worth persisting with for that reason. The amendments I am introducing are considered by state aid authorities in Brussels as de minimis provisions. We can do this without needing further permission. Two changes are being made, one of which is the elimination of the restriction on square footage in the case of Georgian and other historic buildings. It is true the buildings built in our main cities before 1915 tended to be large. The scheme is targeted at such buildings. Its aim is still to encourage the regeneration of designated areas in the nominated cities. We are making de minimis changes that qualify for state aid purposes to see if they will work. A number of Deputies have stated categorically that all of the old section 23 schemes which we abolished did not work. I ask them to bear in mind that there was the availability of rental accommodation when they were in place.
County Leitrim is full of such accommodation.
I know.
However, there are no renters there.
The accommodation is in the wrong places.
Exactly.
There were some other schemes and I abolished and phased out most of them. I am not saying we will bring them back, but I do not think we should exclude the tax incentivisation of projects for social or economic purposes from the tax code as a matter of principle. The living city initiative has been ratified for state aid purposes. The de minimis amendments being proposed do not extend the scope of the scheme beyond the existing designated areas. Two things are being changed. First, I am changing the square footage limitation because it has inhibited the scheme. We introduced it to avoid abuse, but it has limited the scheme to the point that there has been hardly any uptake in some cities. Second, I am extending the scheme to landlords because, as all Members of the Dáil have pointed out, there is a rental crisis, a shortage of rental accommodation and a homelessness crisis. We must incentivise the supply of suitable rental accommodation if we can. If we can introduce tax breaks to make it worthwhile for somebody to turn a Georgian building of four storeys over a basement into modern and well fitted-out apartments, that can make a big contribution to the availability of rental accommodation. I do not think the scheme will work unless the Department of Housing, Planning, Community and Local Government changes some of its regulatory regimes. Frankly, it is too costly to refurbish an old building. The policy intention and desire of Parliament is not being matched by the regulatory regime imposed on developers who might carry it out. I am not looking for low-quality development or anything like it. I am not in the business of arguing that case. It is possible that this minor and low-cost proposal will make another contribution to a series of initiatives that have been brought forward by the Minister for Housing, Planning, Community and Local Government with the intention of increasing the supply of residential accommodation for purchase and rental. I am using the living city initiative which has not been very successful as a vehicle at this stage because it had already passed muster under state aid rules. If we were to start a new scheme, we would have to pass the state aid test again and it would be another two or three years before we could get it across the line.
I will put the question.
My amendment No. 63 on section 14 was ruled out of order. The Minister has a speaking note on it. This amendment relates to the treatment of expenses for non-executive Irish resident directors. There was a change made in the last couple of years to the tax treatment, and there is an exemption, for non-resident non-executive directors of companies. I wish to be clear that we are talking about vouched expenses and whether those expenses would be taxable. I do not understand the logic of a non-executive director's vouched expenses for travel to board meetings being taxed. I do not understand the logic and why the Department of Finance drew a distinction between non-resident and resident non-executive directors. The Minister for Finance knows that many Irish small and medium sized businesses need - and do avail of - the expertise of non-executive directors who can bring a breadth of experience and expertise to their boards. This practice should be encouraged and I do not see why the non-executive directors do not get an income tax exemption for vouched expenses that are directly associated with attending board meetings. This situation should be addressed.
This has been around for a long time. I understand the Deputy's point of view. There is a difficulty about giving a tax break to people for the expense of getting from their home to their place of work. For non-executive directors claiming expenses for their activities as non-executive directors, Revenue would consider a person travelling to Dublin for a board meeting, for example, as that person going from home to their place of work. There is the possibility of this particular tax break being extended to all workers who travel from home to work. I can see the importance which Deputy McGrath attaches to the issue and I can also see that he has a very legitimate argument. I discussed it with my officials yesterday and we will do some work between now and Report Stage. I will come back to the Deputy again on Report Stage. In the meantime I may consult with the Deputy.
The Minister spoke about the potential unintended consequence of the measure being extended to employees. The issue is that non-executive directors are not employees of the company concerned. Non-executive directors are providing their expertise and their experience to guide businesses in Ireland, which should be encouraged. We are speaking of expenses that are actually incurred and vouched. There is a very strong argument for not taxing that.
We have commenced a re-evaluation of the Deputy's amendment. I shall not read out the initial speaking note because it was, in effect, to turn the amendment down, but I will come back to the Deputy, maybe between now and Report Stage.
I have a query on the same topic. The last time I looked at this issue was about two years ago as it applied to the charity sector. Some businesses were able to get around this by recognising it and providing additional payments in lieu, which is absolutely not the way to do it. I support Deputy McGrath's amendment. Perhaps the Minister could also ask his officials to look at this measure as it applies to the charity sector. I have been told that it is a serious issue for charities if a person wants to come onto a board, without remuneration. The person can end up with a potentially large tax liability for trying to be a non-executive director of a charity.
Is that on a pro bono basis?
Yes. We will look at that also.
I am completely opposed to this amendment. It is coming from the Institute of Directors in Ireland, IoD, which has been peddling this idea for quite a while and now it has been proposed by Deputy McGrath. I would fall into the category of Ciarán Hancock's view on this; the Government should tell this group of elites to take a hike. Hancock's article has given us examples of some of the individuals who would benefit from this measure. The presentation put forward by Deputy McGrath speaks about people going to their groups and giving of their experience, but what the Deputy fails to mention is that many of these non-executive directors are actually doing so with large remuneration. Ciarán Hancock's article in The Irish Times talks about one council member of the IoD as a non-executive director of Cement Roadstone Holdings, CRH who receives a fee of €78,000 per year plus €54,000 for serving as a member on two board committees. It goes on to say that this person also serves on another board as a non-executive director, a foreign board, and receives a fee of £45,000 per year and serves on a further board which paid her $55,000 in addition to $25,000 for serving on two board committees. Other studies which have been done in the past, and particularly those from when we looked at the banking scenario, show that non-executive directors tend to be non-executive directors on a number of boards. It is not unique to see a non-executive director on multiple boards. This happens particularly with senior level business people and they are remunerated for that but the Government is considering bringing an amendment which would actually give them a tax relief for travelling to and from these board meetings, when they are paid handsomely on many of those boards. Deputy Stephen S. Donnelly has put forward an argument that people are doing this of their own free will and for no remuneration, which is a separate issue. That, however, is not what the Institute of Directors in Ireland has put forward. The institute is looking for this measure to be treated the same as it is for foreign non-executive directors. If this proposal comes forward from Government it would not have the support of Sinn Féin. The Minister should think wisely with regard to this type of proposal or the type of limits that are being suggested in the amendment and from the IoD council.
The amendment has been ruled out of order but the Minister has said that he will come back and reflect on what Deputy McGrath has said, what Deputy Doherty has said and what others have said. We will deal with that at a later stage.
Question put and declared carried.
SECTION 15
I move amendment No. 71:
In page 30, between lines 26 and 27, to insert the following:
“(3) Where an individual has rented their primary residence and is also renting another property, to apply full deductibility of rent paid on rent received, for the purpose of calculating tax liability.”.
One does not like being the last amendment after a four hour session. This amendment is about accidental landlords and I shall just take a moment to lay out the case. The Minister and I have spoken about this before when I submitted a proposal in 2014. I spoke with the Minister and his officials and they came back with various reasons why they did not feel was the way to go at the time. Most of those reasons have been dealt with or can be dealt with. The reason I am moving this amendment is because we have a situation, and we have spoken about this on a previous amendment yesterday, whereby there are many people who bought small apartments during the bubble and they went on to have kids. They may have bought a small apartment on their own or as a couple they have gone from being a one-person or a two-person household to being a four or five-person household. They find themselves trapped in that situation. It is an unintended consequence of the crash where there are a considerable number of people of a particular age group who have one of five options available to them. They are sitting in a small one or two-bed apartment, with two or three children. It is not a situation in which anyone would want to bring up their children. Option one is to sell the apartment and buy a small home, a two or three-bedroom semi detached house. They cannot do that because they cannot save the deposit, which goes back to the conversation this committee had yesterday about first-time buyers who are in the same situation. The people whose mortgages are in negative equity, I would argue, are in a worse situation in that not only are they paying the high rents that the first-time buyers have but, because of the age difference of some ten years, they tend to have more children at that time. Therefore they are also dealing with very high child care costs. Option one which is to sell the apartment and buy a two or three-bedroom semi-detached house further out is not available to most of these people because they cannot save the deposit to do this.
Option two is to keep the apartment that they have and try to get another mortgage with which to buy a two or three-bedroom house.
Given that the Central Bank's rules on how the negative equity apartment has to be dealt with, the banks essentially will not lend them any money. We do not need to get into the detail, but I am happy to do so if the Minister wants. Basically the Central Bank rules are such that virtually nobody in negative equity can keep a one or two bed apartment and rent it out and get another mortgage. The third option is to rent out the small apartment and rent a two or three bed semi-detached house somewhere else that is more appropriate to raise the children. They cannot do this because they are hit with double taxation, which is the purpose of the amendment and I will come back to it. The only other two options available are to stay in the apartment, which is what many of them are doing and I imagine we would all agree this is not what anyone wants, or to rent out the apartment and not declare the income to Revenue, which obviously is not a situation anyone wants to be in either.
What I want to try to address here is giving these people a reasonable chance. While they cannot sell the apartment and get another mortgage, they cannot save a deposit and they cannot keep the apartment and get another mortgage, what they can do is rent it out and rent themselves a three bed semi-detached in which to raise the children. This is what I am trying to achieve.
At present, the tax system does something which I believe is double taxation and is an unintended consequence. I do not believe the negative equity trap was ever envisaged by the tax rules. It applies full PRSI, USC and income tax to the rental income people in this situation receive and gives no consideration to the rent they pay out. We have a household whose net income and disposable cash have not changed. Perhaps the people receive €12,000 in rent and pay €12,000 out in rent, but they still pay a mortgage. Their income position is no different to that of a family who owns and is paying down a two or three bedroom semi-detached house, but their tax position is changed radically.
Let us assume people are taking in rent of €1,500 a month and paying rent in a new place of €1,500 a month. Let us assume €500 is used to pay down the interest on the apartment they own, so this is tax deductible. What they are left with is a taxable income coming in as rent of €1,000 a month. This, on the basis the household comprises two people who are both out working, is taxed at the marginal rate. They are hit with a tax bill of €5,000 to €6000. This is not a marginal impact, it is a very material change in a situation. Given that it is so marginal, the people are trapped. They are faced with doing one of two things. They can either break the law and hope they do not get caught by Revenue or they can stay in the apartment. Some people in this situation are renting out the apartment, moving to a three bed semi-detached house and paying the €6,000 extra in tax every year, but on that basis they are stuffed. They pay rent, child care and an additional €5,000 to €6,000 a year payment. This is the situation I am trying to avoid.
When I brought this to the Minister and his officials' attention, part of the response I got was that it would be administratively very difficult to do because we would have to get valuations on whether people are in negative equity and whether this is changing on an annual basis. Perhaps they are not in negative equity any more. I agree this would be administratively very difficult to do. In the discussions I had on this with the officials two years ago, it occurred to me that from a pure labour market mobility perspective we should not need to constrain it to negative equity. Let us say somebody in the private, public or social sector who owns a house in Dublin is posted to Galway for three years. That person would rent out the house in Dublin and rent a house in Galway. As the tax law stands, this person would be hit with a €5,000 or €6,000 additional tax liability. I do not believe this is intended either.
The amendment I propose, and I appreciate it probably needs to be checked by the Department and Revenue, is targeted at these accidental landlords, is to state that we do not want them hiding from Revenue or trapped in a one bedroom apartment with three children, so we will make the move tax neutral. The way to keep it very simple is to state it applies across the board. This would mean someone who owns a home in Cork and gets a job in Donegal will not be taxed for renting out the house and living somewhere else. The way I have tried to structure the amendment is that if someone were profiting from renting out one place and paying rent somewhere else, any profit would still be taxable income. For example, if someone rents out a house in Dublin for €1,500 and moves to Cork where the person only pays €1,000 it means that person's net income has increased by €500 a month. The amendment states this is taxable income, because the person is better off with new income coming into the household. However, if someone rents out his or her place for €1,000 and pays rent in a new place of €1,000, be that person in negative equity or posted from Galway to Cork for work for two or three years, that person will not be hit with what is a very substantial tax bill, which I believe is unintended. Not only would this help many people trapped in negative equity, it would improve labour mobility throughout the country. While I imagine there may be technical reasons the Minister cannot accept the amendment as I have drafted it, I would very much like agreement from the Minister that this is what we would implement. I would be very happy to work with the Minister and his officials between now and Report Stage to try to put something together.
Some of the people Deputy Donnelly has described as accidental landlords are not accidental landlords. Whether it is as a result of a disability, an accident or, in some cases, separation, people find themselves in a similar position. The calculation of the rent being used as a tax has a huge impact on them. I support Deputy Donnelly on this. Many people have just been caught in an unusual circumstance and we should try to do something about it.
Deputy Donnelly has raised an important issue. It is an area I have also examined in the past and I put forward proposals in 2014. It is quite costly to do something on it. The proposal we made in 2014 was for people who bought between 2000 and 2009, whereby 75% of their rental expense could be offset against rental income on the property they own. The cost at the time provided by the Department was €27 million. There are people who are very badly caught and there is no doubt about this. Deputy Donnelly has described their situation very well. They are deep in negative equity, no longer living in the property, renting themselves at a time when rents are spiralling and caught with a hefty tax bill in respect of the rental income on the only property they own. It should be a policy objective to do something for them and help them. They are in an incredibly difficult situation. Deputy Donnelly has acknowledged that his amendment would require some work to define the period in question within which people bought and to ensure they only own one property. Such measures would need to be addressed. Money has not been provided for it for 2017 in the budget, but it should be a policy objective and I look forward to the Minister's response.
I am sympathetic to the issues Deputy Donnelly has raised, but in trying to develop something that would assist people in these circumstances, it must be tightly managed so that it is not subject to abuse or exploitation or become another loophole through which people can profit.
If it were not done properly or set up with that danger in mind, it could be open to abuse. That said, I am sympathetic. With regard to the section we are dealing with, in so far as it covers interest deductibility, these are the only people who should get assistance. That is dealing with the wider section.
We can all sympathise with that. Even this morning on the radio, a number of people were interviewed about their cases in this regard. The argument is very strong. Maybe it is a matter of taking up the Minister's offer to revert to us on Report Stage, as Deputy Donnelly said.
I understand the problem but I do not see a solution. That is my problem now. The first issue is the cost. We could also make a commitment to doing something in the future and including the cost next year but there could be unforeseen, unintended consequences along the lines of those mentioned by Deputy Boyd Barrett, in addition to other considerations.
As explained by Deputy Donnelly, the scope is very wide. The amendment appears to propose that any landlord who lets a property that was his or her primary residence and who also rents another property as a tenant would be entitled to claim a deduction for rent paid when calculating any net rental profit from the rental income received. If in this case one decided to get into rental property as an investment, would one's first move not be to acquire an apartment, rent it, then rent another one and keep moving along? One could have a chain of apartments against which one would be offsetting rental income from the first one. There are all sorts of difficulties.
We have made some progress already, however, and it is worth putting it on the record. In section 15, we committed that the interest allowable as an expense for landlords will be progressively increased from 75% to 100% over a five-year period. Therefore, there is an additional offset in terms of the interest on the mortgages. If a person rents his or her existing apartment to a tenant in receipt of a social housing support, he or she can get the 100% interest write-off immediately. He or she would not have to wait for the five years to elapse.
The second relief worth mentioning is that, having discussed this difficulty with the Central Bank, the bank is easing the prudential rules in respect of persons in negative equity. I raised this yesterday and committed to Deputy Donnelly that we would give him a briefing note on the changes. We did not send it to him last night but we will do so. I am prepared to talk about this again on Report Stage. Thus far, I do not see a way forward although I can identify with the difficulties for individuals the Deputy has outlined.
I thank the Minister for his response. I cannot see the unintended consequences. The idea of someone using the measure to rent out a string of properties does not hold up. This is a very simple idea. The idea is that if one owns a home, rents it out and pays rent on another, one can offset one against the other. Let me put it at its simplest. Imagine two families living beside each other who decide to rent each other's homes from each other and pay each other €1,000 per month. Neither of the families would be better off. There would be no more money going in to either. I am using a closed example. There would be no extra money going in but a €10,000 tax bill would be incurred by the families. It just does not make any sense. Where somebody deriving rental income from a property he or she has purchased purchases another rental property, the measure would apply to only one. Critically, the offset would apply only to the amount of rent one is paying oneself. The idea that one could achieve considerable tax deductibility just does not hold up.
I accept that the amendment, as I have tabled it, may not be correct. I have no doubt that there are holes in it. However, it should be reasonably straightforward to legislate for this, with the policy objective ordaining that if one rents out a premises that one owns and pays rent somewhere else, one is not going to get taxed on the double. What is occurring is double taxation.
In addition to the concept of helping accidental landlords, and the people Deputy Michael D'Arcy spoke about, there is a genuine labour mobility issue. If one lives in a house that one owns in Dublin but must move to Galway to work for three years, one will want to rent out the house in Dublin and rent a place in Galway. It does not seem reasonable that one should be taxed €5,000 for doing so. I am more than happy to look into this. I would imagine that other jurisdictions have this well figured out. Having regard to policy, is the Minister amenable to the idea that this constitutes an unintended tax and that it has trapped people? Would what I propose not help many people?
I know people who have left the country over this. They are saying they cannot raise their children in their apartment and are not willing to avoid tax in the hope they are never found by the Revenue Commissioners. They literally do not have the €5,000 or €6,000 to pay the tax bill they would incur if they moved the children from an apartment to a small house in the suburbs. Since I know people who have left the country over this, it is not a marginal issue. For those it hits, it hits really hard. We are not talking about a tax bill of €500 or €1,000; we are talking about a tax bill of €5,000 or €6,000 at the end of the year based on very modest assumptions. I refer to normal market rent today. Would the Minister be able to give an example of where and how he believes the proposal would be abused if it were implemented?
I will come back to it again on Report Stage. I can see many difficulties at present. I am not sure how extensive the problem is. We are getting submissions from landlords stating they cannot make a profit on rental accommodation and that they do not have a taxable income on rental accommodation. Tax liability is on the income, not on the total rent. There is a variety of costs that can be offset against profit, including the cost to the landlord of any goods provided or services rendered to a tenant and the costs of maintenance, repairs and insurance and the management of the property. Where the property is under management in an estate or apartment building, the annual management fee represents a cost. There are also the costs of registering a residential tenancy with the RTB and of letting, including letting agency fees. Wear-and-tear allowances are available in respect of expenditure incurred on furniture, fixtures and fittings provided by a landlord. These allowances are granted at the rate of 12.5% per annum for eight years. An individual may be allowed a deduction in respect of the interest paid on borrowed money used to purchase, improve or repair a premises, subject to certain restrictions. A landlord is entitled to claim a deduction of 100% of qualifying interest in respect of a rented commercial premises but, in general, only 75% is allowed. I have referred to this already.
I would like an example from the Deputy's experience. It seems to me that the potential for profit on renting a small apartment when one moves on to a bigger one is quite limited, especially when it is almost by definition that people in negative equity have very big mortgages and consequently have extensive interest payments to write off against any profit from the rental. I would like to see worked-out examples. I am disposed to being sympathetic if the Deputy can point a way forward for me.
Will Deputy Donnelly work with that and perhaps withdraw his amendment and come back on Report Stage?
If I could sit down with the officials, it would be very useful. To put it very simply without going into any of the detail, let us say rent in Dublin is about €1,500 a month now and for most the costs probably amount to about €500 a month. A lot of them are on tracker mortgages so the interest payments are reasonably low for now. With regard to the worked examples I have looked at, on €1,500 a month, we could probably take off about €500 a month on tax deductibles. That leaves us with about €1,000 taxable income. Over 12 months, that is €12,000 taxable at the marginal rate, which is €6,000. That is more or less how it is working out. From the examples I am getting from the people who are coming to me and showing me their figures, the ball park figure is €4,000, €5,000, €6,000, €7,000 or €8,000. It is material enough that they will either try to avoid it, leave the country, stay where they are or will just never be able to afford a deposit. They will never be able to put it together.
If they leave the country, they will still have the tax liability on profits from rental income.
Sure. That is it. I would like to sit down with the officials. I am more than happy to put case studies together. Will the Minister or Department put together ways they think it could be abused? It would be very helpful in teasing this out. Is it something the Minister thinks we could do?
We will think about it between now and Report Stage.
Is the amendment being withdrawn?
That was a half answer.
The Minister is a deep thinker.
I know. I will withdraw the amendment. I thank the Minister.
Amendment, by leave, withdrawn.
Question proposed: "That section 15 stand part of the Bill."
Is it agreed that section 15 stands part of the Bill? It is not agreed. We will resume on section 15. We will suspend now and resume at 2 p.m. on Tuesday.
Are we sitting tomorrow?
No, we are sitting next Tuesday.
I notify the committee that I will be out of the country on business next week. The Minister of State, Deputy Eoghan Murphy, will carry the remainder of Committee Stage.
What time will we resume on Tuesday?
We will resume at 2 o'clock.
We will resume at 2 o'clock on Tuesday.
We will resume with the Minister of State, Deputy Eoghan Murphy.
Can we go late on Tuesday?
Yes.
Progress reported; Committee to sit again.
The select committee adjourned at 2.15 p.m. until 2 p.m. on Tuesday, 15 November 2016.